Posted on 02/20/2006 3:30:35 PM PST by Bigun
Written by Jan Larson
Sunday, February 19, 2006
The Internal Revenue Service reported [1] last week that $345 billion (not a misprint) in taxes owed for 2001 has not been collected. Not to worry, the report also indicates that IRS enforcement efforts will recover approximately $55 billion of this “tax gap.” Bully for the IRS.
Even if the IRS is successful in recovering the amounts they seek, there is simply no way that a $290 billion shortfall can be justified regardless of how it is spun. There are several reasons why taxes rightfully owed are not collected. Many taxpayers underreport income and/or claim undeserved deductions. In other words, a lot of people cheat on their taxes. Is anyone surprised?
Another factor that significantly affects tax compliance is the complexity of the tax code. According to a report [2] from the Americans For Fair Taxation [3], the federal tax code, rules and IRS rulings comprise more than 60,000 pages. While complexity undoubtedly leads to some paying more than they rightfully owe, that complexity also results in billions in unpaid taxes.
The report also indicates that individuals and businesses spent over six billion hours at an estimated cost of $265 billion dollars attempting to comply with the maze of tax rules and regulations. This is equivalent to a workforce of over 2.8 million people spending the entire year doing nothing but tax compliance.
To cover the uncollected taxes, the 130 million U. S. taxpayers are effectively subsidizing the tax cheats to the tune of over $2600 each. In other words, if the cheaters were prevented from cheating, the average taxpayer would see reduction in his or her tax bite by over 30%.
If the tax gap and compliance costs were in and of themselves not sufficient reason to scrap the tax code, the tax code also hurts the U. S. in other ways. The income and payroll taxes ostensibly paid by businesses (but are in fact simply passed along to consumers) make U. S. products less competitive on world markets. This leads to job losses in the U. S. and, as we also saw last week, record trade deficits. The complexity of the tax code also enables politicians to reward and punish via the tax code. This is probably the single worst aspect of the U. S. tax system.
The sheer lunacy of a tax system that fails to collect billions owed, enables political manipulation, hurts the economy and in general works against the taxpaying public is astounding.
There is a solution however. It is a solution that would eliminate individual compliance requirements and make April 15 just another day. This solution would greatly reduce business compliance costs and similarly reduce the size and scope of the IRS. This solution would lead to job growth and economic expansion. This solution would eliminate most of the opportunities for tax cheats and political manipulation. The solution? The Fair Tax.
The Fair Tax would eliminate all income and payroll taxes and would replace them with a national sales tax paid on the retail purchases of new goods and services. The Fair Tax protects low-income individuals and families by rebating taxes paid up to the poverty level.
The first reaction by many people to the idea of a national sales tax is that prices of goods and service would go through the roof. Under the Fair Tax, this is not the case. Consumers are already paying for the corporate income and payroll taxes embedded in the price of virtually all goods and services. It is estimated that these embedded taxes average approximately 22% of the retail price of goods and services. Make no mistake; you are paying these hidden taxes.
Under the Fair Tax individuals would incur no compliance costs and businesses would remit Fair Tax receipts similarly to the way state sales taxes are remitted today. No more armies of lawyers and accountants to figure out IRS regulations. The IRS (or some similar agency) would need to ensure compliance from just the approximately 25 million businesses instead of 155 million businesses and individuals, as is the case today.
Maybe most importantly, the Fair Tax would eliminate the patently unfair manipulations of the tax code that Congress uses to hand out favors to wealthy constituents and lobbyists. The elimination of the incentive and ability to tinker with the tax code would go much farther toward making members of Congress more “ethical” than any other type of reform.
The Fair Tax has been introduced in both the House (H. R. 25) and Senate (S. 25). The House version already has 48 cosponsors. The Americans for Fair Taxation estimate that it would require just 3000 active supporters in each congressional district to make the Fair Tax a reality. Each of the 435 districts represents approximately 300,000 taxpayers. That means that if just one percent of taxpayers became vocal supporters of the Fair Tax and took the time to write and/or call their representatives in Washington, the Fair Tax could become law.
The Fair Tax would be the most significant tax reform since the Boston Tea Party. Don’t leave this reform to others. Take a few minutes to let those in Washington know that the time for the Fair Tax is now. Think about that as you pore over your 1040 this year.
[1] http://www.irs.gov/newsroom/article/0,,id=154496,00.html
[2] http://www.fairtax.org/pdfs/Tax_compliance_facts.pdf
About the Writer: Jan A. Larson is currently employed in private industry in Texas. He holds a bachelor of science degree from the University of Nebraska, a master of science degree from the University of Kansas, and an MBA from Colorado State University. jan@pieofknowledge.com.
PING!
Fixing the tax system isn't about fixing tax cheats, it is about fixing our out of control government and its spending. There isn't a problem with the people, it is with the people in government. The only tax cheats are our governments.
