Our current tax system....

[Ships 'N' Trips Travel]

So someone made a comment in the illegal immigration thread that got me thinking ... something along the lines of how illegal immigrants avoid paying their fair share of income and social security taxes when they are paid under the table.

So this got me thinking about our current tax system in general ... not to mention I'm still stinging from the latest tax season.

So what do people think? If we completely got rid of the federal income tax and replaced it with a national sales tax (let's assume that food items would be exempted), do you think that would be an effective way to capture taxes from anyone paid under the table (illegal immigrant or legal citizen)?

[Kairho]

The FairTax proposal by Boortz and Linder does exacely what you are suggesting. Except it is not a sales tax but more similar to a VAT.

[jjjenny]

That would be a way to make everyone pay and no one would be able to cheat. But, I think everyone would complain about the higher taxes on items and others would complain about no deductions or refunds. I, of course, wouldn't know about refunds because I always have to pay extra.

[Ned]

While a sales tax may capture some tax money from people paid under the table, I don't think it's a fair way to go about it because taxes like sales taxes hurt the poor and middle class, and barely dent the rich.

Let's take an example of two people. "A" earns $50,000 per year and "B" earns $200,000 per year. The sales tax rate will be 5%.

A buys a $15,000 car and pays $750 in taxes. B buys a $40,000 car and pays $2,000 in taxes.

$750 for A is 1.5% of A's income. $2,000 for B is only 1.0% of his income.

This system taxes the poor far more heavily than the rich. The people that can least afford the taxes are the ones with highest burden on their income. As to the example above, I didn't even take an extreme case. Think about what would be the difference if... No I'll show you.

C earns $30,000 per year and D earns $300,000 per year. C buys a 10,000 car and D buys an $80,000 car. The taxes are $500 and $4,000 respectively. That means the taxes on their cars are 1.67% and 1.3% of their respective incomes. So D can buy a car which cost 8 times C's and still pay a lower percentage of income, in taxes for the car.

[jfrenaye]

I do not have the infor here, but I believe in Sweden the tax system works. I know that it funnels down to speeding fines. THe more able you are to pay, the higher the fine. I believe the president of Nokia was nailed for speeding and the fine was something akin to $200K

[Kairho]

Originally Posted by Ned

While a sales tax may capture some tax money from people paid under the table, I don't think it's a fair way to go about it because taxes like sales taxes hurt the poor and middle class, and barely dent the rich.

The FairTax is good because it automatically adjusts for the "sales tax" inequities.
From FairTax.org:

What is the FairTax plan?

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The FairTax:

* Abolishes the IRS
* Closes all loopholes and brings fairness to taxation
* Ensures Social Security and Medicare funding
* Brings transparency and accountability to tax policy
* Allows American products to compete fairly
* Reimburses the tax on purchases of basic necessities
* Enables retirees to keep their entire pension
* Enables workers to keep their entire paycheck

[Ned]

My first problem with "FairTax" is that while the proponents say it's "voluntary" in that you control the tax you pay, by how much you buy, is nonsense, in my opinion. There are a set of essentials that everyone needs to buy and these things take a proportionately larger share of your income as you make less money.

According to what I'm reading on the "FairTax" web site, total taxes collected by the Federal Government aren’t going to change with the “Fair Tax.” Therefore the Fed still has to take in the same amount of tax dollars in toto as they do today.

At this time in the US, the top 20% of U.S. taxpayers, by income, pay an effective tax rate of approximately 27%. The top 5% in income pay about 30% to 33% in taxes.

Under the “Fair Tax,” proposal, as I read it, the top rate that anyone will pay is 23%, even if you spend everything you earn, and use some of your savings. Ah yes, even your savings is taxed if you spend it under "FairTax."

Clearly, the effective rate that the high income earners pay, will be considerably lower than 23%, as they save some of their incomes. So, in the real world, that means that the effective rate will go down as income rises.

