So, I create a corporate entity that provides my housing, transportation, other major needs. All my income is paid to this entity, which pays no taxes. I, as a biological person, get some basic stipend to cover daily costs, and live comfortably with all my necessities being paid by the corporate entity. How does the state collect any taxes at that point?
EDIT: thinking a bit more, I guess sales taxes could still be collected. Could a government function almost entirely off sales taxes?
My mother is self-employed, and there are strict rules about deducting business expenses (like home office square footage) but not personal expenses (like the rest of the house's square footage).
Then you start to look a lot like the large companies in Asia. I have a family friend who has been a General Manager at Birla Industries in India for 25 years.
His housing is paid for, his drivers are all company employees, and he is given a generous "expense account" for all of his regular needs. I believe his salary has only been used for vacations (where he couldn't do any business) or for his son's tuitions at U.S. universities.
Even now as far as the IRS is concerned you will personally pay tax on all of those services that were given to you. The IRS doesn't just tax cash transfers.
Your edit refers to something like the "Fair Tax", http://en.wikipedia.org/wiki/FairTax. It's been a while since I've read about it. From what I recall, some people are against it because they think it will disproportionately burden low income people.
On its face, a sales tax is highly regressive, so it disproportionately harms poor and middle class citizens.
So the Fair Tax answer is for the government to refund to everyone a stipend for the basic costs of living. This creates a collection of personal data the same size as the IRS (they need to know where to send the check), AND a government entitlement program larger than Medicare and Social Security put together.
While there are a number of federal sales tax proposals, there's only one Fair Tax proposal (they've even trademarked the name). While my short comment obviously does not encompass every detail, the basics are:
1) A flat federal sales tax.
2) A "prebate" to offset the regressiveness, which is a check sent by the federal government to every U.S. household every month.
Why not a progressive sales tax based on the pricing of the individual item?
As for the data collection, for most people the government already has all that info anyway.
The stipend would open the door for the possibility of the guaranteed basic income some people have been going on about lately. People would already be accustomed to the government sending them a monthly check for essentially being alive.
If prices were taxed progressively (which AIUI they are in some cases, e.g. expensive imported cars), you might see large items split into many small parts sold separately, with an on-site assembly service that costs less than the saved taxes.
Then you simply tax the service. But on the other hand, higher taxes don't always result in higher revenues.
In fact, you might see an uptick in revenues. If people see they might save money with that method then more people might be likely to buy the item they, otherwise, may not have.
It all depends on how the taxes are structured.
Of course, we then slide into complicated tax code like we have now.
I can't find the link, unfortunately, but the Congressional Budget Office released an analysis a few years ago comparing the FairTax with a flat tax and I believe another proposal (possibly a VAT system) and found that, while the FairTax would greatly benefit the poor (via the flat "prebate" checks) and the rich (because of the elimination of capital gains taxes and the fact that they spend a smaller proportion of their income), it would increase the burden on the middle class substantially. That kind of killed it for me.
Edit: Found it. It wasn't the CBO, it was a Bush-appointed advisory panel. See the "Chapter Eight - Nine" pdf, page 20:
And, in general, you can't limit your liability if you are a 1-man corp. Courts can "pierce the corporate veil" if it turns out the corporation is acting entirely on the behalf of the invdividual.
Generally that happens when the company is not acting like a conpany. A simple example being when you don't have and/or document yearly meetings and such. LLCs are commonly used to shelter individuals from things like rental properties.
If you have contract income you assign it to a corp and then pay yourself a wage so you can live and keep the rest in the corp to invest / pay dividends. (No you can't deduct everything, but the more frugally you live the less tax you pay)
The thing is most people don't like to live in the most frugal way possible and therefore end up paying some taxes on the things they like.
EDIT: thinking a bit more, I guess sales taxes could still be collected. Could a government function almost entirely off sales taxes?