This is a consolidation of comments I made at a fellow blogger's blog considering costs of administering the FairTax... 

Regarding the bureaucracy:

There was a question as to whether the FairTax would add bureaucracy vs. slim it down. 

I addressed the consideration by mentioning that the FairTax would leverage the Social Security Administration to manage the tax prebates and existing state sales tax systems in 45 of the 50 states and that 1% of national sales tax is split between business collecting the FairTax and the collecting state agency to administer. We would not need nearly the number of administrators, auditors, etc. that the IRS employs and that the bureaucracy would significantly decrease.

With the babyboom generation retiring, the Social Security Administration (SSA) is going to have to administer payments to 30% of the households anyway.

As far as the states go... boy, it sure seems to me that streamlining taxes to do away with income/corporate/cap gains/estate taxes in favor of sales taxes would create great economies of scale.

I live in California (8.25% sales tax in my county). If it were an embedded tax and it broadened to include b2c services as well as sales of new goods, AND it did away with income/corp/cap gains/estate taxes I still can't imagine that State/Fed combined here would exceed 30% inclusive AND STILL NOT AFFECT PRICES MATERIALLY. I can envision states having their own tax prebate and administering the federal tax prebate as well to create even more efficiencies.

Also, with regard to enforcement... I believe there are something like 30 million businesses in the U.S. How many sell business to consumer (b2c)? Half?

If 15 million businesses were randomly audited at 1% per year we are talking about 500 thousand businesses. Is that 10,000 field agents? How many field agents does the IRS have currently?

Even if it were 20,000 filed agents and the audits were pretty extensive (reconcile the profit and loss statement and cost-of-sales to prove out sales receipts). Heck, just because there is no income reporting to the IRS doesn't mean that businesses won't need to secure credit/financing for their businesses which will require certification of income statements and balance sheets for bank purposes. A field agent could request this type of information and ask biz owners to reconcile sales with sales numbers on the financial statements.

If businesses are caught cheating, they lose their business licenses.

California's Revenue Estimates for 2008/2009 budgets are as follows:

- Personal Income Tax - $56b
- Sales/Use Tax - $29b
- Corporate Tax - $12b

Shifting $68b of Personal Income and Corporate Tax to Sales Tax might sound daunting but I wonder what adding services in addition to goods does? If it were just goods (as it is now), the Sales Tax rate would more than triple - 8% to more like 25% (exclusive) - closer to 20% inclusive.

I have to think that services outweigh goods though (insurance, medical treatments, legal, entertainment, etc.) Even if the 23% embedded tax ultimately became a 33% embedded tax for a state like California but the prices didn't materially change AND no personal tax filings... I still like it. Why did I go here? That's right, to get a sense of how much 1% of revenues would be to administer...

I found 2005 California State Product figures quickly HERE. In 2005 California's Gross State Product was 1.6 trillion. Okay, I really am not sure whether that constitutes b2c biz or whether it includes b2b as well.

I do know that 29 billion was collected in sales tax at roughly 7.5% which is $386b. If we double it (adding services) to $773b and take .5% administration fee by the Fed it would provide California with $3.86b to administer the collection of the FairTax. That might afford some decent auditing activity as well.