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I am aware of that provision and read it again to see if I missed it. I interpret it this way. There is a credit to be given to any business up to 2008 if there can be proved a loss of revenue based on previous (embedded) tax obligations once said inventory is sold. In otherwords, the government would be encouraging businesses to recognize savings immediately with current inventory for the new tax system. You surmize that this would encourage business to get an edge on their competition by undercutting them in price wars. Consider the cash flow in any business and then reconsider what industries your summation might not work for.

The construction industry fights a lot of layers and is almost all service related. It is also a very high risk, low profit, fiercly competetive industry. I am a part of it. I have tried to calculate this tax benefit for the construction of say a $100 Million new construction project. First, who pays the 23%. If a brick is a brick when it is sold as the final product to the consumer (mason) then is the whole building taxed per cost of construction to the owner at 23%? If I read the law right, there is no tax when a company buys the brick from the manufacturer. The manufacturer has lots of overhead wrapped up in equipment, buildings, materials, labor, legal, Admin, insurance, etc. Does he immediately lower his/her price? Take on up the line. He buys pigment for his different brick from a supplier that also has a factory but owns several mining operations and trucking companies. Dial in on the Trucking Companies. Then move to the trucking manufacturers. Move to the steel suppliers. Move to the miners, to equipment manufacturers...... Now, back to the brick. Multiply this complicated process times about 500,000 other parts, peices, materials and services and pretend you are the at risk General Contractor hoping to clear 1.5% profit at the end of the year (and that is realistic). The GC cannot afford the cashflow associated with dropping price to beat the competition to an "estimated" level of what will be the future cost of doing business.

This is the industry I know best but I am sure there are other ugly examples out there.

I will wait for your response.

My take is a bit different than what you may hear from some of the other FT's. I don't really think prices will come down all that much simply because of leeway from imbedded taxes. I believe that, since workers have more take home pay, and since producers of goods and services will lose the annual cost of tax planning, tax avoidance and just plain tax, that we will see only a small and temporary increase in prices.

Now is that a bad thing? Sure. The problems I foresee are many: 1. Revenues to the treasury will drop because people will tend to buy used or would have bought as many durable goods as possible before the implementation. 2. Retail sales will suffer and could be a drag on the economy. 3. A lot of people will be able to adjust their lifestyles upward immediately by several methods including finally buying that plasma tv but buying it at the pawn shop so the savings rate will probably stay the same or even go down.

BUT. Retailers with inventory will adjust their prices downward to move that merchandise. Used goods merchants will quickly run out of stuff which they will want to replace quickly (they want to stay in business right?) so there will be an immediate floor on the price of trade-ins and used goods. So the spread between the prices of new and used goods will narrow.

The average worker now has a lot more money coming in every month. If his TV is getting snowy AND his carburetor is having problems he has a lot more options and a lot more money than he had before. He can buy a used TV. He can defer the TV until next month and fix the carb. The one thing he has now that he didn't have before is a choice. Before, he lost 20% of his paycheck before he even saw it. Now he has all of his money and can opt to pay his fed gov taxes when he wants to.

The construction industry, like everyone else, will have to adjust. But, once again, the spread between new and used will narrow. In that industry, unlike many others, as you state, the parts required are numerous and each and every maker will have a good reason and good leeway to ultimately lower prices. But just like we did in the 1970's when inflation grew far more than any 23 or 29% we will adjust. After a period of adjustment there will be a period of economic boom which hasn't been seen since the dawn of the industrial revolution.

I may have unintentionally confused things when I posted about two different things without distinguishing adequately between them.

Let me try to rectify that.

1) The Transitional Inventory Credit -

This is for a retailer selling goods (inventory) subject to the 23% sales tax. There is no requirement for a loss OR a profit, but merely that it be sold up until the deadline you noted and it applies to inventory on hand but not new inventory as the FairTax takes effect (since presumably income tax will have already been paid). It is important to note that this is for taxable items only and therefore does not cover business to busines sales which you use in most of your examples but only things sold at retail. I cannot tell from your description whether whatever you sell is taxable per the bill or involves selling to other businesses. If you have property already purchased and "in inventory" and you sell it to an end consumer (at retail) before the deadline, then you would indeed qualify for the 23% credit called in Section 902. This would certainly be an incentive to pass at least some part of that saving on to the retail buyer. If not, you can be sure that your competitors probably will.

The comments I made at the end of the post about retailers jumping the gun in lowering prices related only to this credit, nothing more. This is a totally separate issue from the comments relating to embedded taxes and I should not have mixed them.

2)Embedded taxes -

It seems to me if I read your examples right that this is what most of your examples deal with and certainly you are correct that time-wise this is quite different that the TIC above (which is an immediate credit). The embedded taxes are now in the system and it will take some amount of time for them to work through the system and see lowering of prices as the embedded taxes are squeezed out.

As that sort of price decrease occurs, then the different businesses in the chain supplying businesses such as yours will be able to lower their prices as THEIR suppliers will be able to do also. Obviously you would not need to estimate future costs and price accordingly - at least to any great degree - but you may be able to get notification of upcoming price drops from your supplier and plan accordingly. You'd have to keep aware of what you competitors might be doing along those lines but still that is not something that will happen on day 1 as with the TIC. Certainly there is a lead time involved and you at the end of the chain would normally not be the first to start dropping prices.

It will happen, though, and fairly rapidly so you'd be wise to have it in the back of your mind and be on the lookout for it.

I hope that helps clarify a bit of the confusion I may have caused. What sort of customers do you sell to? Are the businesses? Individuals? Both?