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VIDEO: Five ways the FAIRtax Curtails Tax Cheats

The FAIRtax improves upon major factors that bear upon compliance.

To understand how it does so, policy makers need to look at the several factors that bear upon compliance – both fraud and non-fraud – from the scholarly research.  The five most important of these are as follows:

  • the number of taxpayers in relation to enforcement resources;
  • the marginal tax rates;
  • transparency or the risk of detection/ability to hide defalcation;
  • the magnitude of punishment if caught; and
  • perceptions of unfairness.

Number of taxpayers in relation to enforcement resources.

The 2014 IRS Data Book gives the number of tax filers under the current system as a whopping 158.1 million.  The FAIRtax removes approximately 134 million taxpayers entirely from the tax system, reducing the number of filers by 85 percent to about 24 million.  Thus, enforcement authorities can catch cheats by monitoring far fewer taxpayers.  Because the number of collection points is so much lower under the Fair Tax, if enforcement funding is held equal then the audit rate for potential evaders increases considerably and the likelihood of apprehension is correspondingly higher.  The perception of risk as a deterrent should also increase commensurately.  In other words, the risk of detection increases and the risk-adjusted cost of evasion increases.

Marginal tax rates.

A taxpayer’s marginal tax rate is the tax rate that applies to the taxpayer’s last dollar of taxable income.  It is the marginal tax rate that affects his or her decision regarding whether to work more.  The higher the marginal tax rate, the greater disincentive to increase work or to find a higher paying job.  Likewise, a high marginal tax rate affects a taxpayer’s incentive to cheat.

Because the FAIRtax has the broadest tax base, marginal rates are the lowest they can be under any sound tax system.  With a lower marginal tax rate, cheaters profit less from cheating.  All other things being equal, the motto that “every man has his price” applies to encourage more attempted evasions as the reward from cheating increases. Lower marginal rates, if the risk and motivation are the same, imply lower evasion rates because the benefit from evasion declines while the cost of evasion remains comparable.  However, precisely because of the larger tax base and lower marginal tax rates, the benefit from lawful tax avoidance or illegal tax evasion under the FAIRtax is much less at the margin relative to either the current system or competing alternative tax systems that have higher marginal tax rates.

The graph below shows the marginal rates under the FAIRtax and the current federal tax system (income and payroll taxes) for 42 stylized married households divided into seven income categories.  The marginal tax rate for the FAIRtax is 23%.  Each additional dollar spent includes 23 cents of taxes.  Across all income categories, the marginal tax rate under the current system is higher than the FAIRtax.*

How can low income persons have high marginal rates?  For example, it is not uncommon for married couples earning $30,000 per year with two children to face high marginal tax rates.  Given the level of their federal marginal tax bracket, and their loss of the Earned Income Tax Credit from earning extra income and their exposure to marginal Social Security/Medicare taxation, their current total marginal effective tax on earning an extra dollar can be over 35 percent, and possibly over 45 percent.

To see the study on which these rates are based click here.

Transparency or the risk of detection/ability to hide cheating.

Visibility was specifically mentioned by the Government Accountability Office as affecting compliance. The transparency of the FAIRtax increases the likelihood that tax evasion is uncovered and leaves little room to hide between honesty and outright fraud (to say nothing of the well-established efficiency of current state sales tax authorities, well experienced in detecting such infractions).  When an individual claims exemption, he has to do so in a very visible way at the cash register.

Magnitude of punishment if caught.

The severity of applicable penalties is also a factor, but this would be expected to increase.  This is not to say that the FAIRtax adds to the impressive array of penalties now in the code; but rather, that it becomes quite transparent when someone is cheating as opposed to “gaming” the system.  When a retailer fails to pay over trust funds, he does so at great peril and with the knowledge that he is violating the law (i.e., committing evasion).  Few excuses apply.

Perception of unfairness.

Perception of the fairness of the tax system is increasingly regarded as an important consideration.  Studies have persuasively shown that attitudes are important determinants of compliance.  Having both a negative attitude towards the tax system and perceiving other taxpayers as dishonest significantly increases the likelihood a person will evade taxes.  Today, cheating is encouraged by the perception that one’s neighbor is not paying his or her fair share.  Under the FAIRtax, as the costs of compliance shrink and the perceived fairness of the tax system increases, some of the hostility to the tax system will decline.

Bottom Line.

State tax administrators can focus enforcement resources on far fewer taxpayers, using consistent and vastly simpler forms, with far fewer opportunities to cheat, diminished incentives to do so, and a far greater chance of getting caught if they do.


Karen Walby, Ph.D. is the Director of Research for Americans For Fair Taxation. See more here.

