Imagine receiving 100% of your paycheck!

Two weeks ago a man stood up at a George Bush campaign appearance in Florida to ask about a piece of legislation known as HR25. Many, including myself, were pleased to hear Bush respond with some positive thoughts about the Fair Tax plan, a movement to replace the federal income tax with a national retail sales tax.

Washington is a city of inertia, and right now the inertia belongs to our present method of funding the operations of our government, the income tax. Politicians will not easily surrender a funding mechanism that lends itself so well to political demagoguery and which can be used to reward political allies and punish enemies.

The Fair Tax plan deserves a thorough public examination and debate. John Kerry seems dedicated to making sure this doesn’t happen. Soon after Bush cited the national retail sales tax as something worthy of further exploration, Kerry stepped forward with the typical class warfare rhetoric of the left. Acting as if he actually knew what was he was talking about (he didn’t), Kerry announced that the Fair Tax would amount to the largest increase in the tax burden on poor and middle income Americans in our history.

John Kerry was wrong. He was either speaking out of ignorance, or he was deliberately lying about the Fair Tax proposal in order to gain a political advantage. A politician lying in order to gain political advantage --- imagine that.

This column is lengthier than the norm, but I promise you that if you will invest the time it takes to read it you will be well on your way to becoming yet another rabid supporter of the Fair Tax plan. You will know that the poor and middle income Americans would be the prime beneficiaries of the proposal. You may even organize your own neighborhood march on Washington to demand that HR25 receive a fair hearing. In the next two minutes I’m going to turn you into a HR25 Fair Tax zealot. Read on:

First … the briefest of overviews: Simply put, HR25 would provide for the repeal of the 16th Amendment (the income tax amendment) and the dismantling of the IRS. All personal and corporate income taxes would end, as would all payroll taxes. There would not be one cent of federal taxes of any nature taken out of your paychecks. No more Social Security taxes. No more Medicare taxes. You earn $2,000 a payday; you get $2,000 a payday. The federal government would be funded through a national sales tax on goods and services sold at the retail level. No taxes on investments. No taxes on savings. You only get taxed on what you spend at the retail level. Store your earnings in a shoebox if you wish. They won’t be taxed.

When originally proposed, calculations showed that the sales tax would have to be in the area of 23%. A complete economic study is now being completed that is expected to bring that total to under 20%. For the purposes of this column, we’ll stick with the 23% figure.

OK … let’s put on our sensitivity hats for a few minutes here and think of the consequences of the Fair Tax Act on our nation’s poor, poor, pitiful poor. After all, they can hardly afford a 23% sales tax when they’re living paycheck-to-paycheck in the first place, right?

Bear in mind that for the most part those whom we define as “poor” aren’t paying any income tax anyway. In fact, many of them are getting checks from the government; a form of outright income redistribution. The absurdly named Earned Income Tax Credit, for example. How can these people survive going from a no-tax situation to paying a 24% sales tax on all their retail purchases?

The implementation of the Fair Tax would fail in short order if, as the question presupposes, nothing were to change except that all of us would be paying today’s prices for a gallon of milk or a loaf of bread, plus a 23% sales tax. But … that’s would be far from the reality under the Fair Tax. Under the Fair Tax the poor won’t only survive, they’ll positively thrive! The Fair Tax could turn out to be the best poverty-fighting tool devised in this country since the concept of hard work.

First, remember, please, that the poor, along with everybody else, will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For the poor this means an immediate 12 to 15% increase in their earnings.

Second. Don’t forget the 22% in imbedded taxes. These embedded taxes exist in virtually everything poor Americans or any other Americans have to buy. These embedded taxes represent all of the corporate and business income taxes and payroll taxes that the companies involved in the production, manufacture, marketing, distribution and sale of the goods and services must pay in the course of business. As soon as these taxes are gone, and after the competitive forces of the free market work their magic consumers, including the poor, will be paying at least 20% less for virtually everything they buy. This includes such basics as food, clothing, shelter and transportation. Yes... they’ll have to pay the new national sales tax, but when you factor in the lower prices caused by the disappearance of the embedded taxes you’ll see that the total price paid for consumer goods in terms of real dollars will fall or will remain very nearly the same.

