Free Republic
Browse · Search
Topics · Post Article

Skip to comments.

The Drudge Report ^ | 8/1/04 | Drudge

Posted on 08/01/2004 6:08:53 PM PDT by NeoCaveman

A domestic centerpiece of the Bush/GOP agenda for a second Bush term is getting rid of the Internal Revenue Service, the DRUDGE REPORT has learned.

The Speaker of the House will push for replacing the nation's current tax system with a national sales tax or a value added tax, Hill sources tell DRUDGE.

"People ask me if I’m really calling for the elimination of the IRS, and I say I think that’s a great thing to do for future generations of Americans," Speaker of the House Dennis Hastert explains in his new book, to be released on Wednesday.

"Pushing reform legislation will be difficult. Change of any sort seldom comes easy. But these changes are critical to our economic vitality and our economic security abroad," Hastert declares in SPEAKER: LESSONS FROM FORTY YEARS IN COACHING AND POLITICS.

"“If you own property, stock, or, say, one hundred acres of farmland and tax time is approaching, you don’t want to make a mistake, so you’re almost obliged to go to a certified public accountant, tax preparer, or tax attorney to help you file a correct return. That costs a lot of money. Now multiply the amount you have to pay by the total number of people who are in the same boat. You can’t. No one can because precise numbers don’t exist. But we can stipulate that we’re talking about a huge amount. Now consider that a flat tax, national sales tax, or VAT would not only eliminate the need to do this, it could also eliminate the Internal Revenue Service (IRS) itself and make the process of paying taxes much easier."

"By adopting a VAT, sales tax, or some other alternative, we could begin to change productivity. If you can do that, you can change gross national product and start growing the economy. You could double the economy over the next fifteen years. All of a sudden, the problem of what future generations owe in Social Security and Medicare won’t be so daunting anymore. The answer is to grow the economy, and the key to doing that is making sure we have a tax system that attracts capital and builds incentives to keep it here instead of forcing it out to other nations."

TOPICS: Business/Economy; Front Page News; Government; Politics/Elections
KEYWORDS: fairtax; gop; gwb2004; irs; nrst; taxreform
Navigation: use the links below to view more comments.
first previous 1-50 ... 151-200201-250251-300 ... 651-656 next last
To: Petronski

"There are plenty of poor families and middle class families who don't pay any federal tax right now, who would now start paying federal tax."

Not true. They all still pay payroll taxes, 7.65% for the employee's share and 7.65% for the employer's share. Most economists believe the employer's share is taken out of the meployee's paycheck, so in essence they're already paying 15%. The FairTax also gives a rebate to EVERY American family for enough taxes to spend up to the poverty line. The closer you are to the poverty line, the lower your effective tax rate. If you're belwo the poverty line, you have a negative tax rate.

201 posted on 08/01/2004 7:52:05 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 164 | View Replies]

To: shrinkermd
It would take a Constitutional amendment to avert having both VAT and a personal income tax. Usually, if Europe is a guide, what happens when you have a VAT you get promises but the personal and corporate income taxes continue.

Absolutely, Europeans pay 20% VAT on ALL goods services FOOD and MEDICINE, AND they pay personal income tax! Do we want to be SLAVES like them ?

202 posted on 08/01/2004 7:52:25 PM PDT by Anticommie
[ Post Reply | Private Reply | To 24 | View Replies]

To: phil_will1
Me: I am for getting rid of the Gestapo, er I.R.S.."

You: These two are mutually exclusive. Which would you prefer?

Me: Yes and know. The/re almost synonymous. Their tactics are the same with a slightly different goal.
203 posted on 08/01/2004 7:53:21 PM PDT by nmh (Intelligent people recognize Intelligent Design (God).)
[ Post Reply | Private Reply | To 161 | View Replies]

To: Libertarianize the GOP

I could go for the elimination of the IRS, I wonder how much we would save per year on the expense of the IRS, and then how much we would save as taxpayers. WHAT A CHUNK, I could take a better vacation.

204 posted on 08/01/2004 7:54:09 PM PDT by Kackikat (,Kerry=the counterfeit, GWBush is the real deal!)
[ Post Reply | Private Reply | To 18 | View Replies]

To: undeniable logic

Read this:

Impact of the FairTax(SM) on Tax-Exempt Bondholders

If the FairTax, a single rate national sales tax imposed only once on all new goods and services, replaces the current tax system then the value of municipal and other tax-exempt bonds will remain approximately what they are today. Corporate bond rates will fall to the tax-exempt interest rate since corporate interest is neither deductible nor taxable. All bonds will be treated the same for tax purposes. Existing non-callable corporate bonds will appreciate.

Under current law, interest received by owners of general-purpose municipal bonds is exempt from federal income tax. Interest on corporate bonds, in contrast, is taxable to the recipient and deductible to the payor. Interest is not subject to payroll tax.

Corporate bonds have a higher interest rate than municipal bonds because for the bondholder (i.e. lender) to achieve a particular after-tax rate of return, the corporation must pay a higher rate. This difference between corporate bonds and municipal bonds is observable each day in the Wall Street Journal.

The interest rate on any particular bond is determined by what lenders (i.e. bondholders) demand to part with their money. The pre-tax interest rate demanded is a function of (1) the normal return to capital (i.e. the time value of money or stated differently, the relative price of current compared to future consumption), (2) inflationary expectations over the term of the bond, (3) the risk of default, and (4) the tax due on the interest received.[1] The normal rate of return to capital is observed to be very stable over time.

The market clears so that the marginal investor is indifferent between whether he purchases a municipal or corporate bond. This means that the after-tax return to corporate bonds for the marginal investor is equal to the return on municipal bonds. Those investors who are not at the margin will find either corporate bonds or municipal bonds clearly more attractive.

Municipal bonds would be treated the same under a national sales tax as under present law. If a national sales tax were instituted, interest on corporate bonds would no longer be taxed (or deductible). Corporate bonds and municipal bonds would be accorded the same tax treatment. In other words, the after-tax rate of return and the pre-tax rate of return on all bonds would be the same. Accordingly, the corporate rate would fall because corporations could achieve the after-tax rate of return demanded by investors at a lower rate.[2]

Today, taxpayers who are in relatively high marginal tax brackets (compared to the tax rate of the marginal investor) find municipal bonds more attractive than taxable corporate bonds (assuming away issues of risk). Taxpayers in relatively low marginal tax brackets (compared to the tax rate of the marginal investor) find corporate bonds more attractive than tax-exempt municipal bonds. High-bracket taxpayers would typically be high-income individual taxpayers. Low-bracket taxpayers would typically be lower- and middle-income taxpayers, investors investing through a qualified account such as an IRA or 401(k) and pension plans.

Under a sales tax, the after-tax return to municipal bonds will be the same as under present law. Thus, some investors who presently find corporate bonds attractive will move into municipal bonds and other investors who presently find municipal bonds attractive will purchase corporate bonds.

