Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

Tax avoidance issue

A couple of weeks ago I was randomly selected to participate in a telephone town hall meeting with Congressman Roy Blunt of Missouri. Time ran out before I was able to ask my questions but I was able to leave them on voice mail following the meeting. This afternoon I received a call from Dan Wadlington, a representative of Congressman Blunt, regarding my questions and request for follow-up. Mr. Wadlington was quite aware and knowledgeable regarding the FairTax, which I took to be a positive sign.

According to Mr. Wadlington, Congressman Blunt is not and has never been against the FairTax. He does not support it, but neither is he against it. He is in favor of tax reform and would support any plan that would simplify our tax system and make it more fair. However, he does have concerns about the FairTax bill.

His primary concern, it seemed to me, was that of tax avoidance. "Why," he asks, "if the tax is placed only on new houses and new autos, would anyone build a new house or buy a new auto? If people can avoid paying a tax, they will."

I must admit that this is an argument I have no ready response to. This aspect of the FairTax plan has always left me unsatisfied as well. While I still believe a consumption tax is preferable to our current system of taxing income I think we need something better than to say, "People have and will always endeavor to avoid paying taxes. That won't change under the FairTax plan." We need to be able to, at least, show that tax avoidance or evasion will not be higher under the FairTax.

Any help with this argument would be most appreciated. I loaned out my original FairTax book and don't have it readily available for a refresher on this point. I believe this is an argument we are going to need to be able to counter effectively. Thanks.

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Permalink Reply by chiefcook on May 22, 2009 at 8:54pm

You are looking at the last seller/distributor tax costs. The total reduction of tax costs for all the different businesses gets removed from the cost of the product to the end seller. As an example, economists calculated there are approx 106 different businesses involved in the production, marketing and distribution of a #2 lead pencil! Consider all the taxes and compliance costs of these businesses combined to equal the 22%. There is also a reduction in the overall cost as the businesses in the chain apply a percentage to determine their profit. Since the product cost will be lowered, the amount of the profit will be less as it is passed up the chain of businesses.

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Permalink Reply by Clay Welsh on May 24, 2009 at 10:06pm

Tony, well said. You're right on as usual.

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Permalink Reply by Sean Fagan on May 22, 2009 at 5:28pm

Tim,

I believe what all of these excellent comments are pointing out is simply this - if the price of a new home, car or whatever remains essentially the same under the Fair Tax as it costs now, then people won't necessarily go out of their way to buy a used item just for the sake of avoiding paying the FairTax.

We bought our new home about 5 years ago, and I can honestly say that it would not have made an ounce of difference to us if we were paying the FairTax or not, as long as we paid the same amount for the home.

As a side note, we never buy a brand new car - it is a much better bargain to buy a "nused" car, but there are many who buy a new car every 3 or 4 years regardless - and I don't see that pattern changing just because of the FairTax, especially if prices remain virtually the same.

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Permalink Reply by David Shipp on May 23, 2009 at 8:08pm

I have never purchased a new house and only purchased a new car once. Payed tax on all of them. I think 23% may well be a conservative number when considered for the reduction in new product prices. I also (get boiled) dislike the issue that is made stating, Fairtax (might/will) causes our government to loose taxes on items that are exported. If we can export more, that means we are able to produce more and our workers will have more money to spend on US produced goods and there fore will be paying more consumption tax. Sounds like a GOOD thing to me. If I can make a lot more money and not be in a recession I will be happy to pay a little more in taxes. Besides, why are these people worried about our government not having enough money. Shouldn't they be more concerned with the tax payer having more money? Our government is STEALING too much now any way. I have to live with in my means, why can't they.

Tim , there is a great pdf file at this site that may clear things up for you. You must have a PDF reader installed to read this.

http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf

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Permalink Reply by Tim on May 24, 2009 at 7:54pm

I can't tell you all how much I appreciate all the considered and thoughtful responses to this question. I will certainly not have a problem arguing the issue of "Tax Avoidance" again.
I would also like to mention what this discussion has taught me on a broader scale. I have been a supporter of the FairTax plan for a few years now. I've read both books, but only once. I've not yet read the actual bill. I have told my friends and family about the FairTax. It makes perfectly good sense to me, and so I can't see how anyone could not support it even with a cursory understanding of the details. But, that's no longer going to be enough.

