FIRE Easier If VAT Replaced Income Tax?

[aenlighten]

Simpler to comply with

also ends up being simpler to evade.

 

[RetireeRobert]

also ends up being simpler to evade.

How many umpteen gazillion ways are there to obfuscate net taxable income? How many ways are there to obfuscate "gross sales"----very few.

Revenue auditor to compute sales tax due: Gross sales = bank deposits
tax due = % rate x gross sales

Revenue auditor to compute income tax:
net taxable income = what the hey?
income tax = what the hey again

Income tax way easier to evade than a sales type tax, if you ask me.

From the standpoint of the tax reporting being understandable, the sales type tax is much easier to understand than our income tax reporting.

Even honest people who want to comply have a very difficult time being fully and accurately compliant with our income tax because it is so complex.

Honest people could easily and accurately comply with a sales type tax.

And the more complexity, the easier for dishonest people to "misreport" their income tax due, and the harder for the Revenuers to catch them.

With simple system in a sales type tax, it is harder for dishonest people to misreport, and easier for revenuers to catch those who try, in my view.

 

[cute fuzzy bunny]

What I have a hard time understanding is why we look at every one of these "new ideas" as though they're not already implemented in a bunch of other countries and have been for years...

The advantages, problems and how to optimize those issues are already worked out.

But sure, it'll always be different here in the USA...

 

[Rustic23]

For those yet to retire, a VAT/FAIR/Sales tax may aid them to FE, however, I faith in our politicians that they will find a way to separate you from an adequate amount of your cash that it will make little or no difference.

However, for those of us who have retired, I think it would hurt. The VAT/Sales tax would have to be substantial to replace both income and SS tax. While they say that there would be some sort of offset for old/poor folks, I doubt it would be large enough. Currently the majority of my retirement income is spent each year. If you were to add a 17-25% sales tax to the things I purchase, I am not sure where the money would come from.

 

[retire@40]

...Like I said, talk to the Revenue agents in the states with both sales and income taxes like I have. They will tell you the sales tax compliance and collection system is so much easier, better, understandable than income tax system, it ain't funny.

I deal with them, I talk with them, and I drink with them.

It's easier to administer and understand a sales tax system, but there's just as much if not more cheating than the income tax system. Unrecorded sales, underreporting sales, recording taxable sales as nontaxable, register manipulation, double receipts, etc. You were in the business and you've never seen this?

Here's an example from one of your favorite magazines...Annual fraud on European sales tax to exceed $100b Accounting Today - Find Articles

 

[RetireeRobert]

I deal with them, I talk with them, and I drink with them.

It's easier to administer and understand a sales tax system, but there's just as much if not more cheating than the income tax system.

I have no doubt there will be cheaters whatever the system. I find it very arguable an "easier to administer and understand" system would have *more* cheating dollar wise than our current income tax system.

My experience was with small businesses, and perhaps the cheaters went elsewhere than come to me.

You mean the revenue agents you know drink? Is that what our income tax system does to them?

 

[RetireeRobert]

...Annual fraud on European sales tax to exceed $100b Accounting Today - Find Articles

Per the IRS-----Tax gap on under reported or misreported or non reported US income taxes for 2001 was $345 billion.
IRS Updates Tax Gap Estimates

 

[retire@40]

RetireeRobert[/left];578625]Per the IRS-----Tax gap on under reported or misreported or non reported US income taxes for 2001 was $345 billion.
IRS Updates Tax Gap Estimates

That article proves my point. If you read the entire article you will see the IRS says...

“Simply stated, compliance is highest where there is third-party reporting.” For example, one percent of all wage, salary, and tip income is misreported, contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income, which is reported on a Schedule C and is subject to little third-party reporting or withholding, has a net misreporting percentage of 57 percent, contributing about $68 billion to the tax gap."

IOW, "cash" type businesses have a tendency not to report all sales. These are the words of the IRS, not just what I think.

 

[RetireeRobert]

That article proves my point. If you read the entire article you will see the IRS says...

“Simply stated, compliance is highest where there is third-party reporting.” For example, one percent of all wage, salary, and tip income is misreported, contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income, which is reported on a Schedule C and is subject to little third-party reporting or withholding, has a net misreporting percentage of 57 percent, contributing about $68 billion to the tax gap."

IOW, "cash" type businesses have a tendency not to report all sales. These are the words of the IRS, not just what I think.

@@@The "point" is income tax system has "more" cheating than sales tax system---IRS reports there is a $345 billion gap with income tax system (as compared to $100 billion gap in EU with sales tax system). Last I heard the EU had a slightly larger GDP than US, so looks like sales tax system "problem" with cheating is 1/3 or maybe only 1/4 the problem of income tax system.

Bye.

 

[cute fuzzy bunny]

Or the processes used to gauge the $100B shortfall and the $345B shortfalls were incompatible or incorrect.

For example...how does the IRS actually have any idea as to what hasnt been reported? It'd have to be some sort of sample and guess. And I'm betting that number was produced by the same folks that stood to gain further funding by showing a huge potential problem.

 

[RetireeRobert]

Or the processes used to gauge the $100B shortfall and the $345B shortfalls were incompatible or incorrect.

For example...how does the IRS actually have any idea as to what hasnt been reported? It'd have to be some sort of sample and guess. And I'm betting that number was produced by the same folks that stood to gain further funding by showing a huge potential problem.

I wondered about that too. But then I wondered the same thing about the report on the EU sales tax cheating. In either case whether US or EU, if they didn't collect it, how do they know how much they left on the table?
Like you say, people likely make these projections based on audit samples of what they found when compliance auditing.

But one thing we can be pretty sure, the current US income tax system is a terrible mess. Seems we'll just have to deal with it for good or bad.

 

[cute fuzzy bunny]

I'd look for the original sources of both reports, who created them, their sampling and methods of estimation, and who the reports were intended to be presented to. From that one could determine if the methods were reasonably sound, what was in or out and what if any inclination there may have been to push the numbers higher or lower.

The current system IS a terrible mess. I guess the good question is do other methods used in other countries produce simpler, better results in terms of funds collected, distribution of collection and fairness of redistribution.

I honestly like the idea of a national sales tax on everything, with low rates and lots of exemptions on staples and low income families and huge rates on luxury items.

As far as FIREing, LBYMers would do well in such an environment, since they dont spend as much and probably wouldnt spend as much after retirement. People raking in huge amounts of money and spending like drunken sailors would be handicapped. There'd be a huge market in cheap used stuff that would duck under the sales tax radar, recycling a lot of stuff that gets thrown out now and creating a whole tier of 'employment'.

 

[clifp]

For those yet to retire, a VAT/FAIR/Sales tax may aid them to FE, however, I faith in our politicians that they will find a way to separate you from an adequate amount of your cash that it will make little or no difference.

However, for those of us who have retired, I think it would hurt. The VAT/Sales tax would have to be substantial to replace both income and SS tax. While they say that there would be some sort of offset for old/poor folks, I doubt it would be large enough. Currently the majority of my retirement income is spent each year. If you were to add a 17-25% sales tax to the things I purchase, I am not sure where the money would come from.

25 years ago, I would have loved to see a FAIR tax system in place. Even back in the mid 90s, when my Congressman Tom Campbell was pushing for it I was a big fan. However during the 90s I forked out over a million dollars in income taxes. Now as retired person, I have figured out how to take advantage of the tax system [-]exploit loopholes[/-], hence my tax burden is minimal.

At this point it seems anything but "FAIR" to tax me for earning income and then change the rules and add a 20+% consumption tax. I find it hard to imagine how any retired person would come out ahead under FAIR tax.

Now I won't be hypocrite and say that the current system is fair one just because I don't pay income taxes. Like Warren Buffett, I don't think I pay my fair share of taxes, but a switch over to the FAIR tax would screw me and other retirees big time.

"Don't tax you ,don't tax me
tax the guy behind the tree"

 

[ERD50]

I'd look for the original sources of both reports, who created them, their sampling and methods of estimation, and who the reports were intended to be presented to.

Sounds like.... w*rk!

