Among the many features and benefits of the FairTax is that it would significantly reduce non-compliance, which is a major problem with the current income tax.
This isn’t just some economist’s hypothesis. It’s solid numbers. It’s REAL.
So let’s look at those numbers.
Today, we have a gross tax gap of $450 billion and a net tax gap of $385 billion after enforcement. For those who are wondering what that means, the tax gap is the difference between what the IRS takes in and what it would have taken in, without any fraud, non-filers, and other non-compliance issues. To put this into perspective, that’s more than 10 times the market capitalization of General Motors.
Another set of numbers that we need to look at is the number of income tax filers. The most recent data available from the IRS reveals that in 2009 there were roughly 138 million individual tax filers and about 10.5 million business filers, for a total of 148.5 million filers. Now that doesn’t sound significant, when stated in those terms. But think of it this way. It’s 148.5 million “opportunities” for tax fraud.
Now consider that under the FairTax, there would be less than 2 million retail businesses collecting and remitting the FairTax, meaning less than 2 million “opportunities” for tax fraud.
This means that for non-compliance to be as bad under the FairTax, as it is under the income tax today, tax fraud would have to increase more than 7000% and let’s face it… that’s just not going to happen.
Now consider that the federal agency that replaces the IRS will audit only the states. This means that enforcement of the FairTax will be much more efficient than current IRS enforcement, since FairTax enforcement will be done at the state level. In EVERY case except the military, state-managed organizations function far more efficiently than federal bureaucracies. Then add to all this, the fact that while the IRS has to keep up with 148.5 million personal and business taxpayers, those state agencies will have to keep up with (on average) less than 40,000 retail businesses per state. Even the number of retail businesses in states like New York, Texas, and California still pales against that 148.5 million that the IRS must keep up with.
Therefore, not only will there be far less tax fraud under the FairTax, but what little tax fraud remains will be much more likely to be discovered by the far less burdened state agencies. I should also point out here, that 45 of the states already have sales tax collection agencies in place and are doing a very good job of maintaining very low non-compliance numbers.
So besides all of the other benefits that the FairTax offers, it would mean that less tax would have to be paid by honest people, to cover for the tax cheats at all income levels. (By the way, on a per capita basis, those most likely to cheat on their taxes are not the super-rich, but rather wait staff, who are notorious for under-reporting tips.)
Dramatically improved compliance is just one more reason why the FairTax is a WIN-WIN situation for the taxpayers and the treasury. The only losers are the tax and spend politicians, who would not be able to hide their tax increases behind layer upon layer of corporate income tax. Those politicians would have to start listening to their constituents, rather than kowtowing to tax lobbyists, who would be out looking for other work.