The FairTax, Join in!

[Eomund]

Final-Fan said:
(First: "eluded" should be "alluded". I alluded to people who elude taxes.)
(Thanks, I went back and fixed it. But what do you expect from that long of a post...)

Eomund:

1. Your only reason given in the last post for why businesses would not cheat on a 30% (exclusive) sales tax is that they would have to have a permit and would be afraid of getting caught. Yet in Florida, 5% of all business-exempt purchases were found to be fraudulent and in fact for personal use. That statistic doesn't even include any other type of sales tax evasion, such as Kasz216 describes! And that is on a sales tax of 6% or less!

Arguing that people won't break the law because they will be afraid of being caught and punished is ... incredible, considering the current existence of crime despite the current existence of punishment. Moreover, the punishment you describe is hardly any deterrent at all -- "pay the fraud back with interest" sounds to me like a loan that you only have to pay off if you get caught! (Or, depending on the interest rate, a credit card. )

(Sounds like you might have experience, lol. But seriously, you do raise a valid concern. I just feel that this is a risk we should take. I have nearly exhausted my reasons for switching to the FairTax, save one, but that is another post. But lets take the evasion concern. These are the penalties of non-compliance with the FairTax. Page 20 of http://www.fairtax.org/PDF/PlainEnglishSummary_TheFairTaxAct2007.pdf is the penalties list. Small list and doesn't seem harsh at first glance, but for each infraction these can add up to big trouble for a person and business. Perhaps the penalties could be harsher, more draconian... but we want humanity to survive under the FairTax LOL.)

2. I don't intend to enumerate all the possible ways someone could evade taxes. Let's just agree that there are such ways. Ways that would be lots, lots more tempting; ways that people use more and more often as a given tax rises higher and higher. Which brings me to the fact that in the PDF you youself referred me to, a study in Minnesota in 2000 found that a 6.5%* (exclusive) sales tax had an evasion rate of 9.9%. (Oddly, they claim that an estimated 15 to 16.6% federal tax evasion rate is "almost double" this. 52-68% more =/= almost 100% more, in my book.)
http://www.fairtax.org/site/DocServer/TheFairTaxReducesComplexityComplianceCostsAndNoncomplian.pdf

(Perhaps they were referring to tax revenue... I am not sure.) 

*This is current general state sales tax according to Wikipedia. I don't know if it was the same in 2000 (but definitely not lower than 6%) and I don't know if the study included local sales taxes or the state alcohol tax. I haven't looked up the study myself.

3. I like your example. But I noticed that the income tax rate you quoted was wrong. This is from the source you quoted:
$ 0 ------- $ 50,000 ---- 15%
- 50,000 --- 75,000 ---- 25%
- 75,000 --- 100,000 -- 34%
- 100,000 -- 335,000 -- 39%
This means that only the income at or ABOVE $100,000 is taxed at 39%, or $0 of our income. Since you say our taxable income is $6245.35, we are taxed ($6245.35*0.15)=$936.80, leaving $5308.54. Even had we had $100,000 taxable income, only $1 of it would have been taxed at the 39% rate.

(My mistake if you are right, which I will cede you most likely are. I was thinking revenue instead of income.)

Secondly, and more importantly, your example actually proves my point. Our business may have tax troubles, but none of those troubles are the 15% withholding tax. That is going right to the government and neither we nor the employee ever see it, even though you rightly put that expense in with "employee wages". If that tax were to disappear, to be replaced by a sales tax, and we paid our employees the same wages, they would suddenly have bigger paychecks, and we would suddenly have bigger (after-tax) prices.

(You are not counting the Complaince costs, which I never even attempted to calculate. I don't even want to try that though.... But perhaps the compliance costs can go toward employee pay in our company? Also in my example we had more taxes than just the taxes on our employee wages which were 7.65% FICA and Medicare + OUR MATCHING 7.65% + 15% withholding tax. 7.65+7.65+15=30.3% of wages paid or 80,000x30.3=24240. 24240 as a percentage of our income= roughly 24%. Now add the other taxes and it just goes downhill fast. In my example, which is by no means scientific or based on hard numbers, other than the tax rates, our tax liability could have been replaced with the FairTax @ 23% and lowered prices and paid our employees the same amount. Again that example wasn't anywhere near perfect, but that many taxes for a small business means higher prices or lower wages or both. Fun fact of the post: Small Businesses create 80% of the jobs in America.)

Unless we dropped their wages and our prices by the amount of the withholding tax ... if all the businesses in the US did this simultaneously when the FairTax took effect, then you would not see higher prices -- but you would not see higher paychecks, either. Is this the way you meant it when you said that it was an embedded tax? I see it as the very nature of interrelated monetary flows. Kinda like how rainwater used to be river water before it was ocean water before it was water vapor.

(I may have said that prices will drop AND wages will increase, but I was mistaken. Now that I know better I did not mention that as a possibility in my example. But yes, the taxes are embedded. Our employees must be paid a "living wage" or they won't work for us. This forces us to pay more matching taxes however.)

P.S. Are you sure all those other taxes are taken out AFTER the corporate income tax? My instinct is to doubt it, since it's a tax on what would otherwise be our final profit, but I really have no idea.

(Again I am not sure as I am not an accountant, thanks for bringing that up though. I hadn't thought of it.)