Investors purchase municipal bonds today because the bonds provide an adequate return. They will continue to purchase municipal bonds because they will continue to provide an adequate return. The interest rates on corporate bonds must fall to (risk adjusted) the rate provided by municipal bonds because the tax treatment is the same and, assuming the risk is the same, investors will be indifferent towards the two types of bonds.

Market Value of Bonds
The market value of a municipal bond is the present discounted value of both the stream of interest payments it generates and the return of principal at maturity. In the case of a zero coupon bond, interest payments are implicit and the market value is the present discounted value of just the principal due at maturity. The discount rate is a function of market interest rates, and includes an inflation premium.[3]

Replacing the income tax with a sales tax will not affect the stream of interest and principal payments of a bond. It should not materially affect the risk of default. However, once the positive economic effects of a sales tax take hold, state and local revenues should increase and the demand for social services should decline, reducing the risk of default somewhat. This reduced risk of default, however minor, will have a mild positive impact on bond prices since the risk-adjusted return will have increased.

As discussed below, the U.S. market interest rates are determined by international capital markets and are not likely to change dramatically except for the tax effect. Thus, the present discounted value of existing municipal bonds will be comparable.[4]

The impact on existing corporate bonds is quite different, in the absence of any transition rules. Corporate bonds that are not callable by the issuer will see a dramatic increase in their value. This increase will occur as the markets become convinced that a sales tax with no transition rules is going to be enacted. The reason for the increase is that the after-tax income stream to corporate bondholders will be higher by the amount of income taxes not paid. The bond was originally priced on the assumption that income taxes would be paid. As it becomes increasingly clear that the tax will not have to be paid, investors will bid up the price of the bond so that (adjusted for political risks of taxation) the present value of corporate bond’s income and principal payments equals that of other bonds.[5] As the price of the bond increases, its yield to maturity will drop. Callable bonds will not experience this appreciation since the market will anticipate that the issuer will call the bonds and issue new bonds at the lower tax-free interest rate. Bonds that are callable but only at a premium or at some future date will appreciate but to a lesser degree.

Savings and Investment
The supply of capital (savings) and the demand for capital (investors, consumers and governments) establish interest rates. Implementation of a national sales tax will remove the tax bias against savings and thus increase the supply of savings.[6] Similarly, a national sales tax would increase the return to investment and demand for investment would increase. If investment demand increased more than savings, interest rates could increase. If savings proved more responsive than investment, then interest rates could decline.

The relative magnitudes of American savings and investment response is not likely to have anything but a very minor impact on interest rates, however, because of international capital markets. If U.S. investment demand exceeds savings response, as is likely since the U.S. will be such an attractive place to invest, then foreigners will supply the capital. If U.S. savings exceed U.S. investment demand, then our savings will be deployed abroad.

Market interest rates clear internationally (adjusted for expected changes in foreign exchange rates and transactions costs). The relevant capital market for judging the impact on interest rates is the international capital market. The international capital stock is so large relative to the excess of U.S. investment demand over savings supply or vice versa, the impact will be quite small.

Existing municipal bonds will retain their value because the present discounted value of the bonds’ interest and principal payments are unlikely to change appreciably. Nominal corporate bond yields will decline so that corporate bonds do not have any competitive advantage over municipal bonds. Risk adjusted returns to corporate and municipal bonds will be the same. The cost of borrowing for states and municipalities will remain comparable to borrowing costs today. The demand for municipal bond issues would remain comparable to the demand today since the repeal of the income tax will not significantly affect the normal return to capital, the risk premium, or the inflation premium. The composition of investors in municipal bonds will change since the advantage that various tax bracket taxpayers accrue from investing in either corporate (low bracket) or municipal bonds (high bracket) will disappear.

[1] Interest rates may also include a price for financial intermediation services provided. In the case of bonds, underwriters usually explicitly charge this price to the bond issuer. In the case of bank loans, however, it is usually built into the interest rate.

[2] The cost to corporations of borrowing will not have changed appreciably once interest rates fall. Under an income tax, interest is deductible. The true cost of the corporation, after-tax, of borrowing is the before-tax interest rate reduced by the value of the tax deduction. The lower interest rates will not induce an increased demand for corporate borrowing since, on an after-tax basis, the cost will not have declined for profitable corporations. If interest rates did not fall, then the demand for borrowing (whether by corporations or homeowners) would fall dramatically.

[3] Risk is usually accounted for by increasing the discount rate. Calculating the probability of a default and imputing a negative interest rate based on that probability and then holding the nominal discount rate constant could also account for it. The result is the same although the later method is perhaps better since it is more transparent.

[4] Inflation is a monetary phenomenon and should not be affected by the sales tax (although the federal reserve may choose to adjust its monetary policy by "accommodating" the sales tax, which would have a one-time impact on the price level but no long-term effect on inflation).

[5] A hypothetical transition rule that would prevent such an effect would be to continue the taxation of interest on existing corporate bonds and provide a tax credit equal to value of the tax deduction for issuers.

[6] The degree of responsiveness of savings is unclear. Theoretically, the so-called income effect cuts the other way. Under this analysis, people have a particular amount of income from savings they want to achieve and they will respond to an increase in the return to savings by saving less since it would take less savings to achieve the target income. Work by highly regarded Harvard researcher Michael Boskin, "Taxation, Saving and the Rate of Interest", Journal of Political Economy, April 1978, showed an elasticity of saving with respect to average after-tax rate of return of 0.3 to 0.4. Recent work updating his findings for more recent years shows elasticities in the 0.7 to 1.1 using various statistical methods, see Gary Robbins and Aldona Robbins, "Eating Out Our Substance: How Taxation Affects Savings", Institute for Policy Analysis, Policy Report No. 131, September, 1995. An elasticity of 0.3 means that a 10 percent increase in the rate of return to savings will result in an increase in savings of 3 percent. An elasticity of 1.1 means that a 10 percent increase in the rate of return to savings will result in an increase in savings of 11 percent.

205 posted on 08/01/2004 7:54:20 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 169 | View Replies]

To: Remember_Salamis

I am talking about the total economic cost which includes the economic disincentives to work, save and invest. See James L. Payne's work -- he calculated .$65 in 1995. It has gone up since then.

206 posted on 08/01/2004 7:55:21 PM PDT by Taxman (So that the beautiful pressure does not diminish!)
[ Post Reply | Private Reply | To 168 | View Replies]

To: dubyaismypresident

Kudos Mr. President! Think big! Reagan thought (and acted big), George H. W. Bush did not. Look at the difference in their legacies.

207 posted on 08/01/2004 7:55:30 PM PDT by SupplySider
[ Post Reply | Private Reply | To 1 | View Replies]

To: ovrtaxt

"It's about time the geniuses at the GOP figured this out. They should have been running an anti-IRS campaign since '92.

Good job, you brainiacs! Glad to see some thought over there!"

-- Their balls finally dropped.

208 posted on 08/01/2004 7:55:58 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 182 | View Replies]

To: malakhi
In its place will be the "Service of Internal Revenue". And it will, of course, be completely different from its predecessor...

