EVASION UNDER THE FAIRTAX
Over the years there have been many attempts by Swamp minions to dismiss the FAIRtax. With no evidence, they have loudly asserted, There will be much more evasion with the FAIRtax than there is with the income tax.
While this is patently absurd and makes you feel like you are debating someone who insists the earth is flat, there was a time when FAIRtax supporters did not have any actual studies addressing this point.
The National Tax Research Center (NTRC) contracted with Dr. Cebula prepare an excellent study on income tax evasion in the United States. NTRC also contracted with David Burton to do a study addressing evasion under a retail sales tax like the FAIRtax.
Below is the Introduction to the Burton study and his Executive Summary. Hit this link to see the entire study.
Introduction
In the attached study, David R. Burton illustrates how to materially reduce evasion of federal taxes in the United States.
Reducing tax evasion is important because, at more than $400 billion per year in 2006, the tax gap, which is the difference between taxes owed and taxes paid, is more than one-sixth of federal revenue. Unfortunately, 2006 figures are very likely outdated, and other experts conclude that the tax gap has likely increased significantly and is likely to continue to grow.
For example, in 2017, Richard Cebula and Fiorentina Angjellari-Dajci estimated that:
- The tax gap was $693 billion in 2017 and will likely increase to nearly $1.2 trillion by 2026
- The aggregate tax burden per household created by the tax gap for the 10 years ending in 2026 would be $68,328, more than the average household income in 2015
Collecting the tax would materially relieve a burden currently borne by honest taxpayers and potentially restore faith in the federal government’s ability to fairly collect taxes.
Executive Summary
The FairTax will reduce tax evasion by at least $38-$52 billion per year, a 9.4% to 12.8% reduction.
Tax Evasion Problem
The existing tax gap is significant. The tax gap is the difference between taxes owed and taxes paid. At $406 billion, the 2006 tax gap was 2.9 percent of Gross Domestic Product (GDP) or one-sixth of federal revenues.
Lower Marginal Tax Rates
Economic theory and empirical studies show that taxpayers evade taxes less when marginal tax rates are lower. The current average marginal tax rate, including payroll taxes, is approximately 37 percent. The FairTax marginal tax rate is 23 percent. Lower marginal tax rates decrease tax evasion because the incentives and rewards for cheating decline. Because of lower marginal tax rates, evasion can be expected to decline by 9.4 to 12.8 percent.
It is likely that the FairTax will reduce tax evasion by significantly more than the estimated $38-52 billion when other
factors, not quantified in this study due to lack of data, are considered. These include:
- Reducing the number of collection points,
- Increasing the likelihood of tax evasion being discovered
- Reducing complexity of the tax law substantially,
- Increasing the clarity of penalties, and
- 5) Items 1) through 4) increasing perceived fairness.
Reducing the Number of Collection Points
The FairTax will reduce the number of tax return filers by approximately 94 percent from nearly 250 million to fewer than 15 million. Moreover, approximately 3.5 percent of all businesses account for more than 85 percent of total retail sales. These businesses are primarily large or medium-sized retailers who have very high sales tax compliance rates.
As with existing state sales taxes, the FairTax will impose tax collection at the point of sale essentially the same as income tax withholding from salary and wages. Third-party withholding has been shown to increase compliance.
Increasing the Likelihood of Evasion Being Discovered
A decrease in the number of collection points (tax filers) will increase the likelihood that tax evasion is discovered by tax authorities. The likelihood of discovery is partially a function of audit rates, which will increase because audit resources will be focused more narrowly.
Reducing Complexity
The FairTax will simplify the tax system. Any income tax has structural complexities that a sales tax does not such as depreciation, inventory accounting, qualified retirement accounts, and tracking and reporting interest income, dividends, and capital gains. None of these sources of complexity would be present under the FairTax.
Complexity increases non-compliance for several reasons. First, the sheer complexity of the tax system creates confusion so that even taxpayers who wish to comply are often non-compliant. In addition, complexity creates ambiguities that aggressive taxpayers exploit. Finally, complexity enables tax evaders to more fruitfully evade taxes by knowingly taking unwarranted positions on tax returns and then, if detected, plausibly claiming that it was unintentional.
Increasing the Clarity of Penalties
The FairTax replaces dozens of poorly understood penalties with 10 clear penalties. Clarity should improve taxpayer understanding of penalties and contribute to higher levels of compliance.
Increasing Perceived Fairness
The FairTax will likely create a greater sense of fairness that will lead to greater compliance. When taxpayers believe that other taxpayers are cheating the system and not paying their fair share, they are more likely to cheat themselves. The sense of unfairness is often a function of deliberate policy choices that are perceived as “loopholes” in an income tax system. The FairTax contains no “loopholes.” A public opinion poll conducted by Rasmussen Reports found that sales taxes are perceived as the fairest means of taxation.
Sales Tax Gaps Typically Lower
Sales tax gaps are typically lower than the federal income tax gap. For example, the California Board of Equalization estimated its sales and use tax gap at only 5.5 percent. The State of Washington Department of Revenue estimates its combined sales and use tax gap at 2.1 percent. The net federal income tax gap is about 17 percent.
About the FairTax
The FairTax replaces all federal income and payroll taxes with a national retail sales tax on new goods and services.
CONCLUSION
NTRC instructed Mr. Burton to be very conservative in his conclusions and ensure that they were based on government numbers that could be easily defended when he testifies before Congress about evasion.
All of us know that the FAIRtax will not eliminate all evasion but, as Mr. Burton, points out, there will be much less evasion with the FAIRtax than under the present income/payroll tax system.
Please share both the Cebula and Burton studies with your elected representatives. It is even useful for those of you living in states with a state income tax to show them to your state representatives. When they say, “This is for federal taxes”, just agree and then ask them, “If someone is evading federal income taxes, is it not reasonable to believe that they are also evading state income taxes?”
If they are honest, they will admit that’s probably true. In that case, the Burton study is very material because reduced evasion of federal sales taxes will also result in reduced evasion of state sales taxes.
If you have friends who don’t know about the FAIRtax send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”
Thank you for staying FAIRtax strong!
Yours In Liberty! Yours In Freedom!
Steve Hayes
Chairman, Americans For Fair Taxation
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