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John Gaver

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How can a flat income tax eliminate the IRS?

There has been a lot of talk lately, with members of Congress suggesting that we go to a flat income tax, with no deductions or other breaks, so you can fill out your tax return on a postcard and that this would somehow eliminate the IRS. But wouldn't there still have to be someone to audit all those postcards?

Wouldn't there have to be someone checking to see that the millionaire reported all of his income, that the waitress reported all of her tips, and that the corporate C++ programmer reported his income from developing websites on the side? Does anyone really believe that the government is suddenly going to trust everyone to report all of their income?

It seems to me that the IRS would become far more prevalent in our lives, under a flat tax. I mean, think about it…

1) Have you ever heard of a government agency getting smaller? Then consider that it currently takes weeks to audit a millionaire and months to audit a billionaire and under a flat tax, those audits will take an hour or two. What will the IRS do with all that spare time?

2) Consider that with no tax shelters to examine, the IRS will have to be more aggressive in finding what is not reported at all.

I'm thinking that instead of eliminating the IRS, the IRS will not only continue, but that with all that spare time, they'll perform 30 or 40 times more audits than they do today and they'll be far more aggressive in doing so. Worse, since the income of most millionaires (except crime lords) is well documented and tracked by the banking system, the IRS will probably focus on middle and low income taxpayers, where cash payments are common and banks aren't required to report every small deposit.

Seems to me that the IRS would not only continue under a flat tax, but low and middle income people, who work off book, would be most hurt by it.

Am I missing something here?

By the way, this is the question that moved me away from supporting a flat income tax and ultimately led me to support the FairTax.

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  • Apr 4 2014: "You see, Zogby reported in 2008 that "by a modest estimate" more than 3 million Americans relocate offshore every year. Then consider that since Obama took office and began his "Soak the Rich" agenda, Federal Register reports show that formal expatriations of rich people have increased 13-fold."

    I cry foul!!!! Does not come close to passing the smell test!

    1) CIA World fact book puts us at a net migration rate of 2.4 per 1000. With 300 million people, that means a net migration of +720,000 people per year.
    https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

    Legal immigration is about 1 million a year, with an estimated illegal immigration now under 500K. per year, and some estimates WAY below that.

    3 million Americans leaving per year would give us a negative net migration rate of some 1.5 million a year, not positive 720K.

    Based on available data, it must be closer to 500K to 750K that leave the USA each year.

    2) Perhaps the CIA is lying.
    Then Census must also be lying. Net birth/death is adding about 1.6 million people a year(and falling). But we know from Census that population is growing almost 3 million a year (281M to 308M 2000-2010)


    Explain.
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      Apr 6 2014: First, the agency whose mandate is most closely tied to counting expats, the US Bureau of Consular Affairs, stated in their 1999 report on Americans living abroad, for the US Census, that it's impossible to get an even remotely accurate count of US citizens living abroad, without enormous expenditures that could not be justified. Furthermore, a 2004 report from the GAO reinforced the conclusion that counting Americans overseas would not be cost-effective.

      By contrast, the CIA's mission is primarily involved in the gathering of foreign intelligence and only relates to the counting of Americans living offshore in the most general sense, of creating the World Factbook. Their numbers are, at best, only a very rough estimate of expatriations and probably derived from the Bureau of Consular Affairs, who have admitted the inaccuracy of their numbers.

      Zogby, on the other hand, used proven survey methods and applied them not to expats, most of whom are hard to find, but to US citizens, who have not yet left. Due to the difficulty of the subject, they surveyed 103,645 Americans, which is far more than the typical 1000 to 2000 that they use for most surveys. You see, since their profitability is based on their accuracy, they won't release numbers that they can't stand behind.

      But let's ignore Zogby and use the government numbers that are admittedly inaccurate.

      If there are only 720K Americans leaving a year, ask yourself how many of them are poor. FYI, Zogby found that 36% of those who were planning to leave planned to spend more than $200K on a home (that will buy well over 3K sq. ft. in most countries) - far more than the US average. Then consider that the top 5% of taxpayers (who pay 60% of all federal personal income tax) is about 6.8M. So how long would it take, at an expatriation rate of just 720K/yr, for most of that top 5% to leave? In the mean time, most of those who come here, have their hands out.