And, of course, completely "voluntary".

209 posted on 08/01/2004 7:56:19 PM PDT by Diddley
[ Post Reply | Private Reply | To 41 | View Replies]

To: Remember_Salamis

When the commercials start telling the public that their food and clothing are going to be taxed, they're going to bolt. Yes, I understand that there's plenty of tax already built in to the price of anything, but the public will choose to go with the devil they know. I think this is an electoral nightmare for the Republicans.

I don't mind making the federal income tax less progressive, but making federal taxation regressive is going to lose elections.

210 posted on 08/01/2004 7:56:50 PM PDT by Petronski (Edwards threatening al Qaida is like Pee Wee Herman threatening Luca Brazzi.)
[ Post Reply | Private Reply | To 201 | View Replies]

To: Remember_Salamis

Yes I am familiar with all of this. You're forgetting that we already have state and local sales tax...and a lot of people avoid that tax by simply paying cash. Everyone does it. I see it all the time. but that means rates have to be much much higher for the legitimate retail businesses -and when they close down or if consumers just aren't in the mood for shopping then say goodbye to that new B-2 bomber

211 posted on 08/01/2004 7:56:53 PM PDT by arielb
[ Post Reply | Private Reply | To 191 | View Replies]

To: Froggie
'A flat tax does not eliminate the IRS or need for still have to keep records, pay accountants, file forms etc. all an unnecessary drain on the economy (unless you are an accountant)"

You don't need an accountant to pay a flat tax, say 13%. You don't need an accountant to look at your paycheck and pay 13%.

" - a National Sales tax makes the best sense - it gets rid of the underground economy - stops the need to file forms, keep records and tell the government under penalty of imprisonment how much income you make. Let's hope they can pull it off."

The government will make more money this way. With a nationals sales tax businesses will be REQUIRED to have accountants, keep records and will have the underground economy thrive because you can get away with paying NO taxes on goods and services.
212 posted on 08/01/2004 7:57:33 PM PDT by nmh (Intelligent people recognize Intelligent Design (God).)
[ Post Reply | Private Reply | To 112 | View Replies]

To: nevergore


Thas perzactly what I was doing!

213 posted on 08/01/2004 7:57:51 PM PDT by Taxman (So that the beautiful pressure does not diminish!)
[ Post Reply | Private Reply | To 188 | View Replies]

To: dubyaismypresident

Sounds great, but one awful fact is that with the implementation of a sales tax system, everyone and their brother is now entitled to social benefits. one of the biggest arguments about illegals is that they don't pay for the services they receive, Under this system, everyone is paying into the system therefore everyone should also be allowed to take.Depending on where you live and how the state setups its local ecomony/taxe this could counteract any potential increase in taxes collected. Basically every illegal could qualify for every program, unemployment, food stamps etc as they are now taxpayers. Could also be viewed as the final solidification of NAFTA. Could such a tax be added to exports to mexico thus ending the border as we know it? Not real knowledgeable on this stuff but seems like a possibility.

214 posted on 08/01/2004 7:58:07 PM PDT by foto
[ Post Reply | Private Reply | To 1 | View Replies]

To: Remember_Salamis

I guess they've had enough of trying to bust mine.

215 posted on 08/01/2004 7:58:13 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 208 | View Replies]

To: SupplySider
You know, if this is true, it will make Bush's economic proposal the centerpiece of the campaign.

This will blow Kerry out of the water, and it will really highlight the Dems dependence on the "trials"-the plaintiff's bar, of which Edwards is chief cook and bottle washer.

Be Seeing You,


216 posted on 08/01/2004 7:58:40 PM PDT by section9 (Major Motoko Kusanagi says, "Jesus is Coming. Everybody look busy...")
[ Post Reply | Private Reply | To 207 | View Replies]

To: Petronski

Basic necessities aren't taxed. Read it-- that money is rebated monthly.

217 posted on 08/01/2004 7:59:50 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 210 | View Replies]

To: Non-Sequitur
backbone that has been sadly lacking in this administration to date.

You're kidding, right?

218 posted on 08/01/2004 8:00:11 PM PDT by alnick
[ Post Reply | Private Reply | To 133 | View Replies]

To: spokeshave
A FLAT TAX 13% and NO deductions like in Russia is MUCH much better.....(that would tik off the lefties....ha ha)

I totally agree. As good as the VAT sounds in theory, as others have noted in this thread without a Constitutional amendment repealing the amendment that gave us the income tax it's too big a risk of winding up with both a VAT and an income tax.

219 posted on 08/01/2004 8:01:37 PM PDT by Marathoner
[ Post Reply | Private Reply | To 11 | View Replies]

To: ovrtaxt

why rebate when you can simply not take the money in the first place?

220 posted on 08/01/2004 8:02:01 PM PDT by arielb
[ Post Reply | Private Reply | To 217 | View Replies]

To: foto

Okay, I see your point, but as it stands, the ones who use the social benefits currently pay NOTHING, or they actually make money with the Earned Income Credit. How is your scenario different? (Except the border thing)

221 posted on 08/01/2004 8:02:34 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 214 | View Replies]

To: dubyaismypresident

What happens to those who are hopelessly in for back taxes?

222 posted on 08/01/2004 8:02:36 PM PDT by Wondervixen (Ask for her by name--Accept no substitutes!)
[ Post Reply | Private Reply | To 1 | View Replies]

To: ovrtaxt
Read it-- that money is rebated monthly.

How does that rebate work? If I'm poor, I file a form stating my income and records of what I paid in sales tax and they send me a check?

I'm learning here.

223 posted on 08/01/2004 8:03:34 PM PDT by Petronski (Edwards threatening al Qaida is like Pee Wee Herman threatening Luca Brazzi.)
[ Post Reply | Private Reply | To 217 | View Replies]

To: YankeeDoodleBoy

"1. Where would the government get the money to pay taxes? Their only stream of income is taxing us.

2. What are the consequences if the government is unable to pay its taxes? Would it eliminate services, cut payroll, shut down parts of itself, or simply raise more income (i.e., raise taxes; see question #1)?"

-- I'll answer both:

1. Government would have to decide whether they would (1) raise taxes or (2) cut spending. I feel us conservatives will win that battle. It will get to the point with a lot of programs that they'll jsut be better off letting people keep their money. Think of Education funding at the state level: The government has the option of (1) spending money on funding public schoiols and paying taxes on it, or (2) giving vouchers and having citizens NOT pay taxes on it (education is TAX-FREE under the FairTax). Do you think they'll give vouchers?

2. They government has to pay the taxes when they make the purchase; the government has to pay the tax at the point of sale (POS).

224 posted on 08/01/2004 8:04:12 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 189 | View Replies]

To: Marathoner

I'm all for something like the NRST, but it can't be sold to the American people. Impossible. Far too much room for rhetoric to kill the issue entirely. A flat tax is unlikely, but at least it's doable. And if done correctly, the IRS could be pared down to virtually nothing.

