Tax Fraud - Fair Tax Paper
Tax Fraud - Fair Tax Paper
Purpose of Paying Taxes
So, why do we pay taxes? Throughout our nation’s history, individuals have received some type of service. Whether that service was food, education, protection, etc., a higher type of government authority provided some type of service for the citizens. In simple terms, because the government is providing a service that typically could not be paid for by a mere few citizens, funds have to be collected from the entire nation’s population. Generally, the services benefit the country as a whole. For instance, the United States of America could never have become a military world power without the taxation of the citizens. Different types of services are more controversial than others; however, we do not get to pick and choose what services or programs we want to pay for and what we do not. We do, however, have the ability to vote which provides some degree of opportunity to influence the direction the government takes. Today, in America, the majority of our tax budget goes to Medicare, social security, military, and social services such as food stamps and housing.
Throughout the history of the United States, the citizens incur a substantial burden that the government has forced on society, and this burden continues to escalate. The major burden on the citizens is taxation. The taxes have increased in terms of real net dollars over the years, and new taxes have been created that create controversy. Taxes are not just simply growing in amount, but they are becoming increasingly more complicated in their rules and regulations. The government constantly looks for new, creative means of collecting revenues without directly affecting the personal income tax. The thought process may be that Americans do not quite realize just how much they continue to pay when presented in this incremental fashion of layers of taxes. For instance, the government places various types of taxes on corporations and, in return, the corporations are forced to place their direct tax cost burden on consumers. As the government taxes retailers and service providers, the cost of these services and products increase to the retailers. In turn, the price of the goods and services increase for the consumer because, in the end, the consumer pays for the retailers’ and service provides’ taxes. Consequently, the average consumer blames the corporation for the increase in price instead of the government because many consumers do not understand the reasoning behind the price increase. Essentially, the government creates a domino effect when it issues new taxes on industries and retailers, and the taxes are eventually paid for by the consumers in the end. As tax codes become more complicated and burdensome, the government does not realize that by creating complicated tax laws, professionals find some legitimate and legal way to evade these taxes. According to the article The FairTax, Tax Evasion, and the Underground Economy, tax evasion has increased by 67 percent during the most recent 11-year period for which data is published1. In addition, the articles states that tax evasion has reached 2.0 percent of our Gross Domestic Product as of 1992 compared to 1.6 percent in 19811. Numbers like these only grow more problematical over the years. Recently, the IRS estimated that Americans avoided reporting almost $1.5 trillion in personal income.2 Tax evasion of this magnitude amounts to approximately 22 to 23 percent of all income taxes3. Clearly, tax evasion is a gigantic crisis in our society today and is only steadily getting worse. In addition to tax evasion, the government is unable to monitor certain industries like the illegal drugs trade and pornography, which account for billions of dollars. If the government were to realize these taxes, the government could capitalize on these tax dollars as well.
Cost of Compliance
Every year, millions of Americans sit in their homes and offices going through receipts, pay stubs, and other important documentation in an attempt to properly file their income taxes. Every bit of information is crucial so one can claim as much tax deduction as legally possible, and these details make the process even more time consuming. In 2005, the estimated time the average American spent on the tax filing preparation process was up to twenty-seven hours (Boortz and Linder 40). That is insanely too long for one family and most people filing their own taxes still will miss out on many tax deductions because the tax code is just too complicated. One of the main reasons the tax code is so complicated is the length. Have you ever noticed how every recent major legislation passed through congress lately has been a least 800 pages long. The stimulus package enacted last year and the healthcare overhaul passed just recently are both prime examples. The tax system has become even worse. Obviously the more words and detailed bills are, the harder it is for the average person to understand and since 1954, the number of words in our tax code has increased by nearly 500 percent (Boortz and Linder 47). To make matters even more dreadful that is just the tax code. Reading the tax code does not even tell you have to file your taxes. The IRS regulations is the information you use to file your taxes and the words in the regulations have increased by 939 percent (Boortz and Linder 47).
