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 John Gaver on May 25, 2009 at 3:18pm

Certainly, people will try to avoid any taxes that they don't have to pay. However, would you buy clothes at a flea market or a used clothing store, just to avoid paying the sales tax. I kinda doubt it. Most people wouldn't. How about buying a used car? Where is the cut-off?

I have bought two new houses in the last three and a half years. If we had to pay a sales tax, we would have done so, in order to get the house that we wanted, on the lot we wanted. It's just the cost of getting what you want and if you can afford it, you pay it, rather than taking something less. Also, when we sold the first house, we would have included "part" of the tax that we paid for that house, in the selling price. You see, the price of used homes is partially based upon what new homes are selling for, "including any taxes".

In Kingwood, where I live, houses on a par with my 3-year old house, but on standard lots, were selling for about $50k more than what we paid for our 3-year old house. Since our house was on a much larger, 1/4 acre corner lot, we decided to ask and got $50K more than we paid. It's just economics. In fact, now that I think about it, since we made so much more on the sale of the first house, we could have probably recovered all of the FairTax, had it been in effect, though not enough to pay the taxes on our new house.

Furthermore, since the builder isn't having to pay income tax, the cost of the new house will be lower, so the sales tax just brings the cost back up to where it was. Then consider that if a quarter or more of your pay check isn't taken out, before you get to see it and you can invest that money, until you spend it, you may well have the extra money to pay the taxes on that new house and opt to do so.

On the income tax side of the coin, we now have, according to a 2000 INS (pre BCIS) report, more than 300,000 US citizens and permanent residents permanently leaving the USA every year. How many of them do you think are poor. (Hint: Poor people can't afford to leave.) That is the ultimate (LEGAL) tax avoidance and as long as we tax income, either progressively or flat, that exodus of the wealthy will continue.

The really bad thing about that exodus is that the top 5% of income earners (the 6.8 million earning more than $153,542) paid more than 60% of the taxes collected in 2006. When the wealthy leave, the government doesn't reduce spending by the amount of taxes those wealthy would have paid. They just expect those of us who are left, to pick up the slack.

After the FairTax becomes law, builders will still build houses and people will still buy them. And when people sell those houses, a few years later, the cost of the sales tax that they paid will be built into the selling price of those houses.

But, while we wait for that time, the income tax and IRS are forcing many of the wealthy to opt for one of the few remaining legal ways to avoid excessive income taxes and more importantly, to avoid the extreme intrusiveness of the IRS and their mostly arbitrary rulings. They are being forced to leave and that drives taxes up for the rest of us.

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Permalink Reply by Dennis Wall on May 25, 2009 at 6:58pm

That was my exact response when I first heard of the Fairtax from a coworker. What keeps everybody from buying used goods only? Later when I started reading the book it dawned on me that it will not be an issue. Lets say you bought a new car 2 years ago for $20,000.oo and today you want to sell it. Lets say it is worth 60% of the new price or $12,000.00. Under the fairtax the same will be true. It want matter if $4600.00 of the new price was taxes. I am not going to knock $4600.00 off and then figure 60% neither will you or anybody else. If every body all of a sudden rushed to buy used goods the prices would go up and make new goods more appealing. And besides there already are embedded taxes in todays cars. Bottom line is people who like new cars now will buy new cars then. And people who like to save that extra money and buy used will buy used.

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Permalink Reply by micheleking on May 25, 2009 at 9:55pm

Can't find notations, but I think it came from N.Boortz: A $300,000 house would actually cost $30k less under FairTax. Surely someone has this info.

Mr. Wenrich's comments run contrary to me. All taxes go except FairTax. 7.65% EE + 7.65 ER + bus. + corp=? The boss now has 7.65% more per emp to invest. Emp. keeps his 7.65% that used to go to SS & Medicare. Which brings me to my question, What is the total % of bus&corp taxes on my new car? Wouldn't this vary for different items? I see this as more than 23%, since corp is 35%.

Read the PDF file hoping to find a housing example. The guy did say there would be a 1-time 2.2% value increase in housing w/out the mortgage interest deduction. Not many taxpayers actually use it. Think less than 20%. (More homework.)

Where is this letter to the editor? We would like to patronize you. Frankly, I am suspect of someone who works for gov long time. Either they saw the easy ride or they are marginally employable elsewhere. I can remember when IRS was a steady 8yrs behind in their "compliance" cases and were proud in 1999 when that rate finally got to 3yrs. At least 12 yrs of 8yrs behind current tax yr.

Perhaps I am a thief at heart, but I just don't see the percentages. On the street it is "1/2 price." Bootleg stove, food stamps, whatever. I come into your shop to by $100 item. I say I don't wanna pay the $23 tax. Am I supposed to split the $23 w/ you? Are you going to risk your business for $12? Or am I supposed to pay you $25 to forget the $23. That don't compute. If I have to buy raw goods for my manufacturing - I get that back. So where do you cheat?

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Permalink Reply by John Gaver on May 27, 2009 at 4:50pm

The corporate tax of 35% is only on "profit". Therefore, if you buy a car for $50k, that doesn't mean that GM pays tax on $50k. Their net profit, before taxes may only be $2K. Therefore, the corporate income tax on that vehicle would be $2k x 35% or $700, not $50k x 35% or $17,500.

The problem with corporate income taxes is that every 3rd party product in that car has corporate tax added to the cost. Steel, tires, wire, computer chips, etc. would all have the corporate tax added to the cost of those products, when they are sold to GM. Of course, the iron that makes the steel, would also have the corporate income tax added to the price paid by the steel mill. It gets very convoluted.

Certainly, there will be some crooked business owners, who will try to cheat on sales taxes. But, people who have a lot of money and time invested in a business are not likely to risk their whole business on a tax that is "pass-through". It is important to note that the business owner does not pay the sales tax. The tax is paid by the buyer and only "passes through" the hands of the business.

While there are some people who will try to keep some of that money for themselves, most businesses won't take that chance, with government money, since the government could close down an otherwise profitable business. In other words, any such cheating will probably be very minimal and limited mostly to business that are already in trouble and as such, likely don't collect that much in taxes.

There will always be tax cheats. But, there is much less likelihood of cheating with the FairTax, than with any other form of taxation.

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Permalink Reply by micheleking on May 27, 2009 at 7:15pm

Mr. Gaver, thanks for the math. I'm w/ you, it gets convoluted. I think much more tax is imbedded than 26%. If there were a pie chart of the % of tax imbeded per group, what would it look like? Sorry I'm tongue tied.

Ind. tax is what, 50%. business 25% corp 25% ?

Per your example: $2K corp taxes is added to my car for sure. ind tax? bus tax?