I honestly like the idea of a national sales tax on everything, with low rates and lots of exemptions on staples and low income families and huge rates on luxury items.

Well, the 'pre-bate' is supposed to accomplish that. Below a certain spend level (around the 'essential' level) you effectively are pre-bated as much as you would pay in taxes.

The problem I see in allowing diff rates for 'luxuries' and 'essentials' is you go down the slippery slope of Congress deciding all this, and then the loopholes start....

Is lobster a healthy low-fat food, or a luxury? Are potato chips junk food, 'food', or ? One of the points in all this is that Congress should be dealing with real issues, not trying to put everything we buy/sell in some sort of 'bucket'.

Snowballs chance of passing and all that, but if I were president, I'd say - I'm going to veto any bill that doesn't include eliminating 100x more tax code than it adds.

-ERD50

 

[RetireeRobert]

.........Snowballs chance of passing and all that, but if I were president, I'd say - I'm going to veto any bill that doesn't include eliminating 100x more tax code than it adds.

-ERD50

I'll vote for that!

 

[retire@40]

...At this point it seems anything but "FAIR" to tax me for earning income and then change the rules and add a 20+% consumption tax. I find it hard to imagine how any retired person would come out ahead under FAIR tax...

Exactly.

 

[retire@40]

..The "point" is income tax system has "more" cheating than sales tax system...

Funny how we can read the same words differently.

I read that section quoted from the IRS to mean when there is 3rd party reporting such as we have in our current system (via W-2 and 1099 forms) there is 6 to 7 times less cheating than when there is no 3rd party reporting (as would be the case under a sales tax system).

I guess we'll have to agree to disagree.

 

[cute fuzzy bunny]

At this point it seems anything but "FAIR" to tax me for earning income and then change the rules and add a 20+% consumption tax. I find it hard to imagine how any retired person would come out ahead under FAIR tax.

I must have a good imagination, although I havent thought these all the way out I'll throw 'em out.

- Could work and collect social security without worries about income tax implications.

- No inheritance or estate taxes to worry about

- No capital gains or income taxes on dividends/interest/etc.

- No need to deal with tax reduced or tax free investments that have lower yields/dividends/interest

- Dont have to worry about losing my house to increasing property taxes

I worked it out and it'd take about a 35% sales tax before I'd be paying more in sales taxes than I owe in the combination of income, property and investment taxes. But then again I dont spend as much as a lot of people.

 

[FIREd]

I think that replacing the income tax with a VAT or sales tax would be positive for those of us living on a small fraction of our income and who are still in the accumulation phase. Right now for example, we live on about 40% of our gross income and I would gladly trade paying taxes on our entire gross income for paying a sales tax on only what we consume. It would take a 50% sales tax for us to pay more taxes than what we pay right now in income taxes.

However, I don't think that a VAT tax system would be beneficial for people who are already retired. With the current system, if you retire on a modest income you can avoid paying a lot of taxes. For example you can take money out of a Roth or a taxable account with minimal tax implications. You can also use personal exemptions to minimize the taxes you owe on IRA withdrawals. Plus part of your SS benefits are most likely tax exempt. So a retiree could end up paying far less than 10% of his income in taxes with the current system. With a VAT system, it would be as if the retiree had to pay a flat tax on his entire income (I assume off course that the retiree spends all his income, since there is little need for a retiree to keep saving money for retirement). So if you introduce a VAT or a sales tax in the 15-20% range as it is in many parts of Europe for example, it would represent a substantial tax increase for retirees.

 

[samclem]

. So if you introduce a VAT or a sales tax in the 15-20% range as it is in many parts of Europe for example, it would represent a substantial tax increase for retirees.

All true, but there are some significant offsetting factors:
-- Most people have significant savings that is in either a conventional IRA, a 401K or other non-Roth type accounts. We pay cap gains on all of this when we sell. It's a very high probability that the cap gains rate will soon be the same as the earned income rate for most people. None of that would be taxed if we had a NRST.
-- No taxation on dividends and interest. That stuff adds up over the years.
-- There will be a significant increase innational GDP from several factors (decreased offshoring or production, productivity increases from elimination of inefficient use of capital caused by our present tax code, etc). That productivity jump will increase dividends for retirees holding equities.
-- As people put more of their earnings into savings (to avoid the taxes on spending), stock prices will rise. Again, good for retires holding stocks.
-- The prebate goes to everyone, and it's not chump change.