Enter in table of growth of tax code words from the Cost of Compliance by Scott Moody, Senior Economist, Tax Foundation, February 2002. Figure 4.1 growth of the tax code: 1955-2000.(47) If you have enough money, you can hire a tax accountant to help prepare all of the documents. Then, take a step back and realize that you are now paying out more in order to have someone prepare your taxes. Sounds ridiculous; people have to double pay because the government’s tax code is so complex. For those who decide to file their own taxes then they potentially miss deductions thus missing out on refunds of their own money. Sometimes one actually will loose out on a tax deduction due to the tax preparer’s error as even they are not perfect. Also, think about all the money missed out on yearly because you are making both business and private decisions aimed at reducing your tax obligation. When decisions start being made based on the basics of your tax obligations you know they have gone too far. Over the years, the Tax Foundation has compiled information on how much it cost our economy each year to comply with the tax code. They estimate that in 2002 individuals, businesses, and nonprofits spent 5.8 billion hours complying with the tax code-an effort that cost an estimated $194 billion (Boortz and Linden 43). A forgotten cost of compliance is opportunity cost. An opportunity cost is the profit you lose because you were prevented from exploring another business opportunity. Corporations and high income earners almost always account for tax implications before making business decisions. Shouldn’t we want our corporations making decisions based on their consumers rather than tax code? Another example of a lost opportunity cost that many Americans loose out on is tax withholdings and overpayment of yearly income taxes. While the personal withholdings bounce around the government all year, this is money that could have earlier been invested in a number of ways. This is basically an interest free loan of our dollars to the government. According to our current director of the Congressional Budget office, making “tax decisions” rather than “economic decisions” is a practice that costs our economy 18 percent of our gross domestic product (Boortz and Linden 49) If you transfer that figure into money terms, it would equate to a $2 trillion loss in the GDP. .
Several Research teams were given an assignment. The assignment was simple; find a way to collect the same amount of revenue the government collects now, but find and use with a more efficient method. After all the various research was conducted and compared, one very popular solution surfaced. H.R. 25 in the U.S. House of Representatives and S.25 in the U.S. Senate, also known as the FairTax act of 2005. After reviewing the legislation, I decided that is what I would implement to cut out tax evasion amongst other things.
The Fair Tax
First and foremost, the FairTax bill would repeal the individual income tax, the alternative minimum tax, Corporate and business income taxes, Capital gains taxes, Social Security taxes, Medicare taxes, the self-employment tax, estate taxes, and gift taxes. To help understand just how and what taxes you would not have to pay anymore let me explain: The personal income tax we pay everyday on what you make would be abolished. This is the progressive tax that is structured towards the idea you pay more the more you make. For now on you would keep your entire pay check. Boss says you make $45,000 a year, then that is exactly what you take home. Starting in 1970 the alternative minimum tax was employed and targeted 155 high-income house holds. These households were eligible for so many tax deductions that they were not paying near the amount the government thought they should be paying. This tax would be abolished also. Currently the corporate tax is levied on businesses profits. Basically it is a tax on the value of the corporation’s profits. The capital gains tax affects you every time you sell an asset that you have had for at least 12 months. These assets typically include, the profit you make selling stocks, bonds, special metal, or property. Once FairTax is implemented you can now enjoy all the money you make selling your house or stocks. The social security tax was originally designed and called Old-Age, Survivors, and Disability Insurance program. Basically, this program has grown in expense tremendously over the years in liabilities and is headed for bankruptcy in the near future. However, it mostly serves the purpose of providing retirement income, unemployment benefits, and temporary assistance for needy families, and living allowance for the old. Another social welfare program that is also due to run out of funds in the near future is Medicare. Medicare tax is withheld from your paycheck by your employer to provide healthcare at retirement. Self-employed tax is basically the same taxes individuals who work for a company are paying however since you do not have an employer; you are responsible for paying both the employee and employer portion. Estate tax is one tax that really bothers me. After you work your entire life to earn whatever you achieve, you will have to pay a tax on your total net worth once you die. This is ridiculous especially since you already paid every tax in the book while earning what you ended up with at the end of your life. Also if you have an insurance policy, the government will tax the payout of the insurance policy. Give me a break; this too will be abolished under the FairTax. Last, the gift tax would also disappear. Even when being charitable and trying to share your money with another person the government wants to tax you for that. Now with all those taxes above abolished you are wondering how we collect the revenue needed to run the government. Simply put, the answer is a 23 percent embedded personal consumption tax on all goods and services sold at the retail level. By taxing consumption, you would now be able to receive tax on individuals who currently earn income illegally. Also, those that consume a tremendous amount of goods and services and are high wage earners would not be able to use the tax loop holes to avoid paying their portioned amount of taxes.
Boortz, Neal, and John Linder. The FairTax Book. 1st. Publications Company Development of Texas, 2005. 40-48. Print
"The FairTax, Tax Evasion, and the Underground Economy." PaFairTax. N.p., n.d. Web. 29 Apr 2010. .