When this was discussed previously, I wrote in with a number of thoughts on how to avoid taxes. In addition to the internet, there’s lots more. It’s kind of a fun game, which you can play instead of going to bed on time.
First, the people who live near the borders. A quick drive and things are 30% cheaper. The nice thing is that they get a big discount on everything from cornflakes to toiletpaper.
Big ticket items. Think of that $20k diamond ring. Then think of Canada and save yourself $6,000. Pays for a lot of air fare. Back in the good old days, when I was first in Japan, there was enough of a difference in price between Tokyo and Hong Kong for Gucci and Viton bags that young women would go on vacation, buy one for themselves and a couple for friends and save enough to pay for the trip.
How can you stop this? Cars would be more difficult to black market because of registration, but cameras, computers, jewelry, and other expensive items will start selling well in Mexico. It could an additional bonus for living in San Diego.
Private shipments. I live overseas. My sister lives in the States. I can mail boxes fairly cheaply and 30% savings pay for a lot of shipping. Basically light, but expensive items are best.
The really cool thing about this is that it screws over the poor, who are less likely to have resources to avoid taxes and rewards the rich who don’t need to flee the States, just take frequent vacations.
All of this is exactly why I’m wondering why Der Trihs would say that rich people would leave the US under the FairTax but apparently don’t leave under the current system. I think Der Trihs has it backwards for the reasons discussed in this post.
Of course, one big reason rich people don’t leave the US under the current system is that (unlike many other countries), the US taxes citizens on income no matter where it’s earned. Hence, leaving doesn’t actually make a big difference under an income tax-you’ve got to give up citizenship (which is hard to do for tax purposes, and has a lot of downsides).
Under a sales tax, no such problem–and so you’d have enormous avoidance/evasion issues. There’s no real good solution-if you raise tax to compensate, as others note, you raise the tax on those not smart/rich/sophisticated enough to go shopping in Toronto. Doesn’t sound very “fair”.
The other alternative, “use taxes” or similar efforts to force people to pay sales tax on purchases in other jurisdictions are uniformly impossible to effectively enforce, and hence show terrible compliance–and it gets even harder when the purchases you’re looking at are in another country, not in another state.
So in short, a lot easier to evade the “fair” tax. (my guess is there would be a “use tax” for the fair tax, and so it’d be evasion, not avoidance–avoidance is legitimate tax reduction strategies–and evasion is the other kind)
I can see his point on this issue. If I were the Chairman of the Board and a 30% sales tax took place, me and the rest of my billionaire peers would announce that we were relocating corporate headquarters to Toronto. It’s the free market - how could New York or Los Angeles or Chicago compete with Toronto or London or Tokyo when their cost-of-living index goes up 30%? The United States would become a nation of absentee owners, where people collect their tax-free incomes by owning capital in America and have the checks mailed to their foreign residences.
And get hit by an income tax? No way. It has already been shown how the rich would make out like bandits with this system. It is easy for them to buy overseas.
I used to go on vacation to the Thousand Islands, and it was common for Canadians to drive to the US to buy gas. In 1980 (if not now) it was cheaper to buy an Izod shirt in NY than Paris. The Fair Tax is welfare for smugglers.
You have it backwards. In order to create, there must be demand. No one does massive manufacturing hoping that someone is there to buy it - not and stay in business long. You start small and ramp, and you of course try to predict the market. Our current crash certainly falsifies your contention that if they make it they will buy.
No charitable donations? No trust funds?
Wealth won’t be fair taxed either. The money invested into this wealth, which comes from income originally, won’t be taxed in the fair tax scheme, but is in the current scheme. Yes capital gains that get spent may be taxed more, but this is unlikely to make up for the lack of taxes on the base. Dividends, as has already been mentioned, get taxed at straight rate. Haven’t you ever filled out a 1040?
Oddly enough the imbalance still exists today. You certainly haven’t given any reason why it wouldn’t exist under a Fair Tax system, except by saying tough luck. There are many reasons why people don’t simply move, including social ones.
Tell that to the California cities getting clobbered by the drop in sales taxes.
What is it you want to know that I’ve not already talked about?
If I understand you right it’s a good question. It’s a complicated issue, and I don’t have all the answers.
My thoughts: It seems to me this is one area where you see the effects of protectionism. Export businesses get a big boost. They will expand rapidly. Foreign companies will flock to the US. So far so good. The US has a huge trade deficit. But all this expansion will require labor and capital, and it has to come from somewhere. That will increase costs for the rest of US businesses. Some import businesses will probably have to shut down or lay off workers.
Since will become hard for foreign products to compete with US made products, US manufacturers can increase their prices.
So, my guess is “the slack” is picked up by non-export businesses (import businesses in particular) and consumers who have to pay more for items they used to import. (This is what I meant by “price inflation due to the protectionist aspects of FairTax”.) “Buy American” comes with a price. At the same time economic growth means higher real wages, and potentially lower taxes.
But again, I don’t have all the answers. You can find research on the effects of the FairTax on fairtax.org, and the wiki article has a lot of material as well.
Nice strawman. The FairTax will work without government price controls. The current proposal in congress (H.R.25) has no price controls. It is my personal suggestion, meant to make up a little for the massive government-caused disturbance in the market.
It’s not a matter of needing government price controls, and I’ve been quite clear about that.
(Another solution offered is monetary expansion. Create real inflation and let workers keep their gross wages. Retail prices are more flexible. The problem then is that those who hold large amounts of USDs lose out. On the other hand they’ll get the prebate, so maybe a compromise is fair. )
These fair tax proposals, and their cousins the flat tax proposals, all seek to shift the immediate tax burdens on the assumption that they will be long term beneficial to all. That may be true, it is hard to know for sure and even if it is, what is the break even point. If we switch on January 1, 2010, when would these benefits be felt. The middle income brackets will be paying a larger percent of the total tax and will be hurt in the short term. That is the group whose spending is most affected by this type of thing (the poor usually can’t cut spending, and the rich usually don’t need to). For some period of time our economy will suffer ill effects. How much shrinkage is acceptable over what period?
My snarky point was that this is something does not make sense for the short term well being of the majority of rational actors out there. A fair tax scheme might be the best way to introduce a general tax and we may be better off today if it was put in place instead of an income tax. But I don’t see anyway that switch now wouldn’t be require massive central coordination, the anathema of the free market.
Your logic is not like our earth logic.
“How can you complain about getting raped - some people get MURDERED!!!” Just because you don’t like the way credit card companies collect and analyze data doesn’t mean privacy is not a concern for anything “less”.
Furthermore, credit cards are not mandatory. Plenty of people don’t have one. And if you really want a credit card but want to keep your privacy I’m sure you can get one with a very restrictive privacy policy. (Though it’s bound to be more expensive.)
Anyway, you said that I “want to give them [credit card companies] more information without requiring how that data is kept or used”. Care to explain how you got that idea?
Cite?
The legislation is already authored by actual legislators. It is sponsored by 43 (44?) congressmen in the current congress. (Down from 76, probably since most the FairTax has a lot more support from Republicans.)
Not supporting the FairTax because you don’t support something that’s not the Fairtax seems really silly to me.
<sigh> We were talking about international trade. Remember?
**
Note that exports are not taxed under the FairTax (or a VAT).**
So you are not adding 20% to the price.
Clearly you completely missed the point of my “parallel US” example. I’ll let someone else try to explain it in more detail. He’s talking about VAT, but the end effect is the same. (Instead of getting a VAT rebate on VAT paid when they export goods, businesses in a country with a sales tax never pays any VAT to be rebated in the first place.)
All taxes are “ripe for abuse”. There will be tax evasion, sure. But in order to have a valid argument you need to show how the FairTax will lead to more tax evasion.
I don’t understand how your example does that. Or even how it’s supposed to work. You’ll have to explain it to me in more detail. A few problems I have with it:
“Totally vertical”? What are they making, rocks? But never mind. I’ll buy it for the sake of argument.
Why couldn’t they hide their sales under the current system, and avoid 35% corporate income taxes?
Why are they risking their entire business for a 5% profit?
How will FairTaxMafia sell retail items in the US without anyone giving the government a hint?
Why would they sell it “internationally”? Imports are taxes as well. Do they export the widgets, and then smuggle them back in?
Let me remind you that consumption taxes are common. I live in a country with a 25% VAT. The tax mostly gets paid. Norway is not the home of the “global black market”.
They are left in peace until they (or their heirs) spend the wealth. (At which point there will most likely be even more wealth to tax.)
I don’t think anything “happens” to them. I fail to see the problem.
Again, consumption taxes (VATs) are enforced by every major U.S. trading partner. They all manage.
Some do claim that VATs are harder to avoid than a pure sales tax. Personally I suspect the FairTax uses a sales tax so as to not complicate the message. But it’s a very simple matter to turn it into a VAT.
I don’t think anyone is arguing that is it impossible for the U.S. to have a VAT or any other consumption based tax. What I think we are saying is that is not a good idea for the U.S. to switch form an income to a consumption tax. If I look at the title of this thread it is about abolishing the income tax. Has any large country every switched from an income tax to VAT?
Does not Norway also have an Income Tax and also even a “wealth tax”? The Income tax rate is higher than the USA?
Note that Norway also has an overall Tax burden of around 45%, one of the highest in the world*:
Note the USA is almost at the bottom with 25%.
Yes, a VAT or National sales tax could work in the USA- to supplement the Income Tax, or replace portions of it.
BUT, we have State sales taxes in most states, at rates of up to 9%. This doesn’t leave room for much at the National Level. The states (and local gov;t) here finance education, a lot of roads, public safety and many social programes.
A VAT of 25% simply wouldn’t work in the USA, esp when combined with an Income tax.
I think that the USA could well reduce the Income Tax, with a std & personal deduction so high that dudes earning less that xxxx would have no Federal Income tax. “xxxx” is the amount to reduce the overal FIT to 50% of what it now collects. Then, we add a National VAT to get back to a revenue Neutral point.
My WeducatedAG would set this at a VAT of around 5%, and “xxxx” @ around $40000. Thus, 'the working lower middle classes" would only pay sales taxes (and FICA, of course). Their tax burden would be slightly less.
The rich would pay more unless they moderated their consumer spending. The middle-middle class and upper-middle class would pay about the same.
A 5% VAT, even combined with a very high 10% state sales tax, would not meet with massive tax advoidance.
for that tax burden, do you dudes get monthly state subsidized blowjobs from the Swedish Bikini team or something? Sure, I guess National Health covers part of it, but I’d at least want weekly topless massages as part of that benefit.
AFAIK, every modern industrialized nation has an Income Tax. I think Mexico comes closest to not having one. From what I can see, Norway has a higher Income tax than America.
For instance, is a landline phone basic? Or is a cell phone? I don’t think paying $50.00 a month so you can mindless chat while you’re on a bus or driving is a basic need. Some people will.
I live in an area of Chicago where I get free over the air (OTA) TV, 16 channels. When we switch to digitial I will have to get cable TV because I cannot get any digital channels.
So is TV basic? In that case is only OTA basic, even if I can’t get OTA TV?
I live in Chicago, I don’t need a car. But in places like Arizona and Florida, that were basically populated after the 50s, public transit is awful. Should those people get taxed more?
That kind of tax favours one part of the nation that had the sense or the ability to build transit systems when they were easy to build a hundred years ago.
I was thinking more about TokyoPlayer’s post today. Any FairTax supporters want to explain what a FairTax audit looks like? It seems to me the only effective audit is a surpise knock on the door followed by a bunch of government workers rifling through your stuff looking for the jewels (for which you must produce a receipt showing tax paid). Sounds a lot worse than the current IRS that the FairTax supporters are so proud of eliminating.
Well you’re right, I did strawman it up there. But I humbly submit that there’s a difference between a 6-10% sales tax that brings in part of a state’s revenue and a 23-30% sales tax that brings in all of the federal government’s revenue, and this difference will cause FairTax audits to be more stringent and frequent by necessity than sales tax audits.
That is your opinion. Mine is that it would be much easier to audit. The primary point of audit will be the retailer to ensure they are collecting the tax correctly. That should be pretty easy as the retailers are already audited by the state and the process will be much the same.
Focus will be more on people illegally selling and not collecting the tax.
With respect to individuals, I doubt there will be much auditing at all. The average individual probably has less chance to cheat on their Fair Tax than they do on income tax. You cheat on income tax by taking an action (or inaction) following the actual event that got you the money, i.e. you subsequently fail to report taxable income, or you invent deductions/credits. With the Fair Tax, the action itself would be the thing that avoids the tax, so the authorities would focus on those actinos, rather than subsequent auditing of individuals’ receipts.
So the retailer’s books will show that it sold $x worth of goods to walk-in customers (on which it collected the tax) and sold $y worth of goods by shipment to foreigners (on which it did not collect the tax). How does the auditor know whether those foreigners are not just U.S. citizens that route items through a foreign country to not avoid the tax?
There are going to be practical enforcement issues with any form of taxation. That needs to be addressed in the tax proposal, but it isn’t the real issue to me. What is important is what the real affect of the tax is and why that makes things better. People throw out numbers representing growth over some term, but that is not what I am asking. These are the questions I want answered before I would support any major change in tax law:
[ol]
[li]Who pays less, why and why is it good?[/li][li]Who pays more, and why is it acceptable? How much harm will it do and how long would the harm last?[/li][li]How much disruption to the overall economy will result just do to the shift?[/li][li]Why is it better than just changing the rates in the current system?[/li][/ol]
And don’t just say “this economist has calculated an X% growth” tell me why he thinks that will happen. The numbers are meaningless guesses because there are two many unknowns for that kind of accuracy.
If all the benefits are from the rich keeping more of their money to invest, just propose lowering/eliminating capital gains taxes and/or the highest marginal rate. If it is about increasing exports, just institute a rebate similar to VAT rebates for employee income taxes. If it is about encouraging savings, give a refund based on savings held for X number of years.
The reason these proposals annoy me is that the real goal seems to be to lower the burden on the rich under the assumption that it will make the economy grow faster. But just lower taxes for the rich is a non-starter politically so they try to hide the goal with these convoluted plans to make the whole system more “fair”.
If you believe in trickle down economics, state your reasons and let’s debate that honestly.
The number of people prepared to pay to ship something out of the country then back in again just to save 23 - 30% (even if they could avoid customs duties both ways) would be minuscule compared with the people who currently cheat on their taxes by failing to declare some income or taxable benefit.
Routing through another country would only be worth it if there were an organized scheme in place, and then the Feds would have other ways of catching those - via customs, for example.