Have They Actually Done Something?

“You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.” – Abraham Lincoln

In 1973, my journey into the world of political activism began when I organized a group of high school friends to work as volunteers in support of partisan candidates and ballot issues. We were young, naïve and full of energy, and were confident our contributions would change the world. More importantly, we blindly believed that all the candidates and elected officials were worthy of our trust.

This was during the time that Watergate exploded and little did we know that the rose-colored glasses we so boldly displayed were about to dull. Instead of taking the time to fully research candidates, their positions and the influencers around them, we just blindly plunged ahead giving them the most precious resource any citizen can give – our time, our energy and when we came of age, our vote.

We even sent a letter of support to the then-entrenched President, and when he wrote us back, we continued down our path of blind support.

Eight months later, the President resigned in disgrace and we learned an extremely painful, yet important lesson; all is not as it seems and many who seek the people’s trust are not deserving, nor worthy. We also learned it is vital that We the People look beyond a candidate’s and politician’s political rhetoric and apply a magnifying lens against what the person does versus what they say.

Our nation is approaching another election in ten days and I am again reminded of how important those early lessons learned are to the FairTax® campaign.

Are the candidates seeking your vote truly worthy of your trust? Are they individuals of impeccable integrity? Where do they spend the majority of their time – with paid lobbyists and consultants or with the people they [will] represent?

Does the candidate wanting your vote support the FairTax legislation?

This is an important question that demands a yes or no answer – not a maybe, sorta or kinda. And if the answer is yes, does the individual support it only in word or on a piece of paper or have they actually done something to try and advance the legislation?

It’s easy to put your name on a piece of paper and say you support something.  It is much more defining when one takes a leadership position to advance a piece of legislation. Washington is full of “go-alongs to get-alongs.” These people are simply fence sitters who take up space – talk a good game and do nothing.

The FairTax legislation demands bold and decisive leaders willing to buck status quo in order to remove the shackles of a tax system that is destroying jobs, the economy and the financial livelihood of the American people who contribute their hard-earned income. 

You have ten days until Election Day. It’s not too late to really get to know the candidates on your ballot. If you candidate is an incumbent Member of Congress, they are working in their district offices. Go visit them. If you can’t visit, call. Ask tough questions.

Bring this comparison chart and ask if they support the FairTax. If they do, ask what they have done to advance it – make them give you specifics. Visit with their staff. Ask them tough questions too. Ask them if they support the IRS.  They will say no and you must then explain to them that the only way to ensure that the IRS goes away is to pass the FairTax collected by the states.  And be sure to let them know that you support candidates who support the FairTax Plan.

Our nation is in the midst of an economic and jobs crisis—things the FairTax will create. We desperately need principled leaders willing to make tough decisions like eliminating the income tax and passing the FairTax. Your vote in support of candidates who support the FairTax is a major step forward to making the FairTax the law of the land.

As former Secretary Bill Simon said, “Bad politicians are sent to Washington by good people who don’t vote.” Whatever you do, please vote. And make sure that any candidate lucky enough to get your vote is worthy of your trust. Finally, as President John Quincy Adams said, “Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost.”

In 1776 American Colonists Told the British “To Pound Sand” — Happy 4th of July!

Today America celebrates her 238th birthday. On July 4, 1776, the Second Continental Congress adopted the Declaration of Independence whose 56 signers were not professional politicians but ordinary citizens of the day.

Yes, these were simple people including farmers, business owners, lawyers, ministers and physicians and what today we would call grassroots leaders.

People like you and me. The youngest was 26 and the oldest was 70.

Imagine 56 citizens crafting a document as profound as the Declaration without the benefit of the Internet, Facebook, Twitter, Instagram, or a host of political hacks churning out canned ham political spin.

Declaration of IndependenceFor 238 years, historians have analyzed the lives, motivations and contributions of these 56 patriots.

Notwithstanding their incredible vision and articulation, what has always captivated me most about their achievement was how they overcame what must have been overwhelming fear in the face of adversity. Their unflinching belief against taxation without representation seemingly provided the needed fortitude to confidently confront the Crown and its worldwide empire.

Today we find ourselves once again confronting a ruling class that imposes taxation without representation through the federal income tax code. Included in this system is an IRS enforcement arm that, as in 1776, strikes fear in the heart of every American citizen.

In 1776, the colonists had to make a choice. Continue status quo or tell the British to pound sand. Their courageous decision quite literally changed the course of history.

In 2014, American citizens again have to make a choice. They can allow the continued proliferation of a tax code that has now surpassed 74,000 pages and is rapidly eating away the very economic fiber of this nation. Or, they can tell the ruling class “pound sand” and engage in the campaign to enact H.R. 25, “The FairTax Act of 2013”.

