PRICES UNDER FAIRTAX WILL NOT GO UP

PRICES UNDER FAIRTAX WILL NOT GO UP - JUST THE OPPOSITE
Within months of the start of FairTax you will see your cost at the register WITH your tax the same or lower than the cost today without the tax...here's how....

Acme's price formula for a $5 profit margin on the sale (today under income tax):
$2 material
$8 labor
$5 IRS tax compliance costs of 25% Acme pays and passes on to consumer
$5 profit margin for Acme

$20 retail cost for the tie to YOU the consumer ( no visible Natl Tax to you but clearly you the consumer are paying Acme's $5 IRS tax costs for them and Acme makes $5 in the transaction)

NOW THE FAIR TAX:
Acme Tie Manufacturing under FairTax - SAME $5 PROFIT MARGIN
$2. material
$8 labor
0 IRS tax compliance costs to Acme
$5 profit margin for Acme

$15 cost of tie at retail - Acme receives the same $5 profit and is happy and they have NO taxes to pay to the IRS

BUT the consumer also pays the same $20 for the tie as before...the price does not go up.....see here's what your sales receipt would say under FairTax

Consumer costs under FairTax:
$15 tie at retail
+$5 - 30% natl retail sales tax (FairTax on new goods and services)

As you can see under the current system or the FairTax, in this example Acme gets the same $5 profit, and the consumer pays the same $20 for the tie..but what has really been gained, what is different?

1. The consumer sees the cost of big government on his sales receipt, namely the $5 FairTax, a tax which he paid in the first example but was not aware of since it was hidden in the price - it's called honesty and 100% visibility in the cost of Big Government!

2. Acme can now broaden their base of sales at $15 to compete with the tax free Singapore Tie Company who has been selling their ties in the USA for $15 all along. FairTax now creates a better balance of trade and the ability for the American firm Acme to also go abroad with their ties and export them at $15. This will create Acme expansion including creating more American jobs available. Factory expansion means Labor becomes a commodity to compete for so salaries and benefits go up for everyone.

3. The ability for Mr NeckTie to open a factory and sell ties for $15 if Acme refuses to lower their price to $15 after IRS costs are removed from them. Or perhaps Mr NeckTie will be happy with a $4 profit margin and sell his ties for $14 creating a little price war that the consumer benefits from..Don't worry Acme & Mr NeckTie won't be working together to bring the price up to $17, cause there is always another American with the willingness to work hard and step into the market at $14 a tie, its called American ingenuity and the free market system. A little competition goes a long way.

4. Don't forget! The consumer can go to the flee market and buy a used tie and pay NO tax at all, lowering their costs to live and lowering their overall net effective tax rate under FairTax. You can't do that in today's tax system, since everything you purchase today is done with "after tax dollars".

All's right with the world, everything is honest, above board, fair, and you can now buy Dad that tie on Father's day for less money than you did before.

go to www.pafairtax.org/calc.php and see what FairTax will do to your current tax rate. The new HHS rebate numbers are now included in the calculation.

I'm telling you though, you have a huge hurdle to overcome in trying to convince most people that exempting business from taxes is smart economics.

Politicians and bureaucrats speak:

Why don't you two fight. Go ahead 'little guy' fight the business community and the ultra rich. Duke it out because you don't want to pay taxes you'd rather the far fewer in number of businesses pay the taxes and you get a free ride.
And to you the businesses just shut up and foot the bill, besides the mob has ruled -- err, I mean the majority has spoken."
Businesses speaks: "Politicians and bureaucrats have been waging a class war for decades. They pit the businesses that create jobs and means of support for people against one another while they skim their own paychecks and use the rest to create evermore obstructionist laws that hinder your and our progress and prosperity.
We the producers -- the businesses, job creators and workers/employees -- create and produce the necessities to sustain life and luxuries that afford a more luxurious lifestyle. Politicians and bureaucrats produce almost nothing of value. Save for protecting individual life and property rights -- the sole purpose of government.
They call themselves lawmaker and lawmakers they are. They create evermore laws to justify their look-busy jobs.
Well., consider these questions...
How is it that you and other Americans increasingly prospered five years ago without this years new laws and regulations?
How did Americans prosper in the 1980's without the laws to come in the 90's and early 21st century?
"How is it that Americans prospered from 1940 to 1960 without the new laws and regulations created after 1960?
How is it that people increasingly prospered from 1880 to 1930 without the new laws and regulations created after 1930?
Today, how do Americans continue to increase prosperity despite not having the new laws and regulations to come in five, ten, fifteen and fifty years in the future?
Think about that. The vast majority of Americans prospered for the past 135 years despite not having future laws created by politicians and bureaucrats.
The mountain of new laws that congress has created over the last 135 years presupposes what?
It presupposes that individuals and businesses would harm each other without the laws. What other purpose could there be?
There is no other explanation, save for the real reason. ...For look-busy, self-proclaiming government officials to usurp the power of government and garner unear4ned paychecks. They operate on the premise that people and businesses would harm one another. To that false end they create evermore laws and regulations.
Yet the premise is totally false. Businesses, employees and customers are on the same side. They need each other and thus they respect each other. Remove any one of those three from the equation and all three lose. They would not harm one another for it would contradict their best interest.
The fact is, it is the politicians and bureaucrats that point fingers at everyone else and proclaim that they are dangerous and need to be protected from each other.
They create boogieman laws that create problems that need not exist.
The fact is, without businesses and their workers/employees doing their jobs the politicians would perish. For the don't know the first thing about creating and producing marketable values. The first thing is the synergy of mutual respect that businesses, workers and customers have for each other.
Politicians and bureaucrats, facilitated by the main-stream media encourage the three mutually respectful categories of people to fight among themselves.
In the meantime the politicians and bureaucrats leech off the producers while burdening them with evermore laws and regulations that obstruct the productivity and prosperity of the mutually-respectful trio.
The mountain of laws and regulations are not static They considerably hinder progress and creativity.
Throw the burden off our trio's back and the three of us will rapidly rise in health, wealth and prosperity

The workers and consumers speak:

Yeah, what the businesses just said. The three of us are in it together. You leeches in congress and at all levels of government will no longer manipulate us to fight among ourselves. We are onto your magician-like illusions.
Today we begin up-righting the world you turned upside down by demanding that you pass and implement the FairTax, abolish the IRS and repeal the 16th Amendment.

