Into the Fair Tax Black Market
Lee on Feb 11 2008 at 9:51 pm | Filed under: Economics, Foreign affairs, Lee's Page
photo: Simón Pais-Thomas
Toronto police recently seized shipments of 10,320,000 counterfeit cigarettes from China (PRC authorities themselves intercepted nine billion in 2007). Chinese made counterfeits bearing fake American branding such as Marlboro, are produced “in underground operations, caves and old warehouses,” and shipped through Vancouver for sale on a vast black market that has developed to evade the high sales taxes legitimate Canadian retailers must charge.
This illustrates another deleterious economic effect of the 23% national sales tax championed by Mike Huckabee (many more were discussed this morning here). As consumers are forced into the black market to escape artificially inflated government pricing, the quality of goods declines with volume, as otherwise quality-focused consumers are introduced to the cheap sub-market products of illegal trade for the first time.
Since the black market is by definition unregulated, there is no effective deterrent for engaging in product counterfeiting to substantially enhance margins, as black marketeers compete with each other, rather than with retailers who are priced and regulated out of the real market. Thus, with high national sales taxes not only does the tax base contract as the black market expands, the real quality of life enjoyed by the populace begins to erode as the marketplace is flooded with cut-rate and even dangerous goods:
Usually priced at $10-to-$15 per 200 instead of a retail price averaging $70, Martin said some contain tobacco scooped off floors. Cut-rate workers also chop up stalks and sometimes leave in lumps due to blunt cutters.
“It’s just human nature for people to save a dollar,” the 10-year investigator said.
(London Free Press)
The belief that most Fair Taxers have that people will not resort to the underground economy to reap fantastic savings, betrays the scheme’s essentially utopian nature. When prices are artificially inflated above natural market prices by the state, someone will always be available to exploit the opportunity. While it is human nature to save a dollar, it’s also human nature to make one when you can. And with a 23% burden resting on businesses to finance the welfare state, there are many to be made.
Sphere: Related Content3 Responses to “Into the Fair Tax Black Market”
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So are you saying that a 23% markup = a 500% to 700% markup? And from what I’ve read, when you take into account the savings from no longer having to pay the business taxes embedded in the price of everything like we do now, the net increase in prices is more like 17%.
Besides, as far as cheating goes, could a fair tax be harder to enforce than an income tax?
yours/
peter.
Great picture by the way =8^]
The Chinese flood of counterfeits is a later stage of a maturing black market. It should be remembered that Chinese manufacturers are exploiting a market that was created by illegal US-Canadian trade in cigarettes. US states also impose sales taxes on cigarettes, yet the difference in rates still create a lucrative market. For instance, the difference between Canadian and Minnesotan tobacco taxes is about 30% and yet that trade flourished.
The black marketeers soon realize of course, that more money can be made if the cost of supply is reduced. Since we’re not talking about firms that have any regulatory restrictions and are largely insulated from media/public attention, little prevents them from going the China route.
It would. The argument the FairTaxers use is that the government is forgoing the revenue of the underground economy (primarily for drugs today), by taxing only reported income. To the FairTaxer, in targeting all retail sales, this money will have tax exposure for the first time as even criminals must buy retail. The problem here is that almost all the money in the illegal economy already has tax exposure, given that most people who are buying drugs are not obtaining their income illegally.
All that you are doing in the Fair Tax scenario is providing an enormous incentive for the illegal firms that operate the drug trade to diversify and horizontally integrate their preexisting operations.