225 posted on 08/01/2004 8:05:08 PM PDT by July 4th (You need to click "Abstimmen")
[ Post Reply | Private Reply | To 219 | View Replies]

To: Petronski

apparantly everyone gets a rebate check from the government: rich or poor. Doesn't sound like such a good idea to me

226 posted on 08/01/2004 8:05:53 PM PDT by arielb
[ Post Reply | Private Reply | To 223 | View Replies]

To: B4Ranch; Taxman; CHIEF negotiator
As much as I'd love to see the IRS completely destroyed, if the states are going to collect the taxes, we're no better off than we were before.

I've been self-employed for many years. I have much more problems with the State of Texas taxes than the federal taxes.

227 posted on 08/01/2004 8:06:19 PM PDT by TexasCowboy (COB1)
[ Post Reply | Private Reply | To 134 | View Replies]

To: Remember_Salamis
The Speaker of the House will push for replacing the nation's current tax system with a national sales tax or a value added tax, Hill sources tell DRUDGE.

VAT is one of the choices listed..

228 posted on 08/01/2004 8:06:19 PM PDT by Drammach (Freedom; not just a job, it's an adventure..)
[ Post Reply | Private Reply | To 149 | View Replies]

To: arielb

It's an administration issue. How are you going to track when someone has spent up to the necessity level every month?

It's easier to just cut a check and tax everything at the point of sale.

Of course, the upside for taxpayers, is that every time we make a purchase, we are reminded of the true tax rate. It isn't hidden by withholding, or being built into the cost of the product.

It's a revenue neutral plan, the total tax burden is just frontloaded so that we can all see it. read it, it's really pretty cool.

229 posted on 08/01/2004 8:06:29 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 220 | View Replies]

To: Drammach

A VAT is a monumentally bad idea. A NRST, however, actually makes a lot of sense.

230 posted on 08/01/2004 8:07:25 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 228 | View Replies]

To: Kackikat

Even if the the government saved nothing from eliminating the IRS it would be worth it to no longer have to hassle with tax forms and the invasion of privacy inherent in an income tax.

231 posted on 08/01/2004 8:07:44 PM PDT by Libertarianize the GOP (Make all taxes truly voluntary)
[ Post Reply | Private Reply | To 204 | View Replies]

To: dubyaismypresident

It's only appropritate that Bush's War of Terror would include the original purveyor's of domestic terror in his crosshairs: the IRS

232 posted on 08/01/2004 8:08:08 PM PDT by Agamemnon
[ Post Reply | Private Reply | To 1 | View Replies]

To: arielb

"No. I work in a retail business (restaurant). The burden of taxation will be focused on people like me."

Do you pay taxes as it is? Do you file as both an individual and a business? Under the FairTax, you'll only file once. Read the following on the FairTax and retailers. There's a reason why the national association of retailers is endoring the FairTax.

Why Retailers Should Support the FairTax(SM)

Retailers Will Be More Profitable
• Like other firms, retailers will enjoy a zero corporate tax rate and their shareholders will not be taxed on dividends or capital gains on their investments.
• Retailers will receive a collection fee of 25 basis points on federal funds collected.
• Compliance costs (discussed below) will be lower by a conservative estimate of $225 billion.[1]

The Economy Will Grow, More People Will Have Jobs, Incomes Will Increase More Rapidly
• Those taxpayers who receive a payroll check will benefit from more disposable income from the first day under the FairTax, due to the repeal of the payroll tax in its entirety.
• All known economic projections predict a much healthier economy.[2] People are willing and able to purchase more goods and services in a healthy economy. Typical estimates are that the economy will be 10 to 14 percent larger within 10 years and consumption will grow very substantially. Some studies show the potential gains to be much higher.[3] Real wages will increase. Retailers will make more money in a prosperous, growing economy.
• Consumer interest rates will fall dramatically, between 25 to 30 percent.[4] Therefore, consumer’s ability to finance consumption will increase. In the case of interest that is presently deductible (home mortgage interest deductions, etc.), this projected drop in interest rates should more than off-set any benefits lost due to the lack of deductibility.[5] With regard to consumer loans, since consumer interest is not deductible under present law, the effect of lower interest rates will strongly and positively impact credit card or consumer loan financed purchases.

Consumption Is Taxed Once Under Both an Income Tax and a Sales Tax
• Under the current federal income tax system, as well as under the FairTax, consumption purchases must be made from after-tax dollars. Therefore, the primary difference between a sales tax and an income tax is not the way they impact consumption, but rather how they impact savings. The income tax double or triple taxes savings, while the sales tax does not tax savings until consumed.
• The criticism by some that consumers will not have available funds to pay the sales is incorrect. Consumers will see their paychecks immediately increase by over $1.6 trillion because income and payroll taxes are eliminated (estimated for 2001). In addition, Dale Jorgensen, head of the Economics Department at Harvard University, has shown that producer prices will drop between 15 and 25 percent after the switch to consumption-based tax. A substantial part of producer price reductions can be passed on to the consumer in the form of lower retail prices, which will increase consumer demand. But, while offering lower prices, retailers will be able to maintain their current profit margins.

Retailers Suffering From Direct Mail Competition and Cross State Sales Should Benefit
• Direct mail sales from out of state sources, and in practice, made tax-free because state use taxes are not enforced. Under the new system, retailers must collect the federal sales tax on all sales occurring within the United States. States that choose to conform to the federal base will have the added advantage of information sharing and clear interstate revenue allocation rules. The ability for the state to collect these heretofore-uncollected taxes would be a major incentive for states to conform their sales tax to the federal sales tax base. Retailers suffering from tax-free direct mail competition or from tax-free sales from out of state retailers would see a major competitive disadvantage removed.

Retailers’ Compliance Costs Will Be Lower
• Instead of having to comply with the complexities of the income tax and payroll tax, there will be one sales tax on all goods and services.
• The firm will simply need to calculate its total retail sales on a monthly basis.
• No more uniform inventory capitalization requirements.
• No more complex rules governing employee benefits and retirement plans.
• No more tax depreciation schedules.
• No more tax rules governing mergers and acquisitions.
• No more international tax provisions.
• Over time, most states will conform their sales taxes to the federal sales tax, reducing the costs of complying with multiple rules in each state and its political subdivisions.
• The firm’s accounting, tax and personnel (human resources) departments will shrink dramatically.

The Mad Dash to Consume Prior to Enactment of the FairTax
• Some retailers have speculated that in the period prior to the enactment of a consumption tax, there will be a "mad dash" by consumers to purchase durable goods without tax. This positive spike in consumption prior to enactment would then be followed by a compensatory drop in consumption of equal magnitude. This drop in consumption would translate into a lack of sales tax revenue for the government during a period following enactment.
• The government would not, however, lack funding during this period. It would benefit from the income tax imposed on corporate profits as a result of any increase in earnings during the period preceding the enactment of the FairTax. In other words, a drop in revenues from retail sales, should it occur temporarily, would be offset by revenues derived under the old income tax system—from corporate income taxes on earnings, payroll taxes, and income taxes received from individual workers earnings as a result of increased demand for goods. It should be noted that consumption of durable goods represents only 14% of total consumption.

