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OPEN LETTER TO BOORTZ/LINDER (FairTax)
self | August 22, 2005 | RobFromGa

Posted on 08/22/2005 6:53:28 PM PDT by RobFromGa

August 22, 2005

U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Phone: 770-232-3005
Fax: 770-232-2909

Dear Representative Linder:

I have met you before and briefly discussed your FairTax proposal years ago in downtown Norcross at a street festival. I also campaigned for you in my neighborhood when you were running against Bob Barr.

I have read your book, and I have spent quite a bit of time researching the FairTax. As a small businessman who lives in Norcross, naturally I am interested in anything that will reduce taxes and assist our economy, so the idea of a FairTax sounds good. But reading your book, the bill itