5 Reasons the American Tax Payer Should Support the Fair Tax! pt 5 – The Underground Economy and Tax Cheaters #tcot #oktcot #fb

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The Underground Economy and Tax Cheaters

A great Oklahoman once said, “The income tax has made more liars out of the American people than golf has.”[1] Tax evasion exists when a person willfully and fraudulently conceals income so as to not pay a tax on it.  To stop all tax evasion under the income tax system would be as optimal as hiring a police officer to stand on every street corner to prevent jaywalking.[2] The cost outweighs the benefit.

The shadow economy, legal income-producing activities that are not reported to tax authorities,[3] represents roughly 10 percent of GDP according to a 2000 survey.[4] The “tax gap,” as the IRS calls it, was $345 billion in 2005.  The underground economy, which consists of illegal activities performed by drug dealers and prostitutes, was estimated at 9.4 percent of GDP in 1994.

A consumption tax will not stop the underground economy from existing but the evaders will, unlike before, have to pay the tax whenever they purchase a double cheeseburger and fries.  There lies the benefit for the honest taxpayer.  Under the income tax system, the government doesn’t take the hit when crooks find ways to not pay the tax.  Instead, the government increases the tax on those already paying it to make up the difference.  Under a consumption tax, that will not be necessary and the dishonest will have to pay as much as the honest.

[1] Will Rogers

[2] Slemrod, p. 45

[3] Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic Literature, 38 (March 2000), pp. 77-114

[4] Boortz, p. 93

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5 Reasons the American Tax Payer Should Support the Fair Tax! Pt 2 – Cost of Compliance #oktcot #tcot #fb

Have you paid your income tax this month ?
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We just passed Tax Day, everyone’s favorite time of year.  Do you remember the last time you filled out the 1040 yourself?  It’s such a nerve racking experience sorting through Schedule C and trying to find Line 52 that many Americans have their taxes professionally done to avoid the hassle or making a mistake which could cause the IRS to breath down their necks.  I forked over $50 per return last year to avoid the horror.  That’s $100 that I didn’t invest or use to buy 20 DVDs from Wal-Mart’s $5 bin.

In 2005, it is estimated that 6 billion hours and $265,000,000,000 were spent complying with the income tax.[1] Those are hours not well wasted.  That is money that was not invested voluntarily by individuals in worthwhile programs like cancer research or used by families for much needed vacations.  Almost 56 percent of this cost is paid by business, 2.5 percent is paid by non-profit organizations, and the remaining 42 percent is paid by the American tax payer.[2] In reality, the cost of compliance paid by the individual is much higher because businesses factor the cost of complying with the tax code into prices rather than taking a hit to their profits.

As mentioned in the section on withholding, the income tax is debited directly from the worker’s paycheck.  Many Americans are debited 25 percent for income tax and 8 percent for payroll taxes for a total of 33 percent before they even receive their check.[3] That’s 33 cents on the dollar that they cannot invest and earn interest off of.

Without the income tax system, we will see the money that is normally spent on compliance being pumped into independent research and development, job creation, personal savings, and pursuing the American Dream.

[1] Boortz, p. 43, fn 2

[2] Boortz, p. 44

[3] Boortz, p. 42, fn. 1

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5 Reasons the American Tax Payer Should Support the Fair Tax! Part 1 – Withholding System #oktcot #tcot #fb

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A change in the way the government collects taxes is a BIG change.  Anytime someone is asked to make a BIG change, they need a reason.  They need to know “why?”  Although other reasons exist, here are five reasons why the American tax payer should support this change in our tax system.

The Withholding System

Many Americans, including the author at one time, are clueless about the amount of taxes they pay to the federal government under the income tax scheme, due in large part to the system of withholding.

One of the first jobs I worked to pay for college was at Braum’s Ice Cream and Dairy Store.  I remember receiving my paycheck and seeing how much tax was being withheld on that first check.  From that point on when I received checks, I usually just looked at the bottom line and saw how much the check was worth and cashed it for rent, etc.  When tax day came and went, I received a check from the United States Treasury Department for around one hundred dollars.  I was instantly ecstatic because I had received “all” my money back.

As you and I both know, I was very much mistaken.  The fact is, the government took a chunk of my minimum-wage paycheck and gave me a pittance back.  Have you or anyone you have known ever made this same mistake?  Don’t be embarrassed because it is a very common thing to do.  For example, in 1965, a study showed that only 12.6 percent of those polled correctly estimated the amount of taxes they paid.[1] See, they were making the same mistake back then.

It wasn’t always like this.  In the beginning, the tax payers were sent a bill detailing how much income tax they owed once a year.  They would then write a check to cover the amount and mail it off to the government.  It is said that person will remember what they see better than what they hear and that they will have a better memory of what they do over what they see.  If this is true, then it is quite possible that person would have a very good memory of how much they paid in taxes if they had to sit down and write it out in a check, especially when the check is as large as twelve percent of your income.[2] Writing such a large check might cause some people to become a little more interested in how their government was spending their money.