"To cover the uncollected taxes, the 130 million U. S. taxpayers are effectively subsidizing the tax cheats to the tune of over $2600 each. In other words, if the cheaters were prevented from cheating, the average taxpayer would see reduction in his or her tax bite by over 30%."
Anyone want to bet that we'd see tax increases since the burden was reduced by 30%?? I never met/saw/listened to any politician that didn't meet tax revenue he/she didn't like..
"The Fair Tax protects low-income individuals and families by rebating taxes paid up to the poverty level."
Herein lies the problem....the US Government already makes approximately 9% mistakes on SSA disbursements, and at a STAGGERING cost. National retail sales tax does the same thing with the cost of rebates to the poor.
You've got it right! Explain to me why gambling losses are deductible in any amount, but medical out-of-pocket expenses have to be 20 percent of your income to be deductible? Or why lower income families struggling to put their children in quality private schools aren't gettting a tax break?
***without the cost of rebates***
Its about BOTH
I beg to differ with you there my friend! As that great old American philosopher POGO once said "I have seen the enemy... and HE is US!!!"
There isn't a one of us who would hire a carpenter to put up a shelf for us and not supervise what they do yet nearly all of us fail to supervise our employees in government at ALL levels!
I wish I am wrong but it ain't going to happen. The government is bigger than we are.
ONLY because we continue to allow it my FRiend!
I wasn't alking about people watching government. I was talking about tax cheats. Tax cheats are not the problem, the government is, and, yes, people not watching the government is.
When someone explains to me how my father, who spent a lifetime paying income tax and now pays virtually no tax on a fixed income, doesn't get totally screwed by a 20%+ sales tax, I'll jump on board.
Otherwise, I'll keep my focus on going after big-government politicians and supporting tax-cutting ones in elections.
Yeah, recover it and spend! We need more spending! You can bet that the $345 bill supposedly owed the gummint is doing a better job for the economy than building bridges to nowhere and paying alphalpha "farmers" for not growing the stuff!
Can anyone inform us of any significant economy where this tax system has worked in the past?
Fair Tax Bump. Good article.
That my friend is exactly right !!! There is NOTHING fair about a "fair tax"
Amen to that. However, if we could lessen the cheating, all us honest folks could pay less too.
Texas and Florida.
I don't want anyone jumping anywhere.... I'd like to know what indicates to you that your father would "get totally screwed". I won't tell you it's gonna be great for everyone - but I don't see anyone getting totally screwed unless you allow me to include people who are cheating the income tax who won't be able to cheat under the nrst.
Anything the gubermint could collect from "tax cheats" would be immediately SPENT. The "honest" tax payers have as much chance of seeing any tax relief from catching tax cheats as your neighbors dog has a chance of learning to fly. To think that the gubermint would not increment ANY tax scale until the point of popular revolt is to believe in the Tooth Fairy and the Easter Bunny.
Or why a single person with 0 kids, doesn't get a tax break?
I agree. But if they were unable to cheat in the first place then rates could have been lower.
It is unfortunate that the notion of a government being a profit making entity, providing dividend checks to its shareholders (citizenry) is too alien an idea for many to contemplate. For nearly a century it has been beaten into us that by nature government is an inefficient system that needs constant propping up through extorted fines on all commerce.
OK! Here we go! Your father, whether or not he realizes it, currently pays the hidden costs of the income tax system with virtually EVERY purchase he makes. He, and others like him, would be FAR better off with the FairTax in place.
Check out why right here! (Adobe acrobat reader required)
The precise method of stealing is pretty much irrelevant.
What one can reasonably say is that the evasion, illegal trade resulting in evasion of taxes will be no worse and may actually improve
to the degree such folks want legitimate goods and services from legitimate retailers under a retail sales tax system.
With 90% fewer tax filers, enforcement will be much more focused and risks of discovery higher for those who engage in more than casual evasion. To the degree that higher risks of exposure deter such activities, and the requirement that a business needs wide exposure (and a certification for tax exempt purchasing) to make significant profit, we can expect a constraining limit to evasion under a retail sales tax.
A Taxreform bump for you all.
If anyone would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
It is possible your father could be a loser in the transition IF he pays no income taxes on his investments now, IF his investments are all in taxable accounts and are not in IRA's and such, IF he pays no taxes on a pension, IF the removal of imbedded income taxes and compliance costs have no effect of retail prices and IF he spends a lot of money over and above the poverty line.
"but I don't see anyone getting totally screwed unless you allow me to include people who are cheating the income tax who won't be able to cheat under the nrst."
After more than 25 years experience in retail sales, I would say the opportunity to cheat under a national sales tax would be tremendous. This will drive even more of our economy underground.
There would have to be a provision to keep retirees who have already paid taxes on their income (which is actually income on their savings) from being taxed again.
I think a flat tax would be a more equitable solution, but I'm with those who argue that reducing the size of government is optimal.
I guessed as much but wasn't sure.
