Yes, your assumption was correct. The same would apply to a barber, nail salon, spa, business consultant, lawyer, accountant, dentist, surgeon, tree removal company, painter, handyman, janitorial service, maid or any other highly labor intensive business.
You no longer have to pay federal income or self employment tax on the profits of your business.
There is no savings for the business from taxes paid. All of this money goes to the individual instead of the govt, that is one of the main tenets of the FairTax.
Assume that this small business is an S-Corp or Sole Proprietorship like most small businesses. So there are no federal taxes on the corporate earnings. The rest of the money is the business owners' profit for operating the business. Right now it is taxed as personal income, but under the FairTax plan the owners will get to keep all of this money tax-free until they spend it. They are not expected to take a cut in their profits because they don't have to pay a tax on it, just like employees are not expected to take a cut in paychecks.
Unless this is the missing thing in the FairTax plan that has been eluding me-- they expect business owners to reduce their distributions by the amount they are now paying in income taxes to allow the business to save money. Business owners would therefore not realize the same income tax savings that employees would.
You no longer have to pay employer fica on your employees wages.
This money (7.65%) will be paid to the employee instead of the govt (he is really paying it now, but wage earners feel better thinking that their employer is getting stuck with it). No cost saving to the business here.
You no longer have to pay a CPA to do your taxes.
There's $500-1000 per year to do income taxes, but I now have to file to recapture all of my business expense tax payments. Essentially, I will turn in all of my monthly business expenses to the accountants, they will check them, and send them in for a rebate of the 30% taxes paid. Probably costs more in the new system, but no more than $1000 savings per year.
You no longer have to pay the vendors embedded tax and compliance costs on soap, wax, towels, tire cleaner, leather conditioner, office supplies, checks, etc.
This might be 15% of my costs, and even if you are right that there is 25% embedded costs in these suppliers (which I don't believe) that would be less than 4% overall savings in my bottom line.
You no longer have to file quarterly payroll tax returns for your employees, or make quarterly tax deposits for your own taxes.
There will still be filing for Soc Sec purposes, at best this is a hassle to be avoided, with very little cost associated with it.
You don't have to worry about whether a person is an employee or contract labor.
I get paid to worry, no cost savings here.
You can make business decisions, such as whether to open a new car wash across town, without considering the income tax repercussions if you do. You can sell your business without worrying about capital gains taxes on the sale. You don't have to worry about your heirs having to sell your business to pay the estate taxes. Your own taxes on the profit of your business may be the single biggest expense you have, and cannot be ignored.
All of these things won't matter if the economy craps out because the prices of goods and services don't take a nosedive when the FairTax plan kicks in. I won't have a profitable car wash model to duplicate, or sell or any profits to keep.
Every one of those items you think will save me money as a small business carwash amounted to at most $1000 per year plus 4% of my operating expenses. How any I going to cut the price of my $20 carwash down to $15.50 when my costs have only gone down by less than $1? ($15.50 is the price that I'd have to charge to allow me to tack on the 30% FairTax and still charge my customer $20).
shoot all the accountants!
wait, what am I saying, I am a controller.
Dear RobFromGa,
Excellent analysis.
What's worse is that the car wash real estate represents a sunk investment that under the current system, throws off depreciation, and thus tax savings.
So, the owner of the car wash may actually be paying very little in the way of federal income and payroll taxes.
He will recapture much less than the average person, because he has much less to recapture.
Even if he doesn't decrease prices, his net income will not rise enough to cover his having to pay the 30% NSRT on his personal expenditures.
AND, his price will be 30% higher than before.
Ouch.
sitetest
There is nothing that says this money will have to be paid to the employee.