H.R. 25 is in essence, the citizen’s Declaration of Taxation Independence.

It is the only tax replacement plan before Congress that sets forth a fair, simple and transparent form of taxation driven by the citizenry and not by the ruling class of Washington.

By its very nature, the FairTax embodies the principles envisioned and codified in the original Declaration of Independence. Declaration signer and Founding Father Benjamin Franklin said, “The ordaining of laws in favor of one part of the nation, to the prejudice and oppression of another, is certainly the most erroneous and mistaken policy.”

The FairTax Plan rights the wrongs of the income tax code by providing a tax code that treats every citizen the same – no exemptions, no loopholes for anyone – no prejudice or oppression.

William Burroughs stated this eloquently on the FairTax.org Facebook page yesterday when he said, “The only way to finance government in a free society is by the voluntary choice of taxpayers, and no better way to enact it than by a sales tax. End the income tax, a free people do not have to scurry around proving to bureaucrats how they earned their money.”

If you are not actively supporting the FairTax, we invite you to become a part of what is arguably, the largest grassroots tax reform movement in America. Take one minute to send a message to your Representative and become a part of the greatest tax revolution of our lifetime.

And on this July 4, Happy Birthday America!

RELATED STORY: Found in rare copy of Ben Franklin-owned newspaper, first news coverage of the Declaration of Independence

A Rogue IRS: Enough is Enough

 “On matters of style, swim with the current. On matters of principle stand like a rock.” – Thomas Jefferson

For over 10 years, the FairTax® campaign has warned about the politicization of the IRS. Events over the past nine months have only served to heighten this concern. Consider the following revelations:

  • The IRS admitted to and apologized for targeting certain conservative leaning groups.
  • The senior IRS official at the center of the targeting, Lois Lerner, pleaded the 5th during questioning by members of a House Oversight Committee.
  • The Chairman of the Ways and Means Committee released an email from another senior IRS official confirming the IRS had been “off-planning” this targeting as early as June 2012.
  • A senior Senator publicly requested the Executive Branch use the IRS and bypass Congress to weaken and curtail funding for certain conservative leaning 501(c)(4)’s.
  • The Chairman of Ways and Means stated the IRS has targeted established conservative 501(c)(4)’s for audits.
  • The IRS proposed new rules that would redefine political activities by 501(c)(4)’s and effectively extinguish their 1st Amendment right to free political speech. Thankfully, opposition has been swift and strong and is coming from the left and the right.

This cascading series of events should strike fear in the heart of every single American citizen.

Today, the IRS may target you for your political beliefs.Tomorrow it could be the color of your skin, your gender or your religious beliefs. Once you begin power sliding down the slippery slope, it’s impossible to predict where you might land.

There is a way out of this increasingly dangerous mess – a way in which citizens do not have to fear their elected officials or their government. It is the FairTax Plan.

The FairTax eliminates the income tax while defunding and disbanding the IRS. The FairTax institutes a progressive, national consumption tax that is simple, fair and ready to implement. It fully funds the federal government, including Social Security and Medicare, while stimulating the economy and generating desperately needed jobs at an unprecedented level!

The American Revolutionary War began because of colonists who were fed up with Britain’s increasing tyranny and taxation. Having had enough, they drew a line in the sand and declared  “no more taxation without representation”.

When a nation’s elected officials use government agencies for partisan political gain, suppress free political speech and target individual citizens for punitive action, that nation has effectively slid into taxation without representation.

Where is your line in the sand? When do you tell your elected representative, I’ve had enough, I want simple and transparent taxation without interference by special interests and a government that does not engage in punitive, partisan manipulation?

Finally, congratulations to Congressman Chris Stewart (UT-2) for becoming the 74th co-sponsor of HR 25! Please call Rep. Stewart and welcome him to the FairTax family.

EDITORS NOTE: The feature image is by Elvert Barnes from Hyattsville MD, USA. The photographer does not in any way endorse the author or the positions taken in this column. The image is licensed under the Creative Commons Attribution-Share Alike 2.0 Generic.

FairTax Friday: “No idea of the [tax code] benefits”!

It’s January and Americans are looking for receipts and lost documentation in their annual quest to prepare their yearly tax return. Arguments will ensure, relationships will sour and health will decline. Are you having fun yet?

Have you started dealing with the significant changes that went into effect for 2013? Not to worry though, National Taxpayer Advocate Nina Olson said, “The complexities of the tax code are only affecting those of us trying to read it. Tax software makes a lot of those complexities invisible to the average taxpayer.” I’m comforted, aren’t you?

