Monday, August 07, 2006

Its been a while!

Hey everyone, thanks so much for you positive and negative feedback! I enjoy hearing that people appreciate the fact that I have a blog on the FairTax, and I also am happy that there are those of you out there who care enough understanding the issue of the FairTax to debate it with me. Even if your heart is dead-set against it, I am still happy that you would have an intelligent, informed discussion about it, rather than demagogue it to death.

I regret that I have not been able to make a post for so long. I have been SOOOOOOO busy. A project deadline is coming up at work, AND I am moving into a new apartment. I still have no more time than I have had for the past week, but I need to write something here. I am addicted to blogging! I love it! I am glad to be back!

Today I will talk about my experiences on the forum

My name is the same on that site, and because it take much less of a commitment to make a simple post on the forum than it does to write a whole blog, I have not neglected the forum as much as I have this site. I have made a few posts, and responded to many concerns about the FairTax.

I will be referencing data that is contained on this PDF. It is a rebuttal to a report filed by ITEP from AFFT.
ITEP Rebuttal

Of the various disagreements that arise on the forum, I believe the most common concern is that the FairTax will not raise enough revenue at 23% inclusive tax. They provide a variety of reasons for this claim...

tax evasion...
black markets...
confusion over who pays what...

... But none of them have ever been able to hold water with me. I will address the issue that the FairTax, as written, will be able to raise the necessary revenue to fund our government as it is today, and then I will respond to a few common concerns about why the expected amount may not be the collected amount.

First, in 2003, the Federal Government collected $1.67 trillion in revenue from the income tax, payroll taxes, estate tax, gift taxes, capital gains taxes, etc. This amount is 15.24% of Nominal GDP for that same year, which was $10.961 trillion. The Federal Government collected, through various forms of income taxation, just over 15% of our GDP in 2003. For that same year, consumption (as currently defined, which will be modified once the FT is in place, but it is an overall wash in the total amount) was $9.5 trillion. The tax rate required to raise the same revenue for taxing consumption would be 17.6%. Thus the tax rate would need to be, at least, 17.6% to remain revenue neutral. After adding in the cost of the prebate, the rate of 23% sounds reasonable.

This, of course, is assuming that all of the taxes are collected and that spending continues on its current general trend from one year to the next. Today I will address the issue that, assuming spending stays on its current trend, a large enough portion of the taxes will be collected to fund the government effectively.

The reason why taxes wouldn't be collected would be tax evasion. Under the current system, several hundred billion dollars are evaded in taxes every year. This is because of the complex nature of the tax, and the ability to hide income in off-shore accounts and various other holdings. Under the FT, income is no longer reported, and there is no longer a need for those off-shore accounts. What is reported is the business's sales and business to business expenditures that the business paid tax on. These are reported monthly. The business will report that it had $10,000 in sales this month, and it made $8,000 in taxed business to business transactions, thus it paid $1,840 in taxes. The company owes $2,300 in taxes because of the $10,000 in sales. So, reporting the expenditures and the sales, the total amount of taxes the company owes to the government is $2,300-$1,840=$460.

If, say, this company made it a habit to sell things cheaper without collecting the tax, and not reporting that sale so the government won't have a record of it. This leads to its overall sales numbers declining. Instead of $10,000 in sales and $8,000 in B2B expenditures, it ends up being $8,500 in sales and $8,000 in expenditures. What will happen to this $1,500 that is left? The owner will most likely pocket the money.

Purchasing 800 widgets for $10 each will add up to $8,000. Selling those widgets for a total sales revenue of $8,500 means an average price of $10.63, or a profit of $0.63 each.

If one was to calculate the numbers again, it will become obvious that something is just not right. $8,500 in reported sales is $1,955 in taxes, and $8,000 in expenditures is still $1,840 in tax credit. Thus total taxes owed is $115. This leaves only $385 for other expenses. This business is just barely scraping by with a 4.5% profit margin, but it is still profiting, and no red flags have yet gone up.

The warning will come from outside the company. The red flag will be from the widget manufacturer. This will most likely be a very large factory that sells to more than this small widget retailer, and will be under a large deal of scrutiny, so they will pay their taxes by the book. Only small businesses will be able to possibly think they can slip under the radar. The sales that the widget company reports will go to the government. The number of widgets sold to every customer will be documented to be sure there is no lying about the tax credit. The manufacturer will report that it sold 800 widgets to our aforementioned retailer so the retailer can get its proper credit. The retailer will be selling the products as if it were collecting the tax, but will not be turning it in, so its prices will be higher than the average price calculated when using the total reported revenue and the number of widgets sold. The company will be audited and caught.

If the company decides to report the correct price for the products, but decides to not include certain purchases so he can keep the tax as profit, it will show in the report as the wrong number of widgets sold.

The system, by forcing businesses to report sales to get tax credits, ensures the system will be hard to avoid.

Even if the retailer decides to not charge the tax or remit it, and does not ask for the tax credit, he will then be in the hole, and the tax will be paid anyway.

It is not worth it to a company to try and avoid this tax. The penalties for getting caught are severe, and the ease of getting caught is obvious. Illegal sales that do not give the government the tax will need to be kept to a minimum in order to avoid detection, and this will prevent abuse. Over 80% of all sales in this country are through major companies who would never dare cheat on the taxes like this, and so a small percent of the 20% will be miniscule. Eventually, the tax will be a way of life, and paying it will no longer be considered a burden, but just what happens. The black market idea will simply not happen because there is little incentive and great deal of risk.

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