Myth: The FairTax will create an underground economy.
Fact: The FairTax will dramatically reduce tax cheating.
One of the myths that the tax and spend crowd likes to perpetrate, as a scare tactic about the FairTax, is that it will create an underground economy. In fact, just the opposite will happen.
It’s all in the numbers… number of tax collection points, that is.
Regardless of what form of tax may be imposed, there will always be some who are disposed to cheat on their taxes. That will never change. But if we dramatically reduce the number of tax collection points, it will have several natural effects.
- Fewer tax collection points means fewer opportunities for tax fraud.
- Fewer tax collection points will make it easier to detect any tax fraud that does occur.
- Even those who are pre-disposed to crime are less likely to commit a crime if they know, going in, that they are likely to get caught. (see point 2)
So let’s look at the facts.
The latest published IRS Collections Data indicates that 135 million tax returns were filed in 2010. Another 10.5 million business tax returns were filed that year, as well (excluding sole proprietorships that are effectively the same point of collection, as the individual owner). That’s more than 145 million points of collection of the current income tax and 145 million opportunities for tax fraud (much more if you were to include the sole proprietorships).
There are about 2 million retail businesses in the United States, so under the FairTax, there will be well under 2 million tax collection points and likewise, less than 2 million opportunities for tax fraud.
Now here’s were the spinmeisters for the tax and spend crowd try to twist the facts. They fear losing the power that the income tax gives them. So they want you to ignore the fact that the number of tax collection points for the federal government will be only 57 (the 50 states, Washington, DC, and the U.S. territories) and the states will together collect tax from well under 2 million retail businesses. Note that although the U.S. Census Department counted only 1.1 million retail businesses in the USA, in 2008, we are assuming closer to 2 million, so as to allow for the massive growth in all types of business that will be spurred by the FairTax.
But to get back to the point, the tax and spend crowd would have you consider every cash register a tax collection point. But the cash register isn’t where the government collects its taxes. Those cash registers are merely gathering points for the less than 2 million retail businesses that are the only entities that actually interface with government tax collectors.
In fact, the states, who are the actual tax collectors under the FairTax, won’t go to every Kroger or BestBuy, to collect tax. They don’t do it in the 45 states that collect a sales tax and they won’t do it under the FairTax. Those companies will forward from their corporate office, the taxes collected at their various locations. You see, the 2 million collection points that we’re talking about are the 2 million retail businesses themselves and it’s that 2 million collection points that are the bottleneck for tax cheats.
Law enforcement officers of every stripe know that the easiest way to detect a complex crime is to find bottlenecks and focus their attention on those bottlenecks. Since every dollar of tax collected under the FairTax will have to pass through one of those 2 million collection points, for tax fraud to occur under the FairTax, it would require the willing participation of one of those 2 million retail businesses. There’s the bottleneck and that’s where the authorities (state authorities, I should add) would focus their attention.
So consider that with just 1.3% as many tax collection points under the FairTax, as under the current system, the number of people willing to commit tax fraud would have to increase more than 70 times, just for tax fraud to remain at the current level. That’s just not going to happen. But let’s take it a step further. Consider that, for the same reason, tax fraud will also be 70 times easier to detect. So not only will tax fraud not increase, even those who are currently committing tax fraud will be less likely to commit that crime, under the FairTax, for fear of being more easily caught.
I should also point out that under the FairTax, as with any sales tax, it takes two co-conspirator parties to commit tax fraud, while it takes only one lone individual to commit tax fraud under an income tax. So when you consider that fact, the number of people willing to commit tax fraud would have to increase not just 70 times, but 140 times (two per instance).
Not only will the FairTax not increase tax fraud, as the tax and spend crowd would have you believe, but it will dramatically decrease tax fraud.
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