Limiting the tax gap through the FairTax


Time Magazine reported this week that the estimated tax gap — the amount of money the IRS fails to collect due to misfiling or tax cheaters — is an estimated $385 billion to $600 billion. The fact is, this money that goes uncollected ultimately increases the tax rates and the amount of money that you and I pay.

An article about a 2002 study by the Government Accountability Office showed that “56 percent of [tax] returns prepared by a paid preparer had errors in comparison to only 47 percent prepared by the taxpayer.” In short, more than 50 percent of tax returns filed in the 2002 study were wrong, and we “only” had 53,280 pages of tax code back then. Fast forward to 2012, and the code has grown to more than 73,000 pages. That’s taxation without comprehension, and it is only expanding the tax gap.

Studies show that simplifying the code leads to better compliance. That makes sense, but what makes a lot more sense is to throw out the entire income tax code and switch to a national retail sales tax like that proposed by the FairTax bill.

The FairTax is simply a different way to collect taxes, taxing consumption rather than income. Under the FairTax bill, the government would collect the same amount of money without the complexities of the income tax. In fact, the FairTax bill is only 133 pages double-spaced. The number of “filers” would be reduced from 150 million individual returns to simple sales reports from approximately 20 million businesses.

Yes, it’s possible to cheat a sales tax, but unlike income tax where it takes only one person to cheat by not reporting or under-reporting their income, a sales tax takes two people to cheat — the person selling and the person buying. In addition, the bill specifically includes provisions to reward whistle-blowers, which makes it a little less likely people will cheat. Not to mention that well over 80 percent of retail sales are through big chain stores like Wal-Mart or Target, and they a not going to risk their business by cheating the system. Used items are not taxed under the FairTax, so there’s no compliance issue there.

After 100 years of income tax and the code growing from 400 pages in 1913 to more than 73,000 pages last year, it’s time we do something that makes sense. Tweaking the code hasn’t worked. Let’s throw it out and switch to the FairTax.