See, up to now the people I have talked to about the FairTax knew nothing, or very little, about it. So, their questions, if they had any, were simple ones. And then I could always conclude with, "Go to fairtax.org and check it out." But, now I see that as the FairTax becomes more popular and the grassroots movement becomes more motivated the detractors are also going to be more knowledgeable and more persistent. In order for me to be effective as a FairTax supporter I am going to have to gain a deeper understanding of the details of the plan.

Thanks again for your excellent responses and I hope to meet up with some of you in Columbia, MO next month.

Regards,

Tim

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Permalink Reply by Jeff G on May 24, 2009 at 8:18pm

Agree with Randy Stone...
While the FairTax would not be applied to the retail sales of used goods, the inherent value of a used good includes the taxes paid when the good was sold at retail. The value is determined by the supply and demand in relation to new goods. The price differential / margins between used and new goods should stay consistent, as the cost and value of used goods are in direct relationship to the cost and value of the new goods. Used/new homes and cars will all reach an equilibrium as supply and demand find the proper price relationship between them.

Consider buying a brand new house for $200,000 (includes $46,000 in tax - all spread over a 30 year mortgage)... and then you have to move a year later for a new job. How much are you going to sell the house for? You going to take a $46,000 loss? No way... your going to sell that house for something close to $200,000. That's the value of the home (new or used). While the new buyer does not pay the FairTax directly (since you've already paid it), the home value includes the taxes already paid.

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Permalink Reply by Randy Stone on May 24, 2009 at 8:57pm

Thanks Jeff, That "IS" how it works!

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Permalink Reply by Nathan & Nicole Lumsden on May 25, 2009 at 10:10am

I wrote a letter to the editor about the Fairtax and it was actually published Apr. 15th. An older gentleman actually looked me up and called me about it. He was a retired IRS agent (for 54 years) and his experience told him that tax avoidance would be the reason the whole thing wouldn't work; otherwise, it's a great idea. I have read both books several times, read the actual bill, and the simplified version (highly recommend the simplified version!) and I was not able to convince him otherwise. I tried to reiterate what the books said about 2 parties having to conspire to aviod it, and how most businesses would not take the chance, so the percentage of cheats would be small. But he thought sole proprietors, like myself, would be cheating all the time based on his years in the IRS, and that was enough lost revenue to be against it. So to him enforcement was impossible. I hope he calls me again after my next letter, I have a lot more to throw at him. Thanks to everyone for sharing their knowledge.

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Permalink Reply by Tony on May 25, 2009 at 2:13pm

Ask him the percentage of non-compliance now and how easy it is to cheat.
Them ask him how it is easier to cheat under the FairTax with less points of taxation to police?

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Permalink Reply by Tim on May 25, 2009 at 3:31pm

Excellent Point, Tony. Thanks for your input. I'm compiling many of these responses and sending them to the Congressman. I figure he will contact me again either to discuss the FairTax or to ask me to stop flooding his office with these arguments. Either way, I'll be ready for him next time.

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Permalink Reply by Randy Stone on May 25, 2009 at 3:34pm

Yes, you are correct! It is a good chance those he claims will cheat under the Fair Tax, he already knows they cheat now!
So many of the underground economy will start paying taxes for the first time under the Fair Tax.

And it is those who know how to cheat and get away with it now that help lead our opposition as well.

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Permalink Reply by Nancy L. Gatchel on May 25, 2009 at 4:30pm

Exactly, Tony!

And since people will have more money in their pockets, and prices change very little, slightly up or slightly down depending, they'll still be buying those new products with no pain and lots of gain. And hopefully, folks will start saving again to purchase some things instead of whipping out the card.