She went on to say, “As a result, taxpayers might not realize they’re being helped by a wide array of deductions and credits. “They have no idea of the benefits they are getting through the tax code.”

Wow, now we are getting benefits from the tax code!

I’m continually amazed at the way Washington “spins” tax code changes. First, Congressional leaders point to the code’s growing complexity. Congress then passes changes (you’ll have to read the legislation to know what’s in it because they are too busy to read it themselves), followed by the executive branch spinning the “benefits”.

You know better, though, don’t you? After all, you are FairTax® smart. You know the only benefits in the tax code are those carved out by special interests. You know that taxpayers are always the perennial losers when it comes to America’s income tax code.

That’s why a group of dedicated FairTax supporters are on their way to Washington this weekend to meet with Members of Congress and their staff. For two days, they plan to further educate them about the benefits of HR 25, the FairTax Act of 2013.

That’s also why the Letters to the Editor/Opinion Editorial team, led by Glen Terrell, has redoubled their efforts in making sure that the FairTax message is spread far and wide in newspapers, magazines and bogs.

Members of the House Ways and Means Committee will soon vote on tax reform. We await their vote on HR 25. It is imperative that every member of Congress knows the magnitude of support the FairTax has across America.

Have you contacted your elected representatives to share with them where you stand on the FairTax? If so, did you only contact their Washington office?

We know that Member’s district directors (DD’s) also report on what issues constituents are contacting them about at the local level. Some DD’s have told us they rarely hear about the FairTax, yet we know you are contacting the Representative’s Washington office.

Have you gone on your Member’s Facebook page and weighed in on the “benefits” you derive from the tax code versus why you support the FairTax plan? Please take 5 extra minutes and call your Representative’s Washington and district offices.

An Open Letter To Ways And Means

Welcome back to Washington and Happy New Year

As you return to the business of the House Committee on Ways and Means, you and your colleagues will, in many ways, determine the direction of our nation by the decisions you will soon make on fundamental tax reform.

You have a clear and distinct choice to make. You can continue to pander to the special interests that will forever hold you hostage to their gluttonous demands, or you can break from this insidious cycle and fully represent the will of the people who elected you.

If you choose to continue in the bondage of special interest slavery, the demands they exact will rise to levels that even you cannot imagine. Once the fatted calf becomes addicted to the feed trough, its’ appetite becomes insatiable.

Contrast this to the people who elected you who simply want to pay their fair share of taxes without the fear and intimidation of an agency that continues to be used as a political weapon.

Even the IRS’s own watchdog, Nina Olson, stated in her just published annual report, “Public trust in [IRS] fairness and impartiality was called into question because of reports the IRS subjected certain applicants for tax exempt status to greater review based on political-sounding games.”

Sadly, Olson’s only remedy is an IRS generated U.S. taxpayer Bill of Rights. By the way, didn’t you already try this in 1988 when Congress passed the first of three Taxpayer Bill of Rights?

To Olson’s suggestion, ladies and gentlemen, isn’t this a little like the fox guarding the hen house; just like the U.S. Justice Department appointing Barbara Bosserman to lead the IRS targeting investigation?

fox guards henhouse

Silly me, I am sure any individual who shelled out over $6,000 in donations to the Obama campaign will show total impartiality during a criminal probe involving conservative organizations.

The bottom line is this – the American people want a simple and fair system of taxation without all the drama, theatrics and corruption. They want the fox to leave the hen house and they want their representatives to put a stop to the longstanding reign of terror by the IRS.

The FairTax® Plan does this and more.

Reduced to its most basic terms, the FairTax eliminates taxes on wages while taxing wealth and borrowing when spent. It eliminates the income/payroll tax system and replaces it with a single rate tax on consumption.

More importantly, it is fair, simple and universal in application – no exceptions, no exclusions, and no more special interests feeding at the trough.  And, it fosters economic growth and efficiency while fully funding the government. 

You will soon have a decision to make on fundamental tax reform.

Option 1: You tinker with the current system, call it major reform and continue in the bondage of special interests.  With this option the American people continue as the losers.

Option 2: You represent the will of the people who elected you and enact HR 25, The FairTax Act, freeing them from the bondage of an out-of-control IRS and a gobbledygook tax code that is fast approaching 100,000 pages. With this option, the American people have a fair and simple tax code that also eliminates the yearly tax return nightmare that has already begun.

Which decision will you make? Perhaps you can draw inspiration from General Robert E. Lee who once said, “You have only always to do what is right. It will become easier by practice, and you enjoy in the midst of your trials the pleasure of an approving conscience.”

Your electorate awaits your decision. Remember, they too have decisions to make in November 2014.