People will generally try and do what is best for their wallet. If this means going to lengths to avoid taxes, they will weigh the penalty and probability of being caught against the money gained. In our tax code, people weight the benefits of legal tax avoidance to the cost of navigating the labyrinth. When taxes are higher, people will go to greater lengths. This is the underground economy.
In the words of Alexander Hamilton in Federalist Paper 35:
“Exorbitant duties on imported articles would beget a general spirit of smuggling; which is always prejudicial to the fair trader, and eventually to the manufacturing classes, to whom they give a premature monopoly of the markets; they sometimes force industry out of its more natural channels into other in which it flows with less advantage; and in the last place, they oppress the merchant, who is often obliged to pay them himself without any retribution from the consumer.”
Here in lies one of the fundamental problems of taxation. The question is how to best squeeze those last few dollars out of those who slip through the net.
One proposal to cast a larger net in Georgia is the replacement of the Individual Income Tax for a Sales Tax. The idea is that everyone buys things, and therefore even those who do not declare income would have to contribute toward taxes. While this system would solve some issues of the income tax, it creates its own set of problems.
First of all, there are many items exempt from sales tax. Manufacturing equipment, telecommunications services, and water are all examples of things exempt from sales tax. Certain parties obviously would support the sales tax because they do not pay it. While some people not paying taxes would be caught in this new net, some who are currently paying taxes would slip through.
Some have used the example of Florida as a state with no income tax. It is true that this works in Florida, but there are several differences between Florida and Georgia that should be considered. Florida derives much of its revenue from tourism. A sales tax is particularly good at capturing visitors to a state, who would not pay income tax, thus broadening the tax base. In Florida, the tourism industry generates $67 billion annually, compared to Georgia in which tourism generates $22.7 billion. The population of Florida is roughly twice that of Georgia, 19 million vs. 9.9 million. Florida generates three times the tourism revenue, meaning that even counting for population Georgia would have to increase tourism revenue by 50% in order to have comparable per capita numbers.
Additionally, property taxes are much higher in Florida, where more services are provided on the county level. For example, Broward county has a millage rate around 20, while Fulton county is roughly half that at 10.281. If you add in the fact that property values are generally higher in Florida, you begin to see where the tax revenue is coming from.
That is the bottom line: if you don’t get your tax revenue from one place, you have to get it from somewhere else. It amounts to a shell game, with no magic solution. Keeping with the Florida-Georgia analogy, the overall tax burden in Florida is actually higher (9.3% to 9.0%). The principle to remember is that taxes effect behavior. So whenever considering a new way to capture the underground economy one must consider three things: enforcement, behavioral effect, and net revenue change. Keeping these in mind, I’m sure most would agree that a simpler tax code would be a good thing.
AP, Senate Shows Support for Internet Sales Tax: http://bigstory.ap.org/article/senate-shows-support-internet-sales-taxes
The Library of Congress, The Federalist Papers: http://thomas.loc.gov/home/histdox/fedpapers.html
The Laffer Center, The Laffer Curve: http://www.laffercenter.com/arthur-laffer/the-laffer-curve/
Mackinac Center for Public Policy, Internet Purchases: To Tax or Not to Tax, Here Are the Questions: http://www.mackinac.org/2771
No Internet Tax: http://www.nointernettax.org/
Wired, Congress Backs Borderless Internet Sales Tax (And So Does Amazon): http://www.wired.com/business/2013/03/congress-backs-internet-sales-tax/
Business Owner’s Toolkit, Tax Avoidance Is Legal; Tax Evasion Is Criminal: http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/tax-avoidance-and-tax-evasion.aspx
Tax Policy Center, National Retail Sales Tax: http://www.taxpolicycenter.org/briefing-book/improve/retail/evasion.cfm
Would Tax Evasion and Tax Avoidance Undermine A National Retail Sales Tax? http://ntj.tax.org/wwtax/ntjrec.nsf/0/53fd55e085260a0685256863004a5931/$FILE/v50n1167.pdf
Tax Foundation, State and Local Tax Burdens, All States, One Year, 1977-2010: http://taxfoundation.org/article/state-and-local-tax-burdens-all-states-one-year-1977-2010