Would the Underground Economy Be a Problem under the FairTax ?

For those who don’t know about the FairTax, a little background:

The FairTax Plan is a comprehensive proposal that replaces all federal income and payroll taxes with an integrated approach including a progressive national retail sales tax on new items and services only, a rebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, repeal of the 16^th Amendment. This nonpartisan legislation (HR 25/S 25) abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes and replaces them with one simple, visible, federal retail sales tax – collected by existing state sales tax authorities. The FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system. More details can be found at www.fairtax.org

The underground economy is everything from Wendy Waitress not reporting all of her tips to Mr. Cash Money, the drug dealer.

Let’s play a little game.

Let’s look at both under the income tax and under the FairTax.

We will start with a look into the life Mr. Cash Money under the income tax.

Mr. Cash Money sells “medicinal items” for cash on the street and takes a “commission” from working ladies.

He even provides a “protection service”!

Do we think Mr. Cash Money files a tax return every year? Any year?

Don’t hold your breath. Mr. Cash Money truly lives in an underground economy doing everything he can to not draw attention to his activities.

Poof, now we are in FairTax land.

Mr. Cash Money needs a new suit. 

Nothing used for this guy!  Bam, FairTax paid.

Mr. Cash Money needs some groceries, Bam, FairTax paid.

Mr. Cash Money needs to pay his rent, Bam, FairTax paid.

Mr. Cash Money needs to………..you get the picture, Bam, FairTax paid.

Do you think Mr. Cash Money will expose himself to the Gov’t by applying for the prebate?

Again, Don’t hold your breath.

Now let’s look at Wendy Waitress under the income tax.

She has been good and filed her taxes, just did not report all of her tips. A bad tax plan made a technical criminal out of a good person. She has worked hard but was never able to get ahead. Her overtime is taxed at a higher rate. Wendy even received an employee of the month gift certificate. That was taxed under imputed income.

Poof, now we are FairTax land.

Wendy applies for and gets the prebate. She now takes all her tips and puts them into savings which are no longer taxed.  Her overtime is not taxed. She is frugal and buys used items where possible which are not taxed. She takes a night course at the local college which is not taxed. She gets a better job which is not taxed.  Now she is able to buy that new car, dress, shoes or whatever she has always wanted, and yes, it is taxed.  But so what, thanks to the FairTax, Wendy has been able to get over that hump of sustenance to success from which the income tax has been holding her back.

Getting over that hump is what we are all trying to do. Most of today’s "well off" were yesterday's begining workers

So in the grand scheme of things…….. 

 
No, the Underground Economy would not be a problem.

Where is “written” that income must be taxed to fund our collective gov’t needs? It has only been that way since 1913. Prior to that, various excise taxes were used.

Why must we tax income?   Some how point number two of the “Ten points of communism” found in the Communist Manifesto has become the norm to redistribute wealth.

What are we taxing when we tax income?

We tax work.

We tax prosperity.

We tax upward mobility.

We tax success.

Many economists believe that if you tax something more, you get less of it.

Do we really want less work, less prosperity, less upward mobility, less productivity and less success?    

The FairTax Act H.R. 25 now has the support of hundreds of thousands, 72 congressional sponsors / co-sponsors, and 6 presidential candidates, and over 70 economists. See www.fairtax.org  So tell your congressman to pass H.R. 25

some of the economic research can be found below.
Fundamentals and facts http://www.fairtax.org/PDF/FairTax-Funda...
Frequently Asked Questions about the FairTax   http://www.fairtax.org/fairtax/faqs.htm

A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax

System and the FairTax Plan http://www.beaconhill.org/FairTax2007/DistributionalAnalysisFairTaxBHI4-25-07.pdf

David G. Tuerck, Ph.D., Jonathan Haughton, Ph.D., Paul Bachman, MSIE

Alfonso Sanchez-Penalver, MSF, Phuong Viet Ngo, MSIE

Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax,  Jokisch, Sabine and Laurence J. Kotlikoff, National Tax Journal, forthcoming, 2007.

http://people.bu.edu/kotlikoff/FairTax%20NTJ%20Final%20Version,%20April%2024,%202007.pdf

Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation   by  Laurence J. Kotlikoff Professor of Economics Boston University

David Rapson  Doctoral Candidate  Boston University  Revised October, 2006

http://ideas.repec.org/p/nbr/nberwo/11831.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875707

Ashford Schwall