So now, the question begs, "Who's going to make up the difference between what the wealthy pay today, and what the wealthy will pay under “FairTax”? You've guessed that one right, you will, and everyone else not at the top of the income heap.

So here's the counter argument, straight from the "FairTax" web site, “Wealthy people spend more money than other individuals. They buy expensive cars, big houses, and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses and expensive jewelry.”

Un hun, and if you don't think that's simplified nonsense, I've got a lovely town to sell to you named Camden. The problem with that answer is that it's overly simplistic. The fact that the wealthy spend more does not prevent a tax from being regressive. When all is said and done, the issue is not how much anyone spends, the issue is what percentage of their income do they spend. The share of a wealthy person's income that is taxed will go down, and their share of total taxes therefore, will also go down. My friends, that’s the best definition of a regressive tax shift that I have ever seen.

The other counter argument, directly from the "FairTax" web site is, "We’re going to give everyone a “prebate.” OK, on its face that makes perfect sense. Under "FairTax" everyone will get back the cost of their essentials, so that, they're not taxed on things they need to survive. This is good, but it’s not at all necessarily better than the current tax structure, where a large proportion of households are exempted from paying any income tax at all, and don't forget that income taxes are inherently a progressive tax structure.

Let's look at the "prebate" for example. It seems to me it adds in all sorts of administrative problems to the "FairTax" which might even bring up a need for a new IRS called the FTS. Here's the problem in a nutshell:

• How do you calculate the size of the prebate each year? It's supposed to be the cost of the essentials which each of us needs to survive. What things have to be in there for people to survive. Different people need different things. For example, I can't find mention of medicine anywhere in the "FairTax" proposal, and I take lots of meds since my heart attack, to survive. Will the prebate cover the taxes on that?
• How do you make certain that everyone gets their “prebate” check?
• Do you adjust the amount of the "prebate" check according to where people live, as the cost of living varies greatly, for example, between New York City and Ames, Iowa?
• Who's going to calculate the size of the "prebate"? Will it be Congress (heaven forbid), or perhaps the President (please save me)?

So here's my bottom line, the “FairTax” shifts the tax burden from the wealthy to everyone else, with the biggest burden falling like a hammer on the heads of people directly above the arbitrary poverty line, established by the amount of this “prebate.”

Wow, the more I think about "FairTax" the more I'm surprised the Halliburton crowd hasn't already pushed it through Congress.

[Ships 'N' Trips Travel]

Ned, your argument assumes that the wealthy actually pay their fair share of income taxes now ... yes, their tax rates are 27% to 33%, but they typically have many more exemptions, so in reality their actual contribution is a lower percentage of their income than lower income tax payers.

Of course the current system only applies to those people that actually pay their taxes....

Also, the current system allows a lot of businesses to completely avoid paying taxes at all ... a sales tax or VAT would capture them as well ... but then the counter argument will be that by having to pay sales tax or VAT will force businesses to increase the prices on their products/services.

[Ned]

With the AMT it's pretty hard for people to get around taxes the way the used to do, unless they have substantial investments in tax-free income. It's harder and harder to avoid the 27% to 33% marginal rates now.

There are ways to shelter some money, but fewer of them than ever, and most are pretty risky.

Originally Posted by Ships 'N' Trips Travel

Ned, your argument assumes that the wealthy actually pay their fair share of income taxes now ... yes, their tax rates are 27% to 33%, but they typically have many more exemptions, so in reality their actual contribution is a lower percentage of their income than lower income tax payers.

Of course the current system only applies to those people that actually pay their taxes....

Also, the current system allows a lot of businesses to completely avoid paying taxes at all ... a sales tax or VAT would capture them as well ... but then the counter argument will be that by having to pay sales tax or VAT will force businesses to increase the prices on their products/services.

[Ships 'N' Trips Travel]

Oh, don't even get me started on AMT and how it hasn't been adjusted over the years so now it's encroaching more and more on the middle class ... and it doesn't even phase corporations.