Understanding the Tax Gap and Taxpayer Noncompliance
Ways and Means, Understanding the Tax Gap and Taxpayer Noncompliance, May 9, 2019
The tax gap occurs in many forms. The most reported loss is from the underground economy. Indeed, part of the attractiveness of the Fair Tax proposal is that, as with all consumption taxes, members of the underground economy would finally pay. This is true, but their customers likely would not unless their activities were legalized. As a retail sales tax, avoidance would be worse as it will be easy for many to claim that their retail purchases were really wholesale, thus avoiding the tax. The higher the tax rate, the greater the incentive to avoid.
As a single tax, without major spending cuts that would be a major blow to GDP and a boon for asset speculation, the Fair Tax rate would have to be high. An invoice value added tax and an additional subtraction VAT for tax benefits and social welfare spending would be much harder to evade. Leaving a menu of taxes in place, especially a high-income surtax, would allow for lower tax rates.
As we commented yesterday, our newest feature is an Asset Value Added Tax paid by the buyer and collected by the broker, rather than relying on the income tax for collection of capital gains taxes. The real money in tax avoidance is in the under reporting of capital gains by the wealthy. A broker collected consumption tax on asset purchases will both decrease avoidance and be a boon for record keeping in computing value added.
No prior value added tax will be credited for inherited assets or options exercised, although the current ESOP sale tax exclusion will remain in place. This will decrease speculation and increase employee democracy. It is a feature, not a flaw.
Attachment One: Senate Committee on Finance, Hearing on the 2019 Tax Filing Season and the 21st Century IRS, Wednesday, April 10, 2019
The tax gap occurs in many forms. The most reported loss is from the underground economy. Indeed, part of the attractiveness of the Fair Tax proposal is that, as with all consumption taxes, members of the underground economy would finally pay. This is true, but their customers likely would not unless their activities were legalized. As a retail sales tax, avoidance would be worse as it will be easy for many to claim that their retail purchases were really wholesale, thus avoiding the tax. The higher the tax rate, the greater the incentive to avoid.
As a single tax, without major spending cuts that would be a major blow to GDP and a boon for asset speculation, the Fair Tax rate would have to be high. An invoice value added tax and an additional subtraction VAT for tax benefits and social welfare spending would be much harder to evade. Leaving a menu of taxes in place, especially a high-income surtax, would allow for lower tax rates.
As we commented yesterday, our newest feature is an Asset Value Added Tax paid by the buyer and collected by the broker, rather than relying on the income tax for collection of capital gains taxes. The real money in tax avoidance is in the under reporting of capital gains by the wealthy. A broker collected consumption tax on asset purchases will both decrease avoidance and be a boon for record keeping in computing value added.
No prior value added tax will be credited for inherited assets or options exercised, although the current ESOP sale tax exclusion will remain in place. This will decrease speculation and increase employee democracy. It is a feature, not a flaw.
Attachment One: Senate Committee on Finance, Hearing on the 2019 Tax Filing Season and the 21st Century IRS, Wednesday, April 10, 2019
Attachment Two: Complexity and the Tax Gap:
Making Tax Compliance Easier and Collecting What’s Due, United States Senate
Committee on Finance, June 28, 2011
posted by Michael Bindner at 10:00 AM
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