As you mentioned, today you deal with the State and the IRS. Under the FairTax, it will only be the State. These are records you are kkeping now most likely in the course of business...if you are in business. Every business keeps an inventory list for example, otherwise, how would you even know if your employees were stealing from you? You keep sales receipts, bank statements, etc.

States are very likely to adopt a broad-based sales tax that piggy-backs on the FairTax to replace their current income tax/sales tax schemes, meaning a lower State rate with a broader base minus all the hodge-podge of rules and exemptions. This reduces the complexity of that system as well.

The savings mentioned for ACME include both compliance and corporate taxation through multiple levels. This includes corporate income taxes and payroll taxes. As simple as a tie is, it goes through several levels of production like most products. Those printing the tie didn't usually make the material or print the ink for example. They also didn't make the machinery that is used to manufacture the tie. Even inside of there own operations, they don't provide their own utilities and possibly contract out maintenance. All of these entities pay business income taxes, payroll taxes and compliance costs in either paying the current income tax or trying to avoid as much of it as possible. These costs are either passed through to the consumer, passed back to the laborer, or over to corporate investors. Today, with global markets, the competitive pressure is for consumers, which means in most cases this savings will be passed forward. There are too few good paying jobs and too many workers chasing them which prevents workers from advancing. This under supply of demand for workers versus the supply results in less pressure to pass the savings to workers.

However, the FairTax also brings with in tremendous growth in the economy. GDP is estimated to be in the range of 10.5% the first year alone (average of Professor Kotlikoff and Jorgenson studies) with capital investment a whooping 76% increase in the first year. Exports are expected to increase by 26% and even imports to grow by 3% the first year. All this means new opportunities for those workers. As the growth spreads across the economy, the supply of workers available will shrink and demand will increase will will raise wages. Because of the increases capital investment, inflation is held down as productivity is also increased.

The reason I went through that refers to your last question. Taxes and compliance costs are embedded in the items you buy today. You pay those hidden costs with already taxed dollars. Even with after-tax savings, you are paying additional taxes as your savings earn interest.

The hidden costs are estimated to be 22% for goods and 25% for services (labor-intensive occupations have the greatest payroll tax costs.) As I stated above, these costs are driven out of the price of the goods and services you buy under the FairTax and interest earnings are no longer taxed at all. If you have qualified money from a 401k or IRA for example, those withdrawals will not be taxed unless spent for new goods or personal services.

The only transition rule in the FairTax currently is an inventory credit for business. Cince the products currently sitting on their shelves or in their warehouses were made under the current system, taxes are already embedded in their costs. The FairTax gives a credit equal to the value of inventory times the tax rate as each product is sold during the first year. That allows businesses to lower prices immediately.

A final note, even flat tax supporters such as Dick Armey agree these embedded cost are included today in the prices of goods and services. They agree it keeps America from being as competitive as it should be. For some of those supporters on here to suggest otherwise is disingenuous. What Dick Armey and others would suggest is that the FairTax savings would not be as great as stated. At any rate, they would be significantly greater than the flat tax. The flat tax retains a 19% tax on business profit AND the payroll tax. While simplier than today, it retains compliance with both an income tax system (federal) and a sales tax system (state) in most States.

The FairTax removes all business input taxes and significantly reduces compliance costs through simplicity.

Yet the greatest benefit in my eyes to anyone who calls themselves a "Freeper" is the personal freedom of controlling your own tax burden through your buying choices. Your money will no longer run through a government filter before you get it regardless where you are on the income scale.

The only why prices can drop significantly on a microeconomic level is if nominal wages are reduced. A person's purchasing power (real wages) would not change much. Even the author of the FairTax agree with this.

Statement of Laurence J. Kotlikoff,

Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research
Testimony Before the House Committee on Ways and Means - Hearing on Fundamental Tax Reform
April 11, 2000
This sentence and the one preceding it assume the price level will rise with the adoption of the Fair Tax. If the Federal Reserve used its monetary policy to maintain the consumer price level, the adoption of the Fair Tax would entail a decline in the level of producer prices and, thus, the nominal wages and capital income received by productive factors.

Response to William Gale

by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998
Federal income and payroll taxes either are or are not incorporated into the prices of goods and services. If they are embedded in prices, their removal will reduce prices. If they are not, then their removal will not reduce prices but instead returns to labor and capital will go up. If returns to labor go up, people will see their after-tax wages increase and asset values will increase since the present discounted value of the new, higher returns will be higher.
The replacement sales tax could be incident on the factors of production or it could be incident on consumers through higher prices. It cannot be both. If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation

by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779
Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.

The Price Level

Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.
A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.
Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.
Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.
Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.

Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.¹⁶ Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.

Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.

Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.

Transition Costs and Macroeconomic Adjustments

One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.⁵ While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.
Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT
Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.
These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).⁶ Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.

See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.

Prices.

Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.

Transitional Issues in Tax Reform

Price Level Effects
Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.
In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.
Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.
The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.
Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level ;and no change in payments to workers in nominal terms."
Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.
Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.

Monetary Implications of Tax Reforms

Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.
And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.
But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.

Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.

The Price Level

When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.
One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.
Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.

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