      Even using government numbers, we still have a serious problem.
      • Apr 7 2014: And how does allowing them to earn money in the USA tax free, then spend it outside the USA, mostly tax free, keep them I the USA?

        The tax code that created the middle class... that is, high rates with lots of deductions, allows people that live in the USA to make money mostly tax free (as long as they spend it in the USA) but anyone that lives outside the USA and does not spend/invest here to get deductions, would pay very high rates.

        If, as you say, rich people leaving is an issue, then it argues against a FairTax based on purchases (within the USA) and for a progressive income tax with deductions for spending in the USA.

        Your FairTax rewards spending money outside the USA, while mine rewards for spending in the USA.
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          Apr 8 2014: Now your questions aren't even making sense. What's this about earning money here and spending it outside the USA. If you're talking about the FairTax, it actually encourages buying US made products, in the USA, since those products would cost less than comparable foreign made products that still contain an income tax component in the price, before any VAT or other taxes are applied at purchase.

          The tax code didn't create the middle class. Free enterprise created our middle class, despite a success-punitive tax code. But for the time period when that was happening, there was no other place on the planet, where free enterprise was tolerated, much less, encouraged. That's no longer the case. Today, countries like Ireland, Spain, Panama, Ecuador, Belize and many others are trying to outdo each other in promoting their low taxes and free-enterprise-friendly economic environment.

          20 or 30 years ago, the wealthy were willing to accept huge tax rates, because even after US taxes, it would have cost them dearly, to move offshore. Today, as we increasingly try to punish success, many are finding that they can't afford to stay. Back then, most countries weren't safe. Communications were lousy. The internet was in its infancy and few people even had email. There was no such thing as FedEX or DHL. But today, with changes in political climates and new technologies, a businessman can safely live on and operate his business from the vast majority of tiny islands.

          Your claim that the FairTax rewards spending money outside the USA shows that you haven't read either HR-25, "The FairTax Book", or "The Rich Don't Pay Tax! …Or Do They?" If you had read any of them you would know that prices of US manufactured products will be lower around the world, but particularly when purchased in the USA. That's why most foreign manufacturers say they would build more plants here, if the FairTax were to become law. They know that otherwise, they won't be able to compete against US products.
      • Apr 7 2014: I did more digging, trying to find data. I found multiple sites saying 3-7 million Americans live overseas with the government's best estimate put at about 5.2 million. The vast majority are in the 25-35 range. This includes military, diplomats and other people sent overseas by the government.

        The number of these people that give up their citizenship is measured in the hundreds per year. 2010 was a record, at 743.

        No, not 743K. 743.

        http://www.nytimes.com/2010/04/26/us/26expat.html?_r=0

        So, EVEN IF it is half a million leaving each year, then average length of stay outside the USA would be about 10 years.
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          Apr 8 2014: You're looking at old data.

          In 2012, there were 3001 formal renunciations of US citizenship. That's up 13-fold, since Obama took office and began his "Soak the Rich" campaign. In fact, that NYT article that you cited came out a day after I reported it and sent a press release to all of the major news outlets. I'm always the first to report that date each quarter.

          1300% increase in expatriation:
          http://therichdontpaytax.com/blog/?p=430

          Links to source expat data:
          http://actionamerica.org/taxecon/taxpats.shtml

          As for that 5.2 million "estimate" by the government, of Americans living offshore, I've read that before. But that estimate is based on the US Bureau of Consular affairs report and they stated very plainly that they knew that their numbers represented a very significant undercount. On the other hand, while I was living in London, I read where the UK government estimates that more than 2 million Americans live in England, Wales, Scotland and Ireland. If both estimates were correct, that would leave only 3.2 million for the rest of the world. But according to that 1999 Consular Affairs report, just 3 cities in Canada was home to more than 650K private Americans. You can believe that 5.2 million "estimate" if you choose. But the numbers just don't add up.

          Also, the length of stay is not what's important. It's how many NEVER RETURN. Historically, the rule of thumb has been that about half of those who move their primary residence offshore will never return. Some intend to never return, while others plan to return but get comfortable in their new country.

          On my last trip to Panama, I spoke with a realtor who deals only with North American buyers. She doesn't speak a word of Spanish. But she is just one of many who do that. Trump Tower Panama was just completed last year and it's almost full. Seems US expats can't get down there fast enough.

          Even using the most conservative numbers, wealth expatriation has become a serious problem. Ignore it at your own peril.

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