The National Retail Association and the Nathan Associates Study
• A study prepared by Nathan Associates[6] for the National Retail Institute, which by its own admission made every conceivable adverse assumption, represents the worst case scenario for a consumption tax. It predicts that the economy will grow only three percent more in ten years than it would have under the income tax and that the increase in consumption will be 1.15 percent less in the first year relative to what it would have been under the income tax. The Nathan study concludes that consumption will be higher in the fourth year and every year thereafter than it would have been under the income tax. In other words, even in the Nathan Associates worst-case scenario, consumption will continue to grow at a healthy pace. (The Nathan study did not assume the repeal of the payroll tax in its entirety, as called for by the FairTax plan.) Even if the growth in consumption is reduced in the first year by the amount predicted by Nathan Associates, retailers will be more profitable after-tax because of the repeal of the income tax and lower compliance costs. This study assumes 1) very low labor responsiveness to lower tax rates on labor, 2) that every dollar in new U.S. investment must come from the U.S. rather than foreign investors and, 3) there will be very small effects of increased investment on productivity. Additionally, the study assumes no gain in productivity from lower compliance costs.

[1] Compliance Costs of Alternative Tax Systems II, Arthur P. Hall, Ph.D., Senior Economist, The Tax Foundation, Special Brief, House Ways & Means Committee Testimony, March 1996; Testimony of Arthur Hall, before the Ways and Means Committee, March 20, 1996 on "Replacing the Federal Income Tax" wherein he estimates that under a national retail sales tax plan compliance costs would decline by 95 percent to $8.2 billion.

[2] See, e.g., "The National Sales Tax: Moving Beyond the Idea," Tax Notes March 21, 1996, David R. Burton and Dan R. Mastromarco. "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax"; Laurence J. Kotlifkoff, April, 15, 1993, Cato Institute Policy Analysis; The Economic Impact of Taxing Consumption; Dale W. Jorgenson, Ph.D., Harvard University, Testimony before the Ways and Means Committee, March 27, 1996; "The Economic Impact of Fundamental Tax Reform, Dale W. Jorgenson; Testimony before the House Ways and Means Committee, June 6, 1995.

[3] "The Economic Impact of Fundamental Tax Reform, Dale W. Jorgenson, Testimony before the House Ways and Means Committee, June 6, 1995. "Looking Back to Move Forward: What Tax Policy Cost Americans and the Economy; Gary Robbins, Aldona Robbins, September 1995, Policy Report Number 127, Institute for Policy Innovation.

[4] John E. Gobb, Economic Review, Federal Reserve Bank of Kansas City, "How Would Tax Reform Affect Financial Markets?", Fourth Quarter, 1995. He estimates a 25–35 percent drop (p. 27). See also The Flat Tax, 2nd Edition 1995, Robert E. Hall and Alvin Rabushka, The Hoover Institution Press.

[5] "The Economic Impact of Fundamental Tax Reform, Dale W. Jorgenson, Testimony before the House Ways and Means Committee, June 6, 1995. "Looking Back to Move Forward: What Tax Policy Cost Americans and the Economy."

[6] Replacing the Federal Income Tax with a Consumption-Based Tax System, Nathan Associates, Inc., for the National Retail Institute, March 1996.

233 posted on 08/01/2004 8:08:13 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 190 | View Replies]

To: Libertarianize the GOP


234 posted on 08/01/2004 8:10:07 PM PDT by Kackikat (,Kerry=the counterfeit, GWBush is the real deal!)
[ Post Reply | Private Reply | To 231 | View Replies]

To: Taxman

"I am talking about the total economic cost which includes the economic disincentives to work, save and invest. See James L. Payne's work -- he calculated .$65 in 1995. It has gone up since then."

-- I thought I read at that $0.65 is the high-end number.

235 posted on 08/01/2004 8:10:31 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 206 | View Replies]

To: Petronski
How does that rebate work?

Everybody gets a rebate check for the same dollar amount: you, me, and Bill Gates. It's enough to cover the taxes paid on purchases up to the poverty level or thereabouts. This turns the FairTax into a progressive system; as you spend more, the rebate cancels less of your taxes percentage-wise, so your effective rate increases.

236 posted on 08/01/2004 8:10:58 PM PDT by ThinkDifferent
[ Post Reply | Private Reply | To 223 | View Replies]

To: Petronski

"How does that rebate work? If I'm poor, I file a form stating my income and records of what I paid in sales tax and they send me a check?"

The rebate has nothing to do with income level, or spending. It depends only on family size (as determined by verifiable SSNs). It is a very simple and clean way to ensure that the system is not regressive. Those living at or below the poverty level would see a 15 - 30% increase in purchasing power.

237 posted on 08/01/2004 8:11:03 PM PDT by phil_will1
[ Post Reply | Private Reply | To 223 | View Replies]

To: Petronski; arielb
This is from the website:

No federal sales tax up to the poverty level means progressivity like today's tax system. Furthermore, to ensure that no American pays tax on necessities, the FairTax plan provides a prepaid, monthly rebate for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This, along with several other features, is how the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive. However, the FairTax is progressive based on lifestyle/spending choices, rather than simply punishing those taxpayers who are successful. Do you see how much freer life is with the FairTax instead of the income tax?

Check out the overview of the whole tax plan here.

238 posted on 08/01/2004 8:11:09 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 223 | View Replies]

To: Remember_Salamis
It's a wonderful idea, and perhaps this is just the crusty old cynic in me, but I don't see it passing in any pure form, and I see our corrupt politicians exploiting too many loopholes, passing exemptions, or just plain ignoring it.

We still need meaningful spending limits. Else how much is each government department going to know how much to spend at the POS?

239 posted on 08/01/2004 8:11:25 PM PDT by YankeeDoodleBoy
[ Post Reply | Private Reply | To 224 | View Replies]

To: ovrtaxt

it will also create lots of opportunities for fraud and abuse. Several people will try to get more than one check once you have this new attitude of "who cares who you are-just take the check"

240 posted on 08/01/2004 8:11:37 PM PDT by arielb
[ Post Reply | Private Reply | To 229 | View Replies]

To: ovrtaxt
I would prefer a flat tax set at a nominal level and changeable only by constitutional amendment..
( personally, I would prefer no tax at all.. )

I don't have any real argument against NRST, as long as congress is prohibited from changing the tax levels, willy-nilly, whenever they feel like it..
There has to be harsh constraints on any new tax system to curb abuse by congress, and government in general..

241 posted on 08/01/2004 8:12:50 PM PDT by Drammach (Freedom; not just a job, it's an adventure..)
[ Post Reply | Private Reply | To 230 | View Replies]

To: Libertarianize the GOP
Even if the the government saved nothing from eliminating the IRS it would be worth it to no longer have to hassle with tax forms and the invasion of privacy inherent in an income tax.

Absolutely. Although I suspect many may consider the invasion of privacy to be a feature; lots of data for Carnivore/Echelon/CAPPS/etc...

