Wedding Dress…

Producers of goods and providers of services number in the hundreds of thousands at most in Pakistan. Compare that to retailers and wage-earners, who number in the tens of thousands, and you can see why I keep repeating this. With the smaller tax base, the government could really chase down figure-fudgers. And of course, there’d be less incentive for people to fudge, since the more they do, the higher the consumption tax rate levied on them would have to be (since the government would be computing the tax rate based on the total revenues they want to generate).

The tax scheme seems not to have been discarded out of hand, at least in the US – one would have to read academic papers on this a bit closely to figure out what assumptions are being made in calculating not just revenue replacement but even revenue boosts from an outright abolishment of all taxes and substitution of a hefty sales tax. My initial feeling is also that this might itself be an inflationary policy.

As for Pakistan, my primary contention with whether a FairTax scheme would work there is that retail outlets of all sizes are largely paperless there rather than being underground. Individual rent-seeking (i.e. tax collectors seeking bribes when they come to the shops to make tax assessments based on observed traffic in the commercial enterprise) cannot be stopped in that case, because it is still up to the retailers to provide a truthful figure of how many units are sold in their shops, and hence how much of the extra 23% in prices they have collected should be passed on to the government.

Also, there’s a great piece on consumption tax (which is what FairTax is) here: A Consumption Tax

(Thanks for the link, SAA.)

I found this particularly pertinent, given what I’ve said above:

Q.6: Adopting a consumption tax would hit the underground economy.

A: False. Drug dealers and others engaged in illegal economic activity currently evade income taxes but would have to pay taxes on their purchases under a consumption tax. The same is true for those engaged in legal economic activity who currently fail to report or pay taxes on their income. But the tax evaders also have customers, who currently pay income taxes before using their after-tax income to make purchases.
Under a consumption tax, purchasers of illegal drugs would no longer have to pay income tax but would evade the consumption tax. The increased taxes on producers in the underground economy would be offset more or less by the reduced taxes on consumers in the underground economy.