Replies

Dear pigdog,

"There is nothing in the cascading tax example in #154 that specifies any sort of business organization at all."

Well, first, you should acknowledge how out of whack your model is. Likely very few or no businesses can: 1. add no value; 2. mark up 41%; 3. incur no costs whatsoever beyond the acquisition of the inputs; and 4. get to keep 25% of revenues as net after tax profits. LOL.

But getting back to your most recent comments, which pretty much overlook the loss of touch with reality of your model in #154, individual proprietors don't pay corporate income taxes.

I assumed you realized that, and thus, I assumed that you knew enough that your model is only relevant for C corporations. But perhaps you don't realize that only C corporations pay corporate income tax. Proprietorships, partnerships, S corporations and the like pay no income taxes. The income passes directly through to the owners, who only personal income and payroll taxes (except, proprietors and S corporation owners have their payroll taxes called "self-employment" taxes - I guess it's supposed to make us feel better) on their personal income, derived from the business.

We've already established that we're not going to "give back" the personal federal income and payroll taxes that individuals pay, or are paid on their behalf. After all, proprietors do the same things with their business income as wage earners do with theirs: pay their personal bills.

If you ask proprietors to "give back" the personal payroll and income taxes that they pay, then you're putting them at a disadvantage at which you're not putting other wage earners.

"The effect is still the same despite your fanciful reasoning s-test."

Well, actually, if you're talking about proprietors, the effect is that you should count ZERO tax in your model.

Proprietors pay NO corporate income taxes.

"That example shows no effects from payroll taxes..."

I thought we'd established that all of the payroll taxes are going back to the employees on whose behalf they're paid (and that must include the proprietor, or he is at a disadvantage to everyone else in his personal income)?

Do you no longer want to make sure that all wage earners get both sides of their payroll taxes?

"...or compliance costs, either, so it is, if anything very low."

Well, YOU made the argument based on the taxes, alone. If you now want to withdraw the argument on that basis, because you now acknowledge that there are no significant savings to be had, that's fine with me.

However, I'll point out that insofar as most corporations spend VERY LITTLE in corporate income taxes, it is unreasonable to assume that they spend VERY LARGE amounts of money to duck out on rather modest tax liabilities.

Thus, compliance costs for even large businesses probably are similar as they are to mine: a fraction of 1% of revenues.

Which still adds up to a pretty penny. Over the entire economy, that's still many tens of billions, or perhaps even as much as a hundred billion dollars.

But it isn't going to get us to anywhere near 22%.

As well, most of the "compliance costs" are necessary accounting and bookkeeping that businesses must do, whether they pay corporate income taxes or not.

My business does not pay corporate income taxes. Nonetheless, I must pretty much maintain the same accounting and bookkeeping as a business that does.

Accounting isn't all about, or even primarily about taxes.

"You better check your figures, since the IRS has stated that the typical corporation pays in the 25% bracket."

That's true. And if you'd read my posts, you'd see I actually said that most corporations that are liable for the corporate income tax pay about 20% - 25% of PRE-TAX PROFITS in federal corporate income taxes.

But pigdog, if you'd have read my post, you'd have learned that on average, corporations with corporate income tax liability have pre-tax profits of about 6% of revenues. Do you understand that you only pay income tax on profit, not on revenue?

Twenty-five percent of 6% is 1.5%. Thus, my assertion that most companies that are liable for corporate income taxes pay about 1% - 2% of revenues in corporate income taxes is pretty much dead-on.

At least according to the IRS information that you quote.

Thanks for affirming my statements. ;-)

"The NIPA numbers show a different sotry altogether in that there were 5.3 million corporations (including 3.2 million S-corps) leaving about 2.8 million corps with net income and they paid taxes amounting to about $210 million."

Well, first, if there are 5.3 million corporations, and 3.2 million are Subchapter S corporations, that would leave 2.1 million other corporations, not 2.8 million.

But other than that, look carefully at what I wrote, pigdog. I didn't say 27 million CORPORATIONS but rather 27 million BUSINESS ENTITIES, or which, in 2000, 2.2 million were C corporations. There are millions of S corporations, as well as millions of proprietorships, LLCs, and partnerships. Thus, if you're saying that there are 2.1 million C corporations, well, that doesn't sound far off from my numbers.

"leaving about 2.8 million corps with net income and they paid taxes amounting to about $210 million."

Perhaps you mean $210 billion?

I don't know what year you're citing, I've only seen numbers through 2003, when the amount was about $165 billion. I won't quibble over $50 billion in a nearly $13 TRillion economy. That's less than a half-percent.

So, perhaps federal corporate income taxes were as much as 1.6% of GDP in some year recently, but not in 2003. Could be.

It still doesn't add up to 22%.

"There are many other types of business taxpayers other than corporations and I've no doubt there were net payments from them into the fed coffers also."

Well, just what federal business tax are they paying now that they won't pay under the NSRT?

Remember, we're not counting personal income taxes, as if these aren't returned to the individual taxpayer, that taxpayer will not be treated the same as all other wage earners, and will not be made whole to pay the 30% NSRT.

"Even the S-corps can figure into cascading taxes."

How? Subchapter S corporations pay no corporate income taxes.

All income passes through to the individual owners, and the individual owners use that income to pay their personal expenses.

As the owner of a Subchapter S corporation, let me tell you what I do with my "profits" (my income, my wages). First, we pay our federal income and self-employment (same as payroll) taxes. We pay our mortgage on our personal home. We buy groceries. We make my car payment. We pay our residential electric bill. We pay our auto insurance. We pay our life insurance. We pay our homeowners insurance.