242 posted on 08/01/2004 8:13:20 PM PDT by ThinkDifferent
[ Post Reply | Private Reply | To 231 | View Replies]

To: arielb

"No. I work in a retail business (restaurant). The burden of taxation will be focused on people like me."

You would STOP worrying about both payroll and corporate income and payroll taxes and instead collect the NRST. Furthermore, you would get to keep a small percentage of the tax collected to defray your administrative cost. That is a HUGE net decrease in your overall administrative burden.

243 posted on 08/01/2004 8:14:23 PM PDT by phil_will1
[ Post Reply | Private Reply | To 190 | View Replies]

To: Petronski
"I don't mind making the federal income tax less progressive, but making federal taxation regressive is going to lose elections."

-- It's not regressive. The good people at

solved the dilemma of sales taxes: how to get progressivity. How did they do it? Every American will recieve a "prebate" every month to pay for enough goods and services up to the poverty line. If you live exactly at the poverty line, you pay 0% in taxes (including no payroll taxes). If you're below it, you pay a negative rate. The higher up in your income you go, the less the "prebate" is a factor in how much you pay in taxes.

Take a look at the chart:

If that's not progressive, I don't know what is.

244 posted on 08/01/2004 8:15:37 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 210 | View Replies]

To: c-b 1

yup you got that right.

I only support the abolition of the IRS I don't support a new tax of any kind shape or size.

245 posted on 08/01/2004 8:16:33 PM PDT by festus (The constitution may be flawed but its a whole lot better than what we have now.)
[ Post Reply | Private Reply | To 42 | View Replies]

To: c-b 1

If this is passed by the RNC you think we'll see a Democratic anything?

246 posted on 08/01/2004 8:17:33 PM PDT by Bogey78O (Kerry lied and if elected people will die.)
[ Post Reply | Private Reply | To 42 | View Replies]

To: Drammach
A flat tax is still a tax on income.

The fairtax is a tax on spending. It's a whole different ballgame.

(I would prefer that we do all this fundraising with Tariffs, like the Constitution says we are supposed to. But, that ain't gonna happen anytime soon.)

There has to be harsh constraints on any new tax system to curb abuse by congress, and government in general..

Think about the beauty of having a sales tax rate at every purchase you make. EVERY SINGLE AMERICAN suddenly sees their tax rate every day. And you think a politician is goin gto get very far talking about an increase? HEHEHE!!!

247 posted on 08/01/2004 8:17:40 PM PDT by ovrtaxt (The Fleet Center? Isn't Fleet an enema company?)
[ Post Reply | Private Reply | To 241 | View Replies]

To: arielb
Read this on evasion. -----------------------------------------------------------

The FairTax, Tax Evasion, and the Underground Economy

An old aphorism says that only two things are certain in life—death and taxes. Perhaps a third certainty should be added to the list—tax evasion! Taxes are unpopular and breed resentment today—as they undoubtedly always have, and to some degree probably always will. Accordingly, some people will evade taxes no matter what the governing tax system, but perhaps some tax systems will "inspire" less tax evasion than others. This paper examines the issue of whether replacing the income tax with a single rate, federal sales tax is likely to increase or reduce tax evasion.[1]
Tax Evasion Today
Under today's income tax system, tax evasion is a major, continuing and growing problem. Under the pressures of a much larger Internal Revenue Service (IRS), more burdensome information reporting requirements, increasingly stiff and numerous penalties, and a host of legislative initiatives, the problem is getting worse. Based on IRS figures, tax evasion has increased by 67 percent during the most recent 11-year period for which data is published. As a percentage of Gross Domestic Product (GDP), tax evasion has reached 2.0 percent in 1992 as compared to 1.6 percent in 1981. Tax evasion continues to amount to approximately 22 to 23 percent of all income taxes collected.  (See table next page). And, these IRS figures do not include taxes lost on illegal sources of income.

The income tax is collected with a heavy hand. In 1997, the IRS assessed over 33 million civil penalties on American taxpayers in an effort to force compliance with the tax system. Of these, about 4.1 million were forgiven. 22.7 million penalties involved the income tax and 9.7 million involved the payroll tax, taxes that the FairTax would replace.[2] Under the FairTax, even if we assumed that every business in America was a retailer and required to file a tax return, no more than 19 million businesses would be required to file returns compared to over 154 million returns (of all types) filed

The tax gap is the difference between what is theoretically owed in taxes and what is actually collected in taxes. In a comprehensive look at the tax gap, the General Accounting Office stated:

Almost every year since 1981 has witnessed legislation to address tax gap issues. These legislative actions generally required information returns [1099's] reporting on income and deductions, imposed penalties for tax noncompliance, or reduced the opportunity for noncompliance by eliminating certain tax write-offs. [The] IRS estimated that some of these provisions resulted in additional 1990 tax revenue of $3.4 billion. Even so, [the] IRS' estimated tax gap increased $50.7 billion in current dollars from tax years 1981 to 1992. However, the growth of the gap could have been higher without these legislative actions.[4]

Relative Magnitude of Tax Evasion Under the Income Tax 1981–1992[5]
Using Internal Revenue Service Estimates


Total tax gap
(Real 1992 $ millions) 
As a Percentage of Income
Taxes Collected
As Percentage of Gross
Domestic Product
Annual Growth Rate
1 0
Annual Growth Rate

According to the IRS, individuals accounted for $94 billion of the $127 billion tax gap and corporations for $33 billion in 1992. About half of the gap is caused by unreported income. If all of this lost tax revenue were collected, the tax burden on law-abiding citizens could be reduced by one fifth to a quarter.

Periodically, the IRS conducts a series of extremely intrusive audits of taxpayers selected at random, and requires those taxpayers to document every item on their tax return to the minutest detail.  These audits are part of the Taxpayer Compliance Measurement Program or TCMP. The 1988 TCMP statistical sample included audits of over 54,000 individual taxpayers, theoretically representing 104 million taxpayers. CMP data showed that if all 104 million taxpayers had been audited, 42 million (40 percent) of them would have seen increases in their tax liabilities.[9]

Tax Evasion Under the Income Tax 1981–1992[10]
Internal Revenue Service Estimates
($ millions (inflation adjusted 1992 dollars))

Source of tax gap
1981 tax gap amount   

1992 tax gap amount   

Percentage increase
Individual tax gap
Unreported income
Sole proprietors
All other income
Overstated deductions
Individual non-filers
Individual remittance gap
Math errors
Corporate tax gap
Small corporations
Large corporations
Corporate remittance gap
Total tax gap

The General Accounting Office, in its recent tax gap report said:
The TCMP data showed that an estimated 33 million of the 42 million taxpayers (82 percent) were not assessed a fraud or negligence penalty, suggesting that much of their noncompliance was unintentional.

