FAIR TAX BLOGBURST 03/22/06

One of the original aims of the FairTax Blogburst was to establish a dialogue or healthy debate about this endeavor. We cordially invite all readers of this Blogburst to submit questions to their respective hosts. We believe that upon discovering the answers to questions, doubters will become supporters, and thus will further our effort in ensuring the passage of the FairTax.

A reader of United Conservatives of Virginia, one of the FairTax Blogburst participant blogs, posed a question about last week’s article that deserves a fair response:

Is this statement correct or is there a “typo” here? “According to the Tax Foundation, just the time and effort of complying with our massively complex tax code costs the average small business about $724 for every $100 it pays in income taxes to the government.” If there is no typo, I am having trouble understanding it.

The statement is correct, and comes from testimony given by Tax Foundation Senior Economist Arthur P. Hall before the House Ways and Means Committee. The entire document is available in PDF format on the Tax Foundation’s web site here (8 pages). The article containing Mr. Hall’s testimony can be found on page 3. (Incidentally, if you want a good laugh, go to page 4 and read Representative Jim McDermott’s (D-WA) comments on our current tax system, especially the first paragraph.)

In fact, the actual text from the report is more disturbing than we originally reported in last week’s Blogburst:

Dr. Hall’s calculations show that two-thirds of the federal income tax compliance costs are borne by U.S. businesses. Relative to asset size, small corporations (those with up to $1 million in assets — 90 percent of all U .S . corporations) bear a compliance cost burden at least 27 times greater than the largest U.S. corporations (those with $10 billion or more in assets). In fact, in 1992, the most recent year that complete income tax revenue data is available, small corporations on average had to pay at a minimum $724 in compliance costs for every $100 they paid in income tax. (Dr. Hall notes that, for those small corporations that did not end the year in the red, the figure was $377 for every $100.) [emphasis added]

It should be noted that Dr. Hall’s testimony was given 10 years ago in 1996, and referenced figures for 1992, the latest then available. The tax code has grown considerably over the last 14 years, so the cost of compliance in 2006 is going to be that much greater. But would the FairTax be any better? Take a look at the following chart which appeared in the report cited above. While it does not reflect 100% conformity with the FairTax plan currently under consideration as H.R. 25 and S. 25, it does represent compliance costs associated with a national sales tax:



The cost of compliance delves into an issue at the heart of why I personally want to secure passage of the FairTax. The American economy rests on the backs of small business, which remains the heart and soul of America. As such, anything that can break the shackles that bind our entrepreneurs can do nothing but help each and every American to become more prosperous. The very same Americans that Thomas Jefferson was speaking of when he took to drafting the indelible words “life, liberty and the pursuit of happiness.”

But, what specifically does it mean to pay $724 for every $100 paid in income tax? It essentially means that the small business owner must pay $724 in order to comply with existing tax law, in addition to paying $100 in taxes, or $824 total. This, after already having suffered through red ink in the previous year. I think co-burst owner Terry said it best earlier this week,

“The short answer is that ‘compliance’ involves much more than filling out forms on or before April 15 each year. It involves paying someone to maintain records on expenditures to a level that would otherwise be unneccessary, maintaining file space for the documentation required in the event of an audit, and paying an accountant to make sure you’re in compliance, among other things.”

So, not only is there a burden to pay the tax, but there is the hidden burden of compliance. Just think of what it takes for you personally to comply when it comes time to prepare your own taxes, then consider the plight of a small businessman with employees. These are costs our economy cannot afford during the best of times or the worst of times.

The FairTax plan would drastically reduce compliance costs literally overnight.

The FairTax Blogburst is jointly produced by Jonathan of Publius Rendezvous and Terry of The Right Track Blog . If you would like to join us, please e-mail Jonathan or Terry. You will be added to our mailing list and blogroll.

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