Of course, just because it hasn't been effectively used in a national economy in the past doesn't mean that we shouldn't try it. I just wonder why noone has.
I read there is some Dem initiative called a "flat tax," but then it has three tax tiers!!!!! Talk about double-speak.
First off, the article explains how the price of products already reflects corporate and other taxes imposed on manufacturers and distributors.
But the real issue is that just because your father has retired, doesn't mean the cost to support him has stopped. There is a military that has to be manned, government programs and officials to be financed, etc.
Why should one person be exempt from paying taxes, while another isn't simply because he attains a certain age or no longer works? Whats not fair is a person who doesn't pay any taxes, and who feels they shouldn't, puts the burden of supporting them on someone else.
I strongly disagree. Today's income tax system is stealing money by preventing us from feeling the hurt of taxation. A simple measure to eliminate withholding and have folks pay in cash would dang sure put a strangle on taxes by making us feel the hurt of taxation - yet this is just an example of a different type of stealing.
Withholding and business taxes are two insidious methods of preventing the populace from revolting. Getting rid of those could do what we all want - make everyone mad enough to use their votes to reduce the tax burden.
The method of stealing has everything to do with correcting the problem. I've been fighting spending for 50 years - fighting hard. But there are too few of us and there are even others pushing for more spending. Fighting the spending battle is noble, but it doesn't work for the aforementioned problems.
If, however, all individuals paid the same rate, we'd all have a more congruent interest in reducing taxes.
The nrst eliminates withholding and makes us pay in cash. It also makes us all pay the same rate.
Claiming legal deductions is NOT tax cheating.
Though I absolutely agree that the system we have now needs major reform BUT IMHO wholesale and immediate removal of deductions that our economy has been based on for many years is a recipe for economic disaster.
We've been known to try new things before.
(BTW, your home page wins some sort of prize. I'm not sure what. LOL.)
Now this I totally agree with ...
ping
Your interpretation misses a major point. A deduction is just that - something to be deducted from something. If there is no income tax there wouldn't be a need for a deduction because what it is being deducted from wouldn't exist.
Ha ha ha!...what a load!
Excuse me, I have to get back on the turnip truck...ha ha ha!
FMCDH(BITS)
BUMP to THAT!!
FMCDH(BITS)
Now if you wish to COMPLETELY eliminate the income tax ... count me in and put me on your mailing list ... BUT a flat tax is STILL an income tax. I tend more towards a national sales tax on SOME items. Food, medicine and other such items would and should NOT be taxed
Very true! Russia's recent experiment with a flat tax and compliance proves that the key is reducing the marginal benefit of cheating - lower tax rates make it less costly to simply report and pay what is due, and therefore remove much of the incentive to hide income under the current system.
I note that Russia has been seriously considering going to national retail sales taxes, in lieu of the 17% VAT they have had in place, due to all the problems that crop up with credit voucher fraud and evasion of small businesses under the VAT side of their Flat Tax.
That's a real knee slapper isn't it ...
He won't be getting screwed. In short, right now when your dad buys a product off the shelf, about 23% of the cost of that product is embedded taxes that were paid in the production of that product. The Fair Tax completely eliminates these embedded taxes and replaces them with a consumption tax. The price of most products under the Fair Tax would remain about the same as they are now. So your father wouldn't be getting the shaft. He won't be paying 20-23 percent MORE than he is now. Not only that, but when your dad cashes in his stocks, etc... he would no longer pay the Catpital Gains Tax (which is also eliminated under the Fair Tax plan). Overall, he benefits. But the big difference for anyone earning taxable income is that they no longer would have Fed income tax taken out of their paychecks, so everyone essentially gets a pay increase, substantially increasing their buying and saving power. There is quite a bit more to this, but read the Fair Tax book and you'll get all the details. Hope this helps.
Someone who breaks the law in order to evade taxes. Obviously, they don't all get caught as the article "mentions".
Claiming legal deductions is NOT tax cheating.
I agree. It's doing illegal things to evade tax that I call cheating.
...wholesale and immediate removal of deductions that our economy has been based on for many years ...
What deductions are being removed? Home mortgage interest is now "deductible", meaning we're allowed to pay home mortgage interest in pretax/untaxed dollars. THat is, to pay $5000 in home mortgage interest, we have to earn $5000 (that benefit isn't going away.) But to pay anything that isn't deductible, we have to earn enough to pay taxes and have enough left to pay the bills.
Under the nrst, everything is paid with pretax dollars. Everything. Interest will still be paid with pretax dollars. ANd, long term rates will decline to the tax-free level (about 25% reduction).
Interest is taxed now because lenders must earn sufficient return to make lending attractive - meaning they must recover taxes and tax costs in the price they charge for money (interest) in an invisible upcharge in price. Under the nrst, tax will still be paid on interest, but it will be visible.
Although a portion of the interest will be taxable, the reduction in rate helps offset the nrst- along with the price reductions that can take place after some of lenders' costs are eliminated.
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