Although forty percent of Americans are not in compliance with the income tax, the reasons for non-compliance are instructive: (1) taxpayers lack the requisite knowledge of the tax law—of course, even tax lawyers and IRS agents cannot grasp the entire tax code these days; (2) taxpayers interpret the law differently than the IRS—but you can depend on the IRS to almost always make aggressive interpretations in favor of the government; (3) taxpayers lack record-keeping ability sufficient to satisfy the IRS—this from an agency that has such poor internal records that it cannot even be audited! (4) taxpayers do their math wrong, or they rely on professional return preparers who get it wrong—if professional tax preparers can't get it right, how are ordinary Americans to do so?[11]

Primary Taxpayer Compliance Measurement Program (TCMP) Reasons for Tax Increase[12]
When Taxpayers Were Not Assessed a Negligence or Fraud Penalty for 1988 (Dollars in millions)

Reason for noncompliance

Number of taxpayers

Amount of tax increase
Multiple interpretations of tax law   
Lack of substantiation
Incorrect accounting or computational procedures
Relied on a return preparer and did not help with preparation     
Lacked knowledge of tax laws to prepare accurate return     

Tax evasion is a major, growing problem under the income tax system, notwithstanding the monumental and increasingly harsh and administratively burdensome steps taken to enforce the law. Forty percent of the American public is out of compliance with the current tax system. All of this despite the $225 to $300 billion spent by the private sector trying to comply with the federal income tax system.[13]

The FairTax and Tax Evasion
Opponents of the FairTax like to assert that a federal sales tax would increase tax evasion. It is more likely, however, that the FairTax would increase tax compliance while reducing compliance costs at the same time. It is impossible to argue in good faith that the current approach is doing its job since the problem is getting worse with the passage of time despite major and ever more intrusive attempts to address the problem.

Estimated Tax Gap by Source[14]
for 1981 and 1992, in Current Dollars
(Dollars in millions)


1981 Tax Gap Amount

1992 Tax Gap Amount
Individual filers Wages and salaries
$2,378 $1,919
1,969 1,891
2,075 2,142
State tax refund
127 102
124 253
Capital gains
1,822 11,535
Form 4797
217 1,264
Pensions and annuities
456 144
Taxable unemployment
107 388
Farm income
2,350 1,909
Partnership income
2,755 2,246
Small business (S) corporation
912 729
Estates and trusts
49 73
Rents and royalties
2,012 4,481
Non-farm sole proprietors
18,714 30,173
Other income
4,366 3,465
Taxable Social Security
0 44
Adjustments to income
752 694
3,540 3,889
1,844 2,224
1,313 1,274
Math errors
487 1,521
Individual non-filer tax gap
5,231 10,233
Individual remittance gap
8,300 11,400
Total individual tax gap
$61,900 $93,994
Small corporation tax gap 
4,461 6,999
Large corporation tax gap 
8,638 23,716
Unrelated business income gap  
56 218
Fiduciary tax gap
111 202
Corporate remittance gap
800 2,000
Total corporate tax gap 
$14,065 $33,135
Total tax gap 
$75,966 $127,129

Some of the problems regarding the underground economy that exist under the income tax would remain under the FairTax, particularly those involving cash transactions made in the illegal economy or with the explicit intent of evading taxation. However, as the costs of compliance shrink and the perceived fairness of the tax system increases, some of the hostility to the tax system will decline. People who are in noncompliance because they perceive the present system as unfair or illegitimate may choose to comply with the FairTax. Most importantly, because of lower marginal tax rates, the benefit from lawful tax avoidance or illegal tax evasion will be much less at the margin relative to either the present system[15] or competing alternative tax systems, such as the USA Tax or flat tax[16], that have higher marginal tax rates, particularly on wages or self-employment income.[17] Research has confirmed the intuitive relationship between higher marginal tax rates and higher rates of evasion.[18] Lower rates, all other things being equal, imply lower evasion because the benefits from evasion decline while the costs of evasion remain comparable.

Much is made from the fact that a federal sales tax would place the responsibility for tax collection with the retailer, a sector of the economy in which small businesses are better represented. Small businesses are viewed as more likely to evade taxes since the owner, and beneficiary of tax evasion, is more likely to also be responsible for keeping the books and filing the tax returns. While there is, of course, some truth to the proposition that evasion rates among small businesses are higher, it is highly implausible to suggest that evasion would increase under the FairTax. First, those small businesspersons that are inclined to cheat on their sales tax are probably already cheating on their income tax and would be inclined to do so under any tax system. Second, the economic importance of small firms in the retail sector is usually grossly overstated According to the Joint Committee on Taxation (JCT), small firms only account for 14.9 percent of gross receipts by all retailers, wholesalers and service providers.[19] Since the gross receipts of wholesalers would not typically be subject to tax, the true scope of the small "problem" companies is smaller still. However, sole proprietorships, perhaps the most likely to evade tax under the present system and under the FairTax, are not included in the JCT figures.

Share of Total Gross Receipt by Firms with less than $1 million of
Gross Receipts

($ millions, 1993)


Entity Type

Firm Sales Under $1 mil.

Firm Sales All Firms

Small Share Percent
Retail and Wholesale Trade
C Corp.
116,929 2,663,541 4.4%
C Corp. 
91,383 610,438 15.0
Retail and Wholesale Trade
S Corp.
358,566 959,501 37.4
S Corp.
98,721 283,680 34.8
Retail and Wholesale Trade
22,938 112,112 20.5
30,783 187,588 16.4
719,319 4,816,860 14.9

Third, the necessary corollary of the tax collection point being concentrated at retail establishments, rather than with individuals or other businesses, is that there are fewer points where revenue agents must concentrate their enforcement efforts. The collection points in the FairTax system would be perhaps 10 percent of those under the current income tax system or other alternative tax systems.[21] Because the number of collection points is so much lower, if enforcement funding is held equal then the audit rate for potential evaders would increase considerably, and the likelihood of them being apprehended is correspondingly higher. In other words, the risk of detection would increase and risk-adjusted cost of evasion would increase. Increased evasion due to the greater concentration of small businesses in the retail sector would be outweighed by greater compliance due to greater simplicity and perceived legitimacy of the tax system, from reduced temptation due to lower marginal tax rates, and from higher risk of detection due to a smaller taxpayer population. Fourth, some small business owners evade taxes because they feel the present system is unfair or overly complex and burdensome, or that they have been wronged by the system.  They are much less likely to feel that way about the FairTax. Fifth, and perhaps most importantly, the marginal benefit from evasion will decline under the FairTax since the marginal tax will decline. Thus, the incentive to cheat will decline markedly.

Any one of the 118 million income tax filers can cheat the income tax system today, and a great many do so. Under the FairTax, however, only retailers (about 14 million-tax filers altogether) would be in a position to cheat In addition, the vast majority of retail sales, 90 percent, are made by large firms that are less likely or find it more difficult to cheat. A retailer who cheats under the income tax system has very similar, if not the same financial gain, as a retailer who cheats under the FairTax system. If a retailer under the FairTax system, failed to report taxable sales, the government would lose and the evader would gain by an amount equal to the sales tax on the good or service purchased. In an income tax system, the government loses and the evader gains by an amount equal to the marginal income tax rate times the amount not reported. An income tax evader will see his taxable income go down dollar for dollar, for every dollar of income not reported. Typically, failing to report a small fraction of a business' gross income will be sufficient to drive its reported profit to zero.