We pay our personal state income tax. We pay our property taxes on our residence. We go to Home Depot and Sears and buy stuff to do things in and around our house. We go to department stores and buy ourselves and our children clothes. We pay for educational stuff (we homeschool, so we buy a pre-packaged curriculum).

We go out to eat on this money. Go to the movies. Buy each other birthday, Christmas, Fathers Day, and Mothers Day presents. Go on vacation.

We buy (a lot of) gasoline. We buy tools and home equipment, like our riding mower, our circular saw, and our gas grill. We had a tree fall down in the back yard. Forty-five footer. We paid to have it hauled away.

We take no business deductions for any of these things. We would pay the NSRT on any of these things that any other individual would pay.

Thus, the personal income and payroll taxes that I pay rightfully should come to me, should be considered in the same category as my payroll costs, not be calculated as a cascaded, embedded tax cost of the corporation.

What other federal taxes does my Subchapter S corporation pay that will be replaced by the NSRT?

"You guys genuinely do not seem to understand the subject but keep flailing around trying to show taxes don't cascade, "

LOL. I see some flailing, all right, but I ain't doin' it. ;-)

The fact is, taxes do cascade. And we know the entire amount to which they cascade, on average, economy-wide. In 2003, it was 1.3%. That's it. That's all she wrote.

"They do, and a heck of a lot more that your 1-2% claim."

That's an assertion that you haven't proved, but I've pretty much disproven.

sitetest

LOL, indeed, s-test. (And hey, werent' you the other guy who was refusing to post to me just recently??).

Let me point out some flies in YOUR ointment.

As to your assumptions about adding no value, etc., marking up, incurring no costs, etc, those do not apply since this is an example of the mechanism involved where those things are assumed to occur and not a P&L statement. Those concepts contribute nothing to the understanding of cascading taxes and can clearly be ignored or assumed-in to the example as given.

It is not MY model and in fact not a "model" at all in the usual sense but it certainly illustrates tax cascading very clearly. As to the types of businesses to which it might apply, even a single man firm needs to cover the taxes he will eventually pay (if any) so he must raise the prices of items that he processes to obtain this necessary money. The fact that he pays it as an individual rather that a corporation (or partnership for that matter) does not matter at all. The mechanism still applies to his business and what passes through it.

I certainly assumed you knew enough to realize that - but obviously you do not. The example applies to the general case of a business manipulating inputs in some fashion and adding value so that it (he, if a single man) will benefit in the long run after taxes. The boost in prices comes not only from any added value and price boost to cover taxes and profit but from the cascaded taxes that are ALSO embedded into the prices. That's what the example shows. It does not matter what the type of business entity might be (excluding the so-called non-profits here).

As for "giving back" the income/payroll taxes to wage earners, yes, that has been established for normal wage-earners but the mechanism operates a bit differently for a person who is not a normal wage-earning employee. The giving back of the wage withholdings applies to the wage earners so that their earnings are stable. In the case of a non C-corp entity you must still file and pay taxes though in a bit different fashion that the normal wage earning employee. That also isn't germane to the cascading mechanism which goes right on functioning as shown in the chart. And it doesn't matter that these taxes are (or are not) corporate taxes, but just that they are business taxes even if levied on and/or paid by individuals. It is the effect of cascading taxes on the things passing through the business to others that is at issue.

As a big, bad S-corp owner (which apparently you are), spare me the trivia about how you do or do not spend the money. That is immaterial also and the real point is that as a business owner you will (supposedly) benefit from your great busines acumen and do better than your wage earners (if any). As such you have the opportunity - but not the guarantee - to do better financially. If your S-corp does poorly or loses money does the government refund all your losses quickly (or at all)? The idea of "giving back" does not apply since you have a unique opportunity to do much better.

With the FairTax removal of the embedded tax costs the input to your business will be quite a bit less expensive that it was before. It is then up to you as a shrewd businessman to adjust your pricing structure to balance the lowering of prices to customers with the appropriate boosting of internal margins where necessary and to increase your volume of business as well with the additional opportunities the improved economy will offer. That is YOUR responsibility, not that of the government - and not that of your competitors (who will be actively trying to eat your lunch). Businesses - particularly smaller ones - paint on a constantly changing canvas and if you are unable to adapt to the new environment then you will perish as a business but it will not be the government OR the tax system that has caused this ... it will be YOU. That's why you're paid the big bux now.

You are far too locked in to thinking that tax cascading applies only to C-corps or that I never took Business 101 in high school. Spare me your condescension. I include the many business types and not just C-corps which you seem so fixated on. The mechanism applies across the board. Flail on; your 1-2% cascading is ludicrous and most, I think, would realize it. As a business owner you are not at all the same as a normal wage earner. If that's what you wish to be so you can have a guaranteed return of your withheld akmounts, then go to work for someone - or get busy and put that noodle to work in thinking about how you can greatly improve your business under the FairTax rather than posting such stuff.

BTW, most of the compliance cost estimates I've seen that seem likely range from $500 billion to $1,000 billiomn per year. Even the lowest I've seen (which is hardly credible) spins out at $250 billion of unproductive costs to the economy. Your own p[ersonal compliance cost may be as low as you say - and it may not - but there are certainly many, many businesses (and individuals) who have far mor significant compliance costs, apparently, than you.