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.In general, I think businesses might take that money and reduce prices a little bit, raise wages a little, and give a greater return on their investor's money. But if this plan is revenue neutral (which I don't think it is), all of that money must be put back into prices through the NRST. In the terms you were using yesterday, overall purchasing power is not increased.
John Linder is going to be on Boortz at 10:30 Eastern today if anyone is interested. Maybe someone can call in some of these challenges to them.
I understand the issue of incidence in terms of an arguement whether an increase in the employers portion of payroll tax drives prices up, or drives prices down... But unless one is asserting that elimination of the payroll tax is going in increase gross wages rather than reduce costs, the whole argument that its elimination would not reduce prices is flawed and misleading.
Also, I understand that the employee, not the empoyer pays the personal income tax and the employee's portion of the SS tax. However, regardless of who the shift is put onto when a change occurs, that tax burden is part of the company's cost whether it is remitted to the government by the company or remitted to an employee to be remitted to the government. Just saying, "they're paying it not us" doesn't change the fact that it must be paid for out of the labor costs of the employer, and is part of the compnay's costs, and therefore has an influence on the price (regardless if it is accounted a tax cost or a labor cost), and can acurately be described as "embedded" into the cost of goods, which does have a direct bearing on price, even if it shares influence with other forces.
If we go back to the hypothetical company we used above, with a 15% margin:
That 15% margin would mean 15% of the price would be taxed at the corporate tax level.
There is a tendency to think that 85% of their price is not taxed, but this is not the case.
Of the 42.5% that was payroll, a portion equal to total matching payments, another portion would be the personal income taxes paid by the wage earners, and the remainder would be untaxed. The rate of that 42.5% would expectedly be an average of tax burden per person.
That leaves 42.5% to come from other sources.
In my example I assumed all other sources has a similar tax structure, and that there would be no protion of the gross receitps that would not ultimately carry a portion of the tax burden.
However, I did fail to consider the current import costs. If the above company was an importer, and all 42.5% of it's other costs were the cost of imports. That 42% would NOT have cascading taxes... and would be the difference in 9.75 embedded taxes, and the ~17% in the previous example.
So it is true to say, that as the amount imports increase, the effect of cascading taxes are diluted. I'm not sure how you would try to compensate for that mathematically to remove the effect of the imports from the calculation.
Ultimately, market forces will determine how the employers 7.65% is allocated. In a tight labor market, employees will probably benefit from increased wages
One of the factors here is there is unlikely to be a tight labor market, very likely just the opposite.
One must recognise the potential incentive to save/invest taxfree over spend with a very visible tax on consumption in place.
With the repeal of income and payroll taxes, the high marginal taxes on labor falls significantly reducting the effective value of leisure. At the same time the attraction to save/invest taxfree draws folks to seek more productive use of their time creating an upward trending supply or desire for more dollars to invest, ergo an increase in the surplus of labor supply.
The effect of incentive to save therefore has two operative effects one in encouraging price decline as suppliers must compete not only with their natural competitors for the individual's dollars but with the investment markets as well, the second effect is one to hold the line on wage increases as business look to recapture their market share to maintain profitibility. From what I see, the first year or so should see a large spike in these effects just from the novelty of the change to an NRST decaying off in time as markets move towards its new equilibrium.
Incidence at each and every level of production is likewise allocated....that's why this is such a sticky wicket.
Indeed, it is also why most pontifications by economists that are not rooted in empirical evaluations end up wide of the mark. Some factors to consider in the assumptions often made when economist tend to speak excathedra as it were.
8 magic assumptions about dollars paid to government by businesses:
1) Paying corporate income tax to government only reduces shareholders capital/earnings, and wages, but never increases consumer price.
2) Paying the corporate employer's excise to government only reduces wages.
3) Paying a vat to government only increases consumer price.
4) Paying retail sales tax to government only increases consumer price
5) Paying sales tax on manufacturers or distributors products to government only increases consumer price.
6) Paying any excise tax(except the employer's excise) to government only increases consumer price.
7) Paying corporate property taxes to government only reduces shareholder capital/earnings and wages.
8) Paying tariffs to government only reduces earnings of foreign producers.
Many many ASSUMPTIONs of convenience, rather than rules arising from evaluation of market behaviours or analysis of economic data:
| Tax Incidence, Tax Burden, and Tax Shifting Who Really Pays the Tax Inconsistent Attribution and Sloppy Theory. Furthermore, the conventions used in tax analysis are often inconsistent from one tax to the next and fail to do a good job of demonstrating even the initial incidence of the taxes. In standard JCT burden tables, and in Treasury and CBO analytical work, consumption taxes are usually assumed to be “passed forward” to consumers in the form of higher prices. *** Snip *** Meanwhile, income taxes and other taxes on factors are assumed to be “passed backwards” to workers and owners of capital in the form of lower take-home pay and after-tax incomes from saving and investing. *** Snip *** Customs fees are an exception to this pattern. They are consumption taxes but are assumed (by the Treasury) to be borne by the suppliers of the foreign labor and capital that produced them. Consumption taxes, such as a retail sales tax, a VAT, or excise taxes, whether imposed on consumers or on manufacturers, are routinely described as being paid by consumers in the form of higher prices because it is assumed that consumers are less flexible than producers, so that consumer prices increase by an amount equal to the tax, with none of the tax borne by the producers of the taxed goods. It is as if the supply of goods and services were totally elastic, such that production would dwindle to zero if there were any reduction in the price received by the producers, so the consumers must foot the entire bill. *** Snip *** The distribution of the corporate income tax is so uncertain that it is left out of most burden tables but is thought to be borne mainly by either shareholders (at least in the short run) or workers (in the long run, as capital adapts). These taxes are described as if workers, savers, and investors offered their labor and capital in totally inelastic supply, undiminished in quantity, when the tax cuts their compensation. It is assumed that they make no demand for an increase in compensation in response to the tax, so they swallow the entire burden of the income and other factor taxes that they pay. *** Snip *** In effect, the analysts pretend that producers can shift consumption taxes onto their customers but must absorb income taxes placed on their own earnings. Supply is infinitely elastic and infinitely inelastic at the same time. This is an inconsistent approach to tax shifting that is at odds with both economic theory and real-world experience. In addition, neither approach deals with any further adjustments that occur in the real world when taxes are imposed and resources are shifted in response from one use to another. |
Bottomline as stated by CBO in regards the corporate income tax, but easily seen from above to be applicable to any other tax paid by a business.
In the words of CBO's Incidence of the Corporate Income Tax,(1998):
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