Even if, however, we were to make the unlikely assumption that evasion rates would be higher under the FairTax system than under an income tax system, they would have to be much higher to justify the income tax's huge compliance costs (estimated to be over $225 billion in 1996), many of which are incurred by businesses and are deductible as a business expense. Moreover, if compliance proved to be a problem, information reporting along the lines of present law (1099's) could be implemented to facilitate cross-checking by government auditors. These 1099s would reflect the quantity of product sold to retailers. An auditor could then ensure that the retailer's books either reflected a sale of these products or that the products were in inventory. The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]

Tax evasion will undoubtedly be a problem under any tax system. It is a major and growing problem under the current tax system, despite very substantial efforts and increasingly harsh treatment of the taxpaying public. Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system. This breeds disrespect for the tax system and the law, and makes a system based on taxpayer self-assessment less and less viable.

The FairTax is likely to reduce rather than exacerbate the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system will induce more compliance. The roughly 85 to 90 percent reduction in filers will enable tax administrators to address instances of noncompliance more effectively, and increase the likelihood that tax evasion will be discovered. The relative simplicity of the FairTax will promote compliance. Businesses will need to answer one question to determine the tax due: how much was sold to consumers? Finally, the dramatic reduction in marginal tax rates will reduce the gains from tax evasion. If the cost of noncompliance remains comparable (or even increases due to the increased likelihood of getting caught caused by the much smaller number of filers), then both the expected profit from and frequency of tax evasion will decline.

[1] In the parlance of modern tax administration, the question of whether the FairTax would increase or reduce voluntary compliance would be posed.  Many taxpayers, however, find the term "voluntary compliance" to be oxymoronic since failure to pay taxes would result in a prison term.

[2] Internal Revenue Service, 1997 Data Book, Table 15.

[3] See SOI Bulletin, Winter 1998-1999, Table 12, p. 210. Note: Sole Proprietorships with less than $2,500 in annual receipts excluded since they de minimus rules in the FairTax would not require most of them to file returns.

[4] Tax Gap: Many Actions Taken, But A Cohesive Compliance Strategy Needed, May 1994, General Accounting Office, GAO/GGD-94-123 (hereinafter "GAO")

[5] GAO, Supra.

[6] $198 billion in 1998 dollars. See, e.g. "IRS Doubles Previous Estimate of Unpaid Taxes," Associated Press, May 3, 1998.

[7] 4.79 percent using a continuously compounding growth rate.

[8] 5.72 percent using a continuously compounding growth rate.

[9] GAO, Supra.

[10] See, GAO, Supra.

[11] The annual Money magazine survey in which 50 accountants prepare a hypothetical middle class couple"s tax return and come up with at least 45 different answers each year is a major indication that our tax system is simply not administrable.

[12] GAO, Supra.

[13] See, e.g. "Federal Tax Compliance Costs Climb to $225," Tax Features, Tax Foundation, March 1996. See also, March 20, 1996.  James L. Payne, Costly Returns, The Burden of the U.S. Tax System. (ICS Press, 1993). Testimony of James L. Payne, "Replacing the Federal Income Tax", Hearings before the Committee on Ways and Means, House of Representatives, June 6, 7 and 8, 1995, Serial 104–28, p. 183-187.

[14] Source: Income Tax Compliance Research, IRS Publication 1415. Gross Tax Gap Estimates by Source of Tax Gap for Tax Years 1981 and 1992, in 1992 Dollars, reprinted in GAO Supra.

[15] For 2000, the 28 percent marginal rate is effective on taxable incomes of $43,850 for joint filers and $26,250 for single persons. The top federal tax rate, of course, is 39.6 percent.

[16] The USA Tax has a top marginal tax rate of 40 percent (actually an effective rate of 32.35 once the payroll tax credit is considered) that takes effect at relatively low taxable income levels. Even a relatively low flat tax rate of 17 percent, plus the 15.3 percent payroll tax, yields a marginal tax rate of 32.3 percent until the Social Security wage base is reached and 19.9 percent thereafter (including the 2.9 percent Medicare tax). At a 20 percent flat tax rate (the beginning rate under the Armey plan), the lowest marginal tax rate is 22.9 percent and 35.3 percent for most middle class wage-earners.

[17] For a particular taxpayer, the marginal benefit from failing to report a given amount of gross receipts under an income tax and a given amount of gross receipts under the FairTax are the same. Under an income tax, the taxpayer will reduce his taxable income one for each dollar not reported. In the FairTax, failing to report sales receipts would also reduce taxable receipts dollar for dollar. Although the problem of falsifying deductions or deducting personal items as a business expense does not arise in the FairTax, the corresponding problem in the FairTax is using a business to attempt to purchase personal goods and services on a tax-exempt basis.

[18] See, e.g. "Estimating the Underground Economy: A Critical Evaluation of the Monetary Approach", Peter S. Spiro, 42 Canadian Tax Journal 1059–1081 (1994); "The Underground Economy in the United States: Annual Estimates, 1930-80", Vito Tanzi, 30 International Monetary Fund Staff Papers 283–305 (June 1983).

[19] IRS Statistics of Income, reported in "Impact on Small Business of Replacing the Federal Income Tax," Joint Committee on Taxation, April 23, 1996, JCS-3-96, pp. 109–127.

[20] Ibid.

[21] See note 3, supra.

[22] State governments, particularly with respect to tax due on out-of-state purchases by businesses, currently use this method.  State sales taxes are, unfortunately, often applied to business inputs.


248 posted on 08/01/2004 8:17:53 PM PDT by Remember_Salamis (Freedom is Not Free)
[ Post Reply | Private Reply | To 211 | View Replies]

To: phil_will1

Fascinating. I don't want to sound like an elitist, but I have to ask this question.

I understand this stuff, but I have a degree in economics. Will the Republican Party be able to win the battle of ideas in campaign advertising?

And does this new plan not effect until the 16th is actually repealed (38 states, etc)? Because if this plan is instituted, but the 16th is not repealed, the income tax WILL return, on top of the NRST.

249 posted on 08/01/2004 8:18:09 PM PDT by Petronski (Edwards threatening al Qaida is like Pee Wee Herman threatening Luca Brazzi.)
[ Post Reply | Private Reply | To 237 | View Replies]

To: Drammach

a constitutional amendment? you mean like the balanced budget amendment, term limits, flag burning, Defense of marriage and all the other ones that failed? We can't count on a repeal of the 16th amendment either

250 posted on 08/01/2004 8:18:17 PM PDT by arielb
[ Post Reply | Private Reply | To 241 | View Replies]

Navigation: use the links below to view more comments.
first previous 1-50 ... 151-200201-250251-300 ... 651-656 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794 is powered by software copyright 2000-2008 John Robinson