Posted on 02/11/2006 8:54:52 AM PST by Eaglewatcher
Recent letters have expressed concern that the poor or middle class might be harmed by adoption of the FairTax (www.FairTax.org) based on a deep misunderstanding of both the FairTax and the current system. We cannot assess the effects of the FairTax without comparing it to the reality of our current income and payroll tax system.
One cannot buy a loaf of bread without paying the income taxes of the baker. The price of that loaf of bread contains the cost of the flour, and the income of the baker, but it also contains the taxes the baker pays. After all, the baker does not have a money tree from which to pluck dollars to pay his taxes, he must get those funds from his customers, like any other business.
Further, the price of that loaf of bread contains the taxes of the miller, the farmer, the trucker and the grocer and those of all their employees. Those income and payroll taxes cascade through the production process and eventually make up more of the cost of that loaf of bread than the profits of any of those who worked to produce that bread.
Those many layers of taxes on productive work make up the embedded tax component of the price of bread or any other goods or services we buy. On average, that embedded tax component is 22.4 percent of the price of everything we buy, from a loaf of bread to brain surgery. So, the true tax burden on the working poor is 28.4 percent, (their FICA tax of 7.65 plus plus 22.4 percent of their remaining take-home pay, which goes to pay the embedded taxes hidden in the price of everything they buy).
Even if the poor paid the entire 23 percent FairTax, they would be better off than now, but they don't. The FairTax provides a rebate of all tax paid on spending up to the federal poverty line to everybody. This cancels out all taxes for those living at or below the poverty line, $25,660 a year for a married couple and two children.
For the same family earning twice the poverty line ($51,320), half their taxes are rebated, yielding an effective rate of 11.5 percent. And even at triple the poverty level, $76,980, their effective rate is only 15.3 percent, still far better than the 28.4 percent the poorest of the poor pay now.
So, who loses? The idle rich, illegal aliens, criminals, "off-book" workers and others who escape the current system through evasion or legal loopholes. Tax lawyers and lobbyists who make their livings from the complexity of the current system will also come up short. Foreign goods sold in the U.S. will no longer get a free ride while production of American-made goods and services bear the whole tax burden.
But those of us who work for a living, or who get by on a fixed income, will be far better off.
Tabor, of Chesapeake, is co-state director for FairTax.org in Virginia.
So, a tax has to HURT someone? < /sarcasm >
Are you talking about after tax savings? The vast majority of retirment money is in pre-tax savings and would enjoy an immense boon under the fair tax. For those whose money is all after tax (first of all, why?) the earnings on that money would be tax free, all purchases up to the poverty line would be tax free. Beyond that they have no advantage and may be hurt somewhat by higher prices. But they would no longer be forced to pay the imbedded tax and compliance cost in every product. So there may not even be an issue with higher prices - not much of one anyway.
And, most importantly, if they have all of their money in after tax accounts, they can chose when and where to pay their taxes.
They're probably doing that now. Hmmm... I wonder if every full time corporate Computer Technician out there reports the income he makes fixing his neighbors computers or setting up their wireless routers. etc...
One thing that bothers me is that many will be able to circumvent it. I'm thinking of the many self employed types. It almost seems as though every working man and woman who works for themselves will have to secure a resale permit/number to report sales and collect taxes. Every garage cabinet shop etc could easily circumvent the taxes. Am I overlooking something?
IMO the primary thing you are overlooking, is the fact that for any business to sustain a substantive longterm profit and stay in business, requires many customers for it product.
The more folks aware of said small/self-employment businesses how are evading the collection of taxes from their customers, or worse collecting them and not remitting them to the state tax administration, the greater the risk of discovery of their operations and getting hit with audit and discovery by the sales tax authority charged to look for such activity.
Furthermore, since such businesses make up much less than 20% of the dollar volume in sales with the other more than 80% portion centered in large incorporated businesses, it is highly unlikely that evasion as measured in dollars impact on government revenus will be any worse than it is under the current system even if every single small business were to operate in the mode that you describe.
Realize that off-the-books businesses such as you describe, would also avoid the certification required to purchase supplies tax free. Their profit margins would be much narrower as a result compared to legitimate businesses that purchase their supplies taxfree. The actual incentives to evade in terms of profit is lower balanced against a high risk of discovery, I don't see the problem to be any greater than it is today under the income/payroll tax scheme when would be replaced by a National retail sales tax and may actually improve over what exists now.
Does the "Fair Tax" proposal mandate that the price of all items will be reduced by the embedded taxes?
If so, the example may be valid. However, what new, big gov't agency will monitor this (= control prices).
If the proposal does not mandate price reductions, how will any money be saved?
(And yes, I've been to the Fair Tax website and no it doesn't answer my question)
Competition mandates it.
Of course they do. But your plan does not get the savings to the business owner. Your plan results in wage earners taking home most of the taxes. How many times must this be explained???? A thousand???? A million???? What does it take to get that simple fact through your thick skull? If Business owner do not see all these savings from the elimination of the tax, they have no way to pass it on to the consumer.
What are you, a 'bot?
Just as expected, nothing specific - just general name calling. It makes you look really smart.
I would think that someone who is idle would spend alot less than someone trying to run a business.
Business use purchases are not taxed under a "RETAIL" sales tax. From my experience most succesful businessmen I know live quite modestly in regards to their consumption spending. Those living off trusts and inherited moneys on the otherhand tend to be quite profligate in their life styles and thus would be hit harder by a retail sales tax.
I guess fair taxers do not believe their own assumption about embedded taxes and who pays. Their assumptions change depending on the arguement at the time.
Someone please contact me when NOTAX.org is being taken seriously, because the only fair tax is NO TAX!
Considering the constitution mandates that taxes be used to pay for the nation's debts, provide for the common defense and the general welfare of the United States, i.e the proper exercise of its enumerated powers of government, I would say you have a long wait.
I don't suggest that you hold your breath in your vigil.
So all businesses will happily operate at a loss? Their costs go down 5% but market forces will make them charge 30% less. Yeah, that will work.
Only retail sales would be taxed not goods purchased for resale.
Why do you call it a 'ridiculous analysis'?
All of the taxes paid by the producers of goods (and their suppliers) are included in the final price of the goods you buy, aren't they?
Taxes on your income are taken out of your pay, aren't they?
Oh, gosh and I am so disappointed - I was SO trying to impress you.
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