This is true, but your interpretation that it will go away is false. That is built into prices because the employees expect a certain level of take-home, after-tax pay, so the salaries are bulked up to include the income-tax that is withheld. So far so good.
However, my argument is that, if a National sales tax is instituted, the employee will still expect the same gross salary, especially since gross prices will go up to include the new sales tax. So the sales tax will now be embedded in prices, instead of the income tax.
One reason why there is so much fire in these discussions is that there is a kind of circular reasoning going on. The pro argument: IF prices don't go up, then workers will need less gross pay and the embedded tax cost will cancel out the added sales tax. OTOH, if workers expect that same gross salary, then prices will go up by roughly the same amount as the sales tax. Which do you think is most likely?
One reason why there is so much fire in these discussions is that there is a kind of circular reasoning going on. The pro argument: IF prices don't go up, then workers will need less gross pay and the embedded tax cost will cancel out the added sales tax. OTOH, if workers expect that same gross salary, then prices will go up by roughly the same amount as the sales tax. Which do you think is most likely?You nailed it.
Employees will still receive the same gross pay. Why would an employee's gross pay change?
Employees' gross pay stays the same, and prices stay the same.
However, my argument is that, if a National sales tax is instituted, the employee will still expect the same gross salary
Which is true, wages will not decline as a consequence of the enactment of the Fair Tax Act. People will receive their full pay.
especially since gross prices will go up to include the new sales tax.
Gross price including NRST is actually expected to fall 3-10% over time as compared to gross price paid for goods and services today with embedded business taxes and tax related costs which will be removed on repeal of the income/payroll taxes on business.
The reduction in price received by the producer ( i.e. cost paid by the customer less taxes) arises from the reduction three components of loss to the business:
1) repeal of the taxes collected from business per-se (i.e. income and payroll taxes paid by businesses)
2) the overhead costs associated with those taxes, they include:
- the cost associated with planning and limiting the tax byte, legal and otherwise,
- the costs associated with accounting and reporting the tax owed,
- the costs associated with audits, litigatation, legal fees and fines imposed, whenever a controversy arises between business and the IRS.
- the costs associated with loss of productivity through non-productive uses of resources in sheltering income from the tax system and various avoidence schemes to convert income to non-taxable forms that don't add to the businesses production.
- the costs associated with estimated tax payments that are padded for uncertainty of the amount of tax owed which removes cash flow from productive use by the business.
3) the losses due to reduction of demand for products due to the higher prices that must be received by business to finances all of the above.
Repeal of the current income/payroll taxes on businesses removes the above losses associated with the conduct of business under the current tax system. All business transactions upstream from retail sale are no longer burdened with the above costs implicit with the federal income/payroll tax system, and business to business purchases are free of the NRST. The result allows business to reduce prices by the amount of savings realized yet maintain current profit and contractual wages to their employees.
Thus, as an average the shelf(before tax) price of products are expected to fall in the range of 15-25% in the first year of the NRST, depending on industry and the length of the production chain involved in producing a particular product.
Essentially that would mean the total amount(NRST included) paid by the consumer for goods and services, on average, would be roughly the same as they pay today for a specific basket of consumption products under the income/payroll tax system.
The net result of all this would be to provide over time, a very conservative estimated 15% increase in economic standard of living with under the Fair Tax Act (HR25) as compared with the current federal tax system it replaces.
I agree. There is no reason for a change. If you agree to $50k per year, that's what you'll get. But under the nrst, your taxes will be paid when you spend, not be taken form you before you even put your hands on it!
"One reason why there is so much fire in these discussions is that there is a kind of circular reasoning going on. The pro argument: IF prices don't go up, then workers will need less gross pay and the embedded tax cost will cancel out the added sales tax. OTOH, if workers expect that same gross salary, then prices will go up by roughly the same amount as the sales tax. Which do you think is most likely?"
Neither. There are employee borne costs, the elimination of which will allow employees to receive their entire paychecks without deductions. In essence, a raise in net take home pay.
There are employee borne tax costs, including (but certainly not limited to) payroll taxes. The compliance costs of the current system, for example, are simply staggering.
Employee borne cost elimination will lead to an increase in net take-home pay.
Employer borne tax cost elimination will lead to a decrease in (pre-tax) prices to consumers.