Oh boy, that's where you supporters of the FairTax are way off base. See #274.
EXP: Oh boy, that's where you supporters of the FairTax are way off base.
It's not the supporters who came up with that figure. They were PhDs and LLMs in taxation from Stanford and Harvard among others who did the research that came up with that number.
Or, from the other point of view, the business can't reduce prices by the amount of the sales tax if his labor costs don't go down.
Oh boy, that's where you supporters of the FairTax are way off base. See #274.
Certainly they can. Just replacing the federal income tax alone with a NRST, is sufficient to intiate the fall in producer prices for the overhead costs savings on just that side of the federal tax system, with consequent reduction in price to consumer including NRST:
http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf
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Revised April 12, 1999. This paper was prepared for presentation at the We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described. The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided. PDF page 25-27: 2. Figure 4 compares the consumption tax rates for revenue-neutral substitution of the Armey-Shelby Flat Tax (FT) and the National Retail Sales Tax (ST) for existing income taxes. The Flat Tax rate is 25.1 percent in the year 1996 and remains virtually constant through the year 2020. The National Retail Sales Tax rate rises from only 15.7 percent in 1996 to 21.4 percent in the year 2020. Only the Flat Tax includes a system of personal exemptions, so that the tax rate is considerably higher, especially at the initiation of the tax reform. Second, the consumption tax base for the Flat Tax grows at nearly the same rate as government expenditures, while the tax base for the Sales Tax grows more slowly, reflecting the increased importance of investment. 3. Figure 5 compares the impacts of the Flat Tax and the Sales Tax on GDP. Under the Flat Tax the GDP is only 0.6 percent higher than the Base Case in 1996; the impact of this tax reform on GDP gradually rises, reaching 1.3 percent in 2020. Under the Sales Tax the GDP jumps by 13.2 percent in 1996, but the impact gradually diminishes over time, falling to 9.0 percent in the year 2020. The short-run differences between these two tax reforms are due mainly to the impacts on labor supply, while the long run differences also reflect the impacts on capital accumulation. 4. Figure 6 compares the impacts of the two tax reform proposals on consumption. The impact of the Flat Tax in 1996 is to increase consumption by 3.5 percent, relative to the Base Case. This impact gradually diminishes over time, falling to 1.3 percent by 2020. While it may seem paradoxical that consumption increases with a rise in the consumption tax, the marginal tax rate for low-income taxpayers is reduced to zero, stimulating consumption. By contrast the Sales Tax curtails consumption sharply in 1996, resulting in a decline of 5.6 percent, relative to the Base Case. However, the level of consumption overtakes the Base Case level in 1998 and rises to 5.5 percent above the Base Case in 2020. 5. Figure 7 compares the impact of the two tax reform proposals on investment. The impact of the Flat Tax in 1996 is to depress investment by 8.6 percent, relative to the Base Case. Investment recovers over time, eventually reaching a level that is only 1.7 percent below the Base Case in the year 2020. Substitution of the Sales Tax for existing income taxes generates a dramatic investment boom. The impact in 1996 is a whopping 78.5 percent increase in the level of investment that gradually gives way by the year 2000 to a substantial increase of 16.5 percent, relative to the Base Case. 6. Figure 8 compares the impacts of the tax reforms on exports, while Figure 9 compares the impacts on imports. It is important to keep in mind that net foreign investment, the difference between exports and imports in nominal terms, is exogenous in our simulations, while the exchange rate is endogenous. The Flat Tax results in a very modest decline in exports of 0.5 percent in 1996, relative to the Base Case, but exports recover rapidly and exceed Base Case levels in 1997, rising eventually to 4.6 percent above these levels in 2020. Imports initially rise by 2.0 percent, relative to the Base Case, in 1996, but this impact declines to only 0.3 percent by 2020. The Sales Tax generates a substantial export boom; the level jumps to 29.2 percent about the Base Case level in 1996, but declines by 2020, reaching 18.9 percent of this level. Imports in 1996 exceed the Base Case level by 2.5 percent, but fall to 1.3 percent below this level in 2020. 7. The inter-temporal price system provides the mechanism for re-allocations of resources in our simulations. Figures 10 and 11 give the impacts of the tax reforms on the prices of investment goods and consumption goods and services. Under the Flat Tax the price of investment goods drops by more that 6.8 per cent in 1996 and the price decline continues, falling only modestly to a little over six percent by 2020. The Sales Tax produces a reduction in investment goods prices exceeding twenty percent in 1996, rising gradually to between twenty-five and thirty percent over the period 2000-2020. Under the Flat Tax prices of consumption goods and services decline by more that 4: 5 percent in 1996, but this price reduction falls over time to around three percent in 2020. The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020. 8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020. 9. Since producers would no longer pay taxes on profits or other forms of income from capital and workers would would no longer pay taxes on wages, prices received by producers under the Sales Tax, shown in Figure 13, would fall by an average of twenty percent in 1996. Figure 14 shows that prices received by producers would fall by an average of twenty-five percent by 2020. The impact of the Flat Tax on prices received by producers is much less dramatic. Prices decline in the range of six to eight percent for most industries in 1996 and five to seven percent by 2020. |
Of course it helps to know the definition in an equilibrium model that economists are speaking about when discussing "producer price"; that it is the consumer price discounted for taxes and subsidies. Producer price is the price received by the supplier (i.e. for the market considered) sans tax and subsidies as opposed to the total amount including tax and subsidies that is actually paid by the consumer to purchase a product.
| Algebraic Solution of Linear Supply and Demand Models R. Wigle Director Masters Program in Business Economics Wilfrid Laurier University May 9, 2001 http://info.wlu.ca/~wwwsbe/faculty/rwigle/ec238/ref/pe-algebra.pdf
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