When the income tax was first put into practice in 1913, withholding was the method by which the government intended to collect the revenue.  The people rejected the idea and in 1917 a law was passed discontinuing the withholding component of the income tax.  It is not hard to understand why politicians prefer withholding.  Under that system, they receive revenue as soon as the taxpayer earns it rather than having to wait to receive a check once a year.  Additionally, the government has the benefit of letting the money draw interest, although they generally spend it before it can incur any.

Let’s put it another way.  Without withholdings, the taxpayer could place the amount of their paycheck that will be taxed into a savings account where it can draw interest until they are ready, once a year, to write a check for the amount of money owed to the tax.  Even if the interest that can be made is a small amount, it is still interest that could go to the taxpayer to buy new shoes for their child or to save the money for a rainy day.

[1] Joseph Van Wagstaff, “Income Tax Consciousness under Withholding,” Southern Economic Journal, Vol. 32, No. 1, Part 1 (Jul., 1965), p. 75

[2] The average tax rate of all taxpayers is 12.68% while some Americans pay an average of 22% of their income according to the Internal Revenue Service.

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Shaking Up the System Instead of Shaking Down the People

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Ask anyone who has ever been mugged or burglarized and they will tell you that the experience wasn’t pleasant.  Ask anyone that was cheated out of their savings by Bernie Madoff and they will tell you that his serving time in prison is not as satisfying as getting their money back.  What if I told you that you were the victim of a ponzi scheme and that every April 15th your wallet was being pick-pocketed?  If you are a taxpaying citizen, then you probably are.

The first part of this article addresses the problems imposed by the current tax system, an unstable currency, and government program in the red.  The primary purpose of these reforms is to give Americans more control of their finances and provide more security for dollars invested.


President Kennedy once stated that “Our present tax system…exerts too heavy a drag on growth…it reduces the financial incentives for personal effort, investment, and risk-taking…the present tax load…distorts economic judgments and channels an undue amount of energy into efforts to avoid tax liabilities.”[1] At the time of his statement, Kennedy did not know that an efficient, growth-encouraging system called the Fair Tax would present a real possibility for America to abolish the IRS and its punishing tax code in just half a century.

When the United States was born, the federal government raised much of its revenue through taxation of a few items such as alcohol and tobacco.[2] During times of war, additional taxes were levied to cover the costs.[3] It was understood that those taxes would disappear afterwards because most governing in times of peace was expected to be done at the state and local level.

In 1894, politicians in Washington introduced a bill entitled “An Act to reduce taxation, to provide revenue for the government, and for other purposes.”[4] This act created a 2 percent tax on everyone with an income greater than $4,000 a year.[5] Additionally, government officials were exempt from the tax.[6] President Grover Cleveland believed the law was unconstitutional and let it become law but did not sign onto it.[7]

The United States Supreme Court in Pollock v. Farmers’ Loan & Trust Co. heard a case about the Constitutionality of the newly imposed income tax and decided that it was in violation Article 1, Section 9 of the Constitution.[8] Farmers’ Loan & Trust Co., in compliance with the act, announced that they would be providing the names of all of those liable under the act to the Department of the Treasury.[9] Charles Pollock, owner of 10 shares of Farmers stock, sued to enjoin the company from paying the tax.[10]

The Court held that a number of the taxes in the act were direct taxes.  As such, the tax imposed on the incomes of real estate and of personal property is a direct tax and is therefore unconstitutional and void because it is not apportioned according to representation.[11] All of those sections, constituting one entire scheme of taxation, are necessarily invalid.[12]

Undeterred, Congress decided to amend the Constitution.  The amendment passed in both the House and the Senate and then three-fourths of the states ratified the Sixteenth Amendment, making it law on February 12, 1913.  Today, nearly two-thirds of income tax revenue comes from the top ten percent of wage earners and 52 percent of wage earners pay nearly 100 percent of all personal income taxes collected by the Internal Revenue Service.[13] To the 52 percent of Americans shouldering the burden of government spending, this does not seem like a very fair tax.

[1] President John F. Kennedy, November 20, 1962

[2]James Hines Jr., “Taxing Consumption and Other Sins,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 51

[3] Hines, p. 52

[4] Charles Dunbar, “The New Income Tax,” The Quarterly Journal of Economics, Vol. 9, No. 1 (Oct., 1894), p. 26

[5] Dunbar, p. 31

[6]Edwin R. A. Seligman, “The American Income Tax,” The Economic Journal, Vol. 4, No. 16 (Dec., 1894), p. 644

[7]Gerald G. Eggert, “Richard Olney and the Income Tax Cases,” The Mississippi Valley Historical Review, Vol. 48, No. 1 (Jun., 1961), p. 25

[8] Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895)

[9] Pollock, 157 U.S. at 430

[10] Id.

[11] Id., at 434

[12] Id.

[13] Michael Graetz, “Tax Reform Unraveling,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 81; Neal Boortz & John Linder, The Fair Tax Book. (New York: Harper Collins Publishers, 2005) p. 16

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