So … just considering these factors, the Fair Tax delivers a winning hand to people living in or near to what we call poverty. They get every penny they earn on payday, amounting to a 12 to 15% pay raise, and when you factor in the Fair Tax and the lower prices, they’re actually end up spending less of their money for a retail purchase than before. What John Kerry calls the greatest increase in the tax burden on the poor in the history of our country is, in reality, their greatest tax reduction.

You need a clearer picture? Pull out your calculator. Let’s say that a single mother with two children spends $45 a week on groceries. The removal of the 22% embedded tax would bring the price of those groceries down to $35.10. The sales tax at 23% would be $8.07. This brings the total price to $43.17. That’s less than would have paid under today’s tax system. This single mother, whom we’ll consider “poor,” has just received a 12% to 15% increase in her weekly paychecks, and she’s paying less at the grocery story for her basic necessities.

So far, so good. At this point you should be thoroughly convinced that the Fair Tax would actually benefit, rather than harm the poor. But, then again, maybe not. Here’s the convincer. Brace yourself for the knockout punch.

Under the Fair Tax plan every consumer, rich and poor alike, will receive a check or an electronic credit to their bank account from the federal government every single month equal to the sales tax that person or that family would be expected to pay on the purchase of the basic necessities of life for that month. The size of the monthly payment will be based on the government’s published poverty levels for various sized households.

Let’s say you’re a married couple with two children. The Fair Tax Act sets forth a formula for computing the poverty level, based on government figures, which negates any marriage penalty. If the Fair Tax Act had been law in 2003 you would have been granted an annual consumption allowance of $24,240. This is what the government would assume you would have had to spend during that one year to buy the basic necessities of life for your family. The sales tax on this amount would equal $5,575. The government would have rebated this amount to you in 12 equal monthly installments of $465. What about a single woman with one child? Her monthly rebate in 2003 would have been $232. The lowest payment would be to a single person with no dependents. That person would have received $172 per month.

Now … bear in mind, this rebate isn’t only paid to the poor. It is paid to everyone, rich and poor alike. The purpose here is to make sure that no American has to pay the Fair Tax sales tax on the basic necessities of life. Unlike the present income tax system, the Fair Tax treats each and every person in this country exactly the same. This, of course, presents somewhat of a problem to politicians who like to use the tax code to foment class distrust or outright warfare.

1. They get their entire paycheck. 2. Even with the sales tax, and considering the drop in prices, they’ll be paying essentially the same or less for everything they buy. 3. They get a check from the federal government every month to rebate any sales taxes they had to pay on life’s basic necessities.

Are you beginning to see just how far off-base John Kerry was with his intemperate criticisms?

Though most of the poor don’t have what we would call complex tax returns, let’s also include the time these they (all of us, really) will save by not having to keep tax records or file tax returns.

If you’re looking for some reason to oppose the Fair Tax plan, you’re going to have to find a better excuse than its effect on the poor. John Kerry might find it politically expedient to demagogue the issue for votes, but now you know enough to know what he’s up to.

For more comprehensive information on The Fair Tax you can visit http://www.fairtax.org.

"well i just wanted to know why he differentiates tax costs incurred from other types of costs incurred when it comes to considering cost of doing business in pricing decisions..."

Because he hates the FairTax and has gone to all manner of contortions in logic to deny its obvious benefits. He has been proposaing the elimination of corporate income taxes and the substitution of tariffs on these threads for some time now. He ignores the obvious problems with that approach, as well as the problems associated with retaining individual income and payroll taxes. He attacks FairTax supporters, by calling them "shills". He wishes he had managed to convince anyone of his proposal's superiority, so he would have his own "shills". I'm not aware of a single FReeper, besides Willy, who thinks his proposal has merit. He can't understand why we all don't understand his brilliance and bow to his superior intellect.

ignoring costs in the formulation of pricing is beyond a contortion in logic... it is just plain illogical.

as i read here, "you just can't make this stuff up"!!!

