Friday, April 21, 2006

debunking FairTax, III

Ah, that shadowy underground economy. Stealthy criminals slipping through the cracks, carefully making fortunes while our tax engine goes on oblivious. Those neighbor kids with their lawn-mowers...

Neighbor kids? Lawnmowers? Yep. I think the most intellectually dishonest section of Boortz and Linder's book is this part. They cite a study that says the amount of money not going into the tax coffers is about 10%, then jump into a discussion of criminals who like to carry $100 bills and drug dealers and all that. Of course, what the study points out is that MOST of the crime is people not reporting every dime they made. If you mow the neighbor's lawn in the summer and he uses the big snowblower on the walks in the winter, neither of you probably paid any taxes. Yet the IRS says you're both supposed to hand the recipient of your labor (and the government) a 1099-B that includes the fair market value of the labor done, which the recipient then counts as income. It goes on a lot, and is usually not reported. It's the lion's share of the underground economy - unreported labor and 'In-Kind' exchanges. Fortunately, FairTax has a solution. You no longer have to fill out the form and give it to your neighbor for them to pay income tax. Instead you calculate fair market value and pay the government 23% of that - you pay, not your neighbor.

done laughing yet? ok, let's go on...

I assume you can see the two FairTax claims this destroys. First, that FairTax will eliminate the underground economy. Because right, the kids are going to raise money for a car-wash and then send 23% of their earnings to the government. (Yes, that counts as well.) No, the underground will keep right on ticking.

The second claim destroyed is that it'll eliminate the IRS. Actually, perhaps we'll remove the IRS. But we still have to send the taxes to some agency, and the government is going to want to ensure we send all 23% which means investigators, and they'll need a support network. And don't forget the folk who have to make decisions of Solomon - remember the working from home bit? How much of your electrical bill should contain an embedded tax, and what proportion should be free of such?

But in the last post I said I'd mention not only the underground economy, I'd also discuss scams. Note that scams mean more rules and investigators to counter. If you think it's going to be easy...

Some scams are going to be subtle and narrow. You use 10% of your house as office but claim 11%, and variations on that theme. More blatantly, you make up a business that absorbs most of your expenses. hmmm, I'll be a professional blogger, selling adspace and my collected works. OK, now my computer and my internet connection are at the reduced rate. Given the nature of blogging, which means a lot of things that happen to me can be listed as part of the job, well, most of the things I do are tax-exempt. They're research. Sure, it can be countered. I can get audited - oops, IRS again. By the way, substitute freelance journalist for blogger. The rules are already in place for them for income taxes, and they're rather complex as you might imagine. Doing it as sales tax isn't going to make it less complex.

Or here's a nifty one. There is no tax on used goods, only new. So I buy used junk and refurbish it and sell it. Is that a scam? maybe. But it means I completely bypass having to pay the tax. So how do I make it a scam? I buy office equipment for my office - a business expense. I "use" (keep) the equipment for a week. I sell the stuff as used goods - no tax, essentially new. A variation? OK, how about those wonderful dealer plates on cars you see running around. The dealer buys the cars as they currently do (They're usually franchises, not subsidiaries). Every member of the staff, however, is required to drive lot cars, and to do so for a period of at least a week. Now I count the car as "used", and put it on the used car lot. I can sell it for what I paid plus up to 30% more and STILL sell it for less than the schmuck selling "new" cars. Oh, wait, that's too blatant? OK, let's lease cars instead. A monthly lease is probably good enough. Since I'm going to make 30%, I can afford to lose money on the leases and their tax (rents - especially of new goods - are 'end-user retail'.)

OK, one more thing and I'll be done. Off the scams, back to the underground, and specifically to criminals. We're going to catch those criminals. They buy something and the people/company from whom they buy pays the tax. Right? Wrong. Ask yourself a silly question - why do these criminals use cash instead of checks and electronic transfers? Why, because cash can't be traced and doesn't raise flags about unreported income. So, you're a car dealer. And Joe Smith offers you a slice above your normal profit but will pay cash, all you have to do is fudge the sale. So Joe Smith pays 85 instead of 100, and you get an additional 8. Hide it? Call it leased for a while (heck, do the paperwork), then move it through returned, used-car inventory, and sold used goods. use 3 of that extra 8 to 'legitimize' the lease because you only pay 23% of the money recieved (lease agreement) not the total value of the car. That way your books are clean in addition to the profit you made.

Other criminals who still won't pay taxes? Burglars (selling used goods).

So let's recap. Fairtax won't eliminate the need for an IRS - heck, it won't make the rules any simpler. It won't give everyone all their money. It won't cause the tax-shirkers to pay their fair share. It's not simple (once you look into it). It's not workable. It's not fair.

Don't fall for the scam. Repeat after me:

"If it sounds too good to be true, it probably is."


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