Response:The FairTax is not regressive. The effective tax rate climbs with consumptio. It is a highly progressive tax proposal.
By its very structure, the poor would pay no tax at all under the FairTax plan. Period. Because of the payroll tax, some poor people do pay tax today, and therefore, some poor will see an improvement under the FairTax. In fact, those with expenditures below the poverty line will actually have a negative effective tax rate under the FairTax plan.
The FairTax provides a tax rebate to every household equal to the sales tax rate (23 percent) times the HHS poverty level ($16,050 for a family of four). Thus, households that live at or below the poverty level will not pay any sales tax at all, and no household in America will pay sales tax on the cost of the basic essentials of life as estimated by HHS. Because of the rebate, the effective FairTax sales tax rate for a family spending $32,100 is only 11.5 percent. Most families earning spending $32,100 have combined payroll tax and income liabilities of over 11.5 percent today. If you take into consideration only the entire payroll tax of 15.3 percent today that family will pay 30 percent more tax today than they would under the FairTax. And this does not include income taxes or the hidden component of tax in goods and services they purchase.
Your comment:
Where are these substantial drops to the cost of business compliance going to come from? In fact, haven't we just added more work to businesses as the entire revenue stream of the government is to be collected by businesses? Since there will be a 20 or 25 or 30% sales tax rate (whatever the final number ends up being), there's going to be a big incentive to try to evade these taxes. Businesses will now have to police their customers, to make sure that anything they claim is for business use isn't actually for personal use. This is why almost every country in the world has gone to a VAT system. The opportunities for tax evasion are quite high otherwise, and there's the risk that the government asks to police the purchases of it's customers. An income tax audit is bad enough, but how about an audit of everything you've sold in the last six months and who you sold it to? You have to be dreaming if you think we can get rid of all the tax auditors. If we do, too many people will evade taxes.
Response:
Today, a service provider pays a high income tax rate and a 15.3 percent payroll tax (very explicitly if the service provider is self-employed). Effective income tax rates are very high for service providers since deductions and tax planning devices are quite limited in the service businesses. Thus, a service provider in the 28 percent income tax bracket will pay a combined 43.3 percent tax inclusive rate and can very nearly double his after-tax income by failing to report the income. Under the FairTax plan, this service provider would bear a 23 percent tax inclusive rate. The lower marginal rate reduces rather than increases the incentive to evade tax and the dramatically smaller number of filers increases the risk of being detected. Since the benefit of evasion goes down and the risk of evasion goes up, evasion will decline. Of course, there will continue to be evasion but perhaps less than under current law.
There is no reason to believe that auditing or collecting a sales tax on services will be any more difficult than it is under an income tax system. The issue regarding sales tax audits is the same as the first line on an income tax return, what were the gross revenues (i.e. how much was sold)? A sales tax audit will be simpler, however, because a host of subsidiary issues will no longer be relevant to the determination of tax liability. You fail to provide a reasonable and objective explanation as to why this dramatic simplification should make a tax on service “problematic” under a sales tax.