Hey you bunch of blood suckers in Washington, my state capitol, and my local tax commissioner, STOP SPENDING SO MUCH AND TAX ME LESS! That is the answer to the problem.

"the objective is to maximize profit yes, but that is done as frequently by lowering prices as increasing them."

Thank you for that lucid post!! I have been trying to explain to LewisLynn/balrog666/YourNightMare for years that maximizing price and maximizing profit are NOT synonymous. Maybe you will have better luck explaining to him than I have.

i wonder if i could find any business whose budget included no line item whatsoever relating to costs...

maybe next i'll hear that budgets are unnecessary??

"how much are prices inflated by the costs of our tax system - and how does wage reduction factor into this? or does it? i'd like your opinion and any supporting information..."

According to the economists who have studied it, anywhere from 15 - 30% depending on the industry, somewhere around 22% on average. I'm not sure I understand your question about wage reductions.

thank you philwill for the information. do you have any links or sources?

the part about wage reduction was a question as to whether the tax costs not only affect price but also affect wages... since we have to compete price-wise with subsidized imports, maybe some of the domestic tax costs are paid via wage reductions?

you have a huge incentive to do your business in the black market.

Killing the IRS at any cost is a first step...black markets are actually white markets...the black market is the IRS

"And a VAT is incredibly counterproductive because it is a hidden and unattributed cost and is easily changed by law in the dead of night."

Finally!! We agree on something.

"Everything is governed by supply and demand and that never remains static."

That is very true. However, it is also true that any business that consistently sells its product at less than its total costs (including tax costs) won't be in business on a long term basis. Also, any business that doesn't provide its owners a competitive rate of return for their investment won't be able to attract capital in the future.

"the part about wage reduction was a question as to whether the tax costs not only affect price but also affect wages... since we have to compete price-wise with subsidized imports, maybe some of the domestic tax costs are paid via wage reductions?"

Well, I'm not sure I have ever heard that (non-payroll)tax costs may affect compensation levels. There has been considerable debate on these threads relative to whether the employer's portion of payroll taxes, if eliminated, would be reflected in higher wages or in product pricing reductions. I suppose you could argue that one either way and it is probably a mixed bag in the real world.

Care to post a link to some of those "studies"?

Sure.

The economic analyses reviewed suggest that the tax-free status of exports under a destination-based consumption tax may have short-term effects but is unlikely to have a long-run effect on the overall U.S. trade balance. First, these analyses conclude that the tax-free status of exports simply maintains a level playing field between domestic and foreign producers in domestic and foreign markets. Second, any increase in net exports in the short run is neutralized in the long run by exchange rate movements. However, the studies suggest that changes may occur in the composition of U.S. trade. For example, U.S. net exports of capital-intensive goods could increase, while net exports of labor-intensive goods could decrease.

source

btw do you have link/source for the 22% "embedded" tax?

No one seems to eager to point you to a source for a 22% embedded tax in consumer prices, do they?

BTW, I'm sure you know the difference between a producer price and a consumer price, right?

well i have asked 3 people in the last hour or so... delay doesn't mean much yet... maybe they're looking...i'll give more time...but i hope for an answer... i'll be seeing the pillow soon but i'll check back... i was going to ask you too -

as to producer versus consumer...
i would suppose producer prices are prices paid by producer and that consumer prices are prices paid by consumer...

or is it wierd?

"Because he hates the FairTax"
=====
"why?"

He's a Pat Buchanon protectionist who keeps posting this attack that says that it is a truly "despotic" system that will lead to two classes blah, blah, blah. Another FReeper counted more than 400 times he has presumably copied and pasted the same attack message - presumably on 400+ different threads.

Tariffs would encite our trading partners to retaliate, generate more WTO sanctions and would simply band-aid a tax system which, at its heart, disadvantages US producers vs their counterparts in other countries. Trying to fix what is wrong with this tax system with tariffs is like putting a new roof on a house with major structural termite damage.

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