Replies

"....Imbedded taxes include the taxes paid by a deliveryman who delivers to Wal-Mart. His imbedded taxes could have no effect on the system unless his wage falls. Do we all agree? I can see no way that removing his embedded taxes will allow prices to fall unless his wage falls.
Maybe I'm dense, but why wouldn't his gross wage fall? Why would his falling gross wage be a bad thing?

Whether as an employee or as an independent contractor, the lower cost of making deliveries to the retailer will help lower prices, right? Am I missing something?..."

I've not read the entire portion of this thread, so forgive me if I state the obvious, but I think I see the fallacy here........

Taxes which are truly incident on the delivery man ARE NOT embedded in the price of the good or service. The fallacy here is the notion that a tax can be incident on two individuals / entities simultaneously. In gross total, entity level taxation can be borne by more than one entity, but the total of the tax cannot be multiplied in the process.

If the delivery man bears the incidence of the employer portion of FICA, it can't be also embedded in the price of the good. If the delivery man bears any incidence of the corporate tax, that portion which he bears as a lower wage is not embedded in the price of the good. If the investors in the corporation bear the incidence of the corporate tax, it can't also be embedded in the price of the good.

Estimates in price reductions based on the idea that consumers bear 100% of the incidence are misguided. I think it's far more accurate to speak in terms of 'total purchasing power' remaining unchanged as a result of improved Return on Investment, price reductions and increased wages.

Some goods, like bread which cannot be imported and the demand for same is relatively inelastic, probably bear the full incidence. Other goods, which can be imported and there are ready substitutions in the market and or demand for same is elastic, probably bear little of the ultimate incidence of the corporate tax. Looking at a total market basket of goods purchased by the average American, and making blanket statements about price reductions is a difficult task. The reality is that NO ONE can accurately say where the ultimate incidence of the tax reposes until we look at changes in prices after the FairTax is enacted. What we can say with certainty is that the FairTax is calculated to be revenue neutral in year one, and that means that in gross total, we should be in roughly the same position we were in before the Fair Tax was enacted.

What am I missing here?

For a discussion of the shifting sands of the incidence of the corporate tax, please see ftp://ftp.iret.org/pub/BLTN-88.PDF

What we can say with certainty is that the FairTax is calculated to be revenue neutral in year one, and that means that in gross total, we should be in roughly the same position we were in before the Fair Tax was enacted.

Thanks for the post. Revenue neutral means revenue still has to come from somewhere. In theory, AFT says the revenue will come from sales taxes on items who's gross prices will decline due to the disappearance of imbedded taxes. I think we are beginning to see that the only possible source of this is corporate taxes and I think we can debate who actually pays those taxes. I'm going back through the AFT website.

Thinking about the incidence discussion of yesterday.....

The employer portion of FICA presents quite a conundrum.

Whereas economists agree that the employee currently bears the ultimate incidence of this tax (CBO even acknowledges this), nothing in the FairTax Act requires wages to increase by this amount. Therefore, when attempting to project the impact on prices, it must be considered as a potential contributor to price reduction.

Ultimately, market forces will determine how the employers 7.65% is allocated. In a tight labor market, employees will probably benefit from increased wages. Where price competition is fierce, it will be used to reduce the price. Where the labor market is soft and Wal-Mart hasn't moved in.....the employer will pocket it, thereby increasing his return on investment. Could also be a combination of all three...depending on the relative strength / weakness of market forces.

Incidence at each and every level of production is likewise allocated....that's why this is such a sticky wicket.

Ancient Geezer is also quite correct, that the compliance costs saved at each and every level of production are available to reduce prices....but they are subject to the same allocation forces as the tax itself.