-- Most importantly, the societal benefits of the tax will "lift all boats"--or at least most of them. Increased employment and having US industries capable of competing worldwide will reduce demand on government anti-paverty programs at local, state, federal level. That's worth something to retirees . . . and everyone else.

 

[RetireeRobert]

Funny how we can read the same words differently.............

I guess we'll have to agree to disagree.

Yes, we'll have to agree to disagree. I was wondering why you took IRS's words as gospel on third party reporting and apply their words to the EU system. IRS must have credibility wuth you.

And it is funny how the two of us can look at the two amounts of studied tax underpayments (cheating) is both systems, $345 billion in US (population 300 million) and $100 billion in EU (population 500 million), and conclude differently as to whether EU's sales tax system produces the worst cheating or not.

Yes we disagree.

 

[ERD50]

Funny how we can read the same words differently.

I read that section quoted from the IRS to mean when there is 3rd party reporting such as we have in our current system (via W-2 and 1099 forms) there is 6 to 7 times less cheating than when there is no 3rd party reporting (as would be the case under a sales tax system).

I guess we'll have to agree to disagree.

R@40, aren't you comparing under-reporting of income tax when there is no 3rd party reporting, versus under-reporting of sales tax?

Part of the argument against income tax is that it is so complex, it fosters cheating. I'm not sure you can apply % of non-compliance of sole-prop directly to sales tax.

-ERD50

 

[ERD50]

- Dont have to worry about losing my house to increasing property taxes

I worked it out and it'd take about a 35% sales tax before I'd be paying more in sales taxes than I owe in the combination of income, property and investment taxes.

You need to pull property tax, state income tax, and state/local sales tax out of the equation. Those are local taxes that would be unaffected by a NST.

If every taxing body, national, state and local would go the Sales tax route, then your number would apply (maybe that is what you were inferring, for reference?).

Maybe I'll do the math on mine later. Of course there are many 'soft' numbers - how much would prices come down w/o embedded tax and cost-of-compliance, how much better would investments do if this improved our exports, etc, etc, etc.

Gut feel is that I would be hurting under NST at present- not collecting SS or pension yet, still have deductions, my fed taxes are low. But as someone said, maybe this would be a good thing long term for our children and grandchildren?

-ERD50

 

[retire@40]

R@40, aren't you comparing under-reporting of income tax when there is no 3rd party reporting, versus under-reporting of sales tax?

Part of the argument against income tax is that it is so complex, it fosters cheating. I'm not sure you can apply % of non-compliance of sole-prop directly to sales tax.

-ERD50

Based on what the IRS states, although the current income tax system has it's problems, the biggest problem withing that system is when there is no third party reporting.

In a sales tax system, there is zero percent third party reporting, so the entire system is subject to that problem.

Your employer "forces" you to report your entire wages because he gives you a W-2 at the end of the year and submits the same to the IRS. There is no similar set of checks and balances under a sales tax system. I'm sure there are people reading this that have cash businesses and know what I'm talking about, although understandably they will not admit to ever skimming off the top. Next time you buy a pizza or get a hair cut, see how often you get a receipt.

 

[ERD50]

In a sales tax system, there is zero percent third party reporting, so the entire system is subject to that problem.

Next time you buy a pizza or get a hair cut, see how often you get a receipt.

I always get a receipt, don't know where you get your hair cut or pizza from. Maybe the same place

Well, maybe some people who have done retail can chime in, since we are mostly all anonymous here. I do know some people who have small retail businesses, they are terrible with paperwork, procrastinate on everything, always file for extensions for income tax, yet, they seem to be VERY concerned about the state sales tax, and they make sure their i's/t's are dotted/crossed each and every quarter. That is just a few anecdotal data points though, I don't know the larger picture.

-ERD50