FAIRtax (FT) Myth that IRS is “Abolished” - it is NOT, instead it gets WORSE!
The FT marketers frequently employ their sales claim that “the IRS is ABOLISHED” and there would be no more tax filing or need to keep receipts for tax purposes. They set us up by fanning the flames of our appropriate outrage at IRS abuses, and while our passions are so inflamed, they then slip us this quick sales claim, “FT Abolishes the IRS”.
Indeed the FT superficially purports to defund the IRS over 3 years. FT merchants hope that simple superficial statutory facts will convince people that the IRS is truly abolished – it has a certain simplistic appearance of the truth that dissipates when reality sets in.
Winding up with BOTH the OLD AND with the NEW IRS:
By far the major problem is that the FT would surely lead to a NEW Income Tax, IN ADDITION to the FT.
The FT has been advertised loosely as sort of “repealing” the 16th Amendment. Of course, it can do no such thing. Specifically, FT has a comical provision (its “Sunset Clause” - Sec . 401) under which it purports to repeal itself if the 16th Amendment is NOT repealed within 7 years after the FT is enacted. When I read that, I immediately thought of Cleavon Little, as the Sherriff in Blazing Saddles who when confronted by a hostile crowd, puts his gun to his head and threatens to shoot himself. When he reaches the safety of the jail, he says, “Boy, are they STUPID (for thinking he would shoot himself). I believe it to be an extremely likely scenario that Congress would repeal that Sunset Clause. Also, one should not realistically expect the 16th Amendment to be repealed within 7 years.
I fully expect that FT receipts would fall far short of their revenue-neutral target collections. The principal reason for that shortfall is those FT economists unrealistically “assumed” that there would be no revenue loss at all to (illegal) evasion or from (legal) avoidance (i.e., decisions to save rather than to spend). Economists and others who have NOT been engaged by AFFT believe that evasion and avoidance would be massive at such unprecedentedly high retail sales tax rates. That large shortfall would likely be used by Congress as its “excuse” for enacting a NEW Income Tax in order to close FT's $600-$900B revenue gap.
This would bring back the old IRS to complement the FT's NEW IRS – see below.
For additional concerns about winding up with BOTH the FT and a NEW Income Tax (with BOTH the old and a new IRS) see former Cato Institute, Senior Fellow, Dan Mitchell’s paper,.
The FairTax’s (FT) NEW IRS and Consumer Audits:
The FT brings its own NEW IRS, namely the Sales Tax Administration Authority (STAA) which would be a FEDERALLY controlled, managed, directed, overseer. Some old IRS agents may be “leased to” or otherwise employed by the States to conduct audits. Economists (engaged by AFFT) concluded that State administration costs will rise by MORE than any savings in federal administration costs (and they may underestimate State costs and overestimate federal savings) - see BHI report
FT Sec. 101(d) makes CONSUMERS liable to pay the tax -similar to State and local “use” taxes - but they can satisfy that liability by paying the tax and RECEIVING a receipt therefore. That gives the STAA the legal basis for AUDITING CONSUMERS, if they chose to do so - I think they will have to do so.
Strategizing what STAA might well do, I placed myself in the shoes of the STAA Commissioner and thought about what I might do to hold evasion down (but not out). It was not difficult at all to create an efficient and effective (for STAA, that is) method to generate substantial immediate tax revenue and greatly improve voluntary compliance. That is, I would send out millions of Pre-Audit Questionnaires (See Exhibit A, below). I would later move to convert this Questionnaire into a required filing of an “Annual FairTax Summary” by all consumers.
Note that while FTers advertise that you do not have to keep receipts, my Questionnaire would require consumers to attach all such receipts or they would have to pay the FT (plus interest and penalties) upon completing the Questionnaire. The only way for a consumer to establish to STAA that he RECEIVED a receipt is by producing it.
Exhibit A
Pre-Audit Questionnaire (to later convert to a required filing of an “Annual FairTax Summary”)
L. 1. Gross spending - including FairTax (attach schedule & summaries/copies of all accounts)
L. 2. Minus, Exempt purchases (attach receipts and documentation)
L. 3. Taxable spending (L.1 - L. 2)
L. 4. Total FairTax Due (L. 3 x 23%)
L. 5. Minus, total FairTax shown on attached receipts
L. 6. Balance due (L. 4 - L. 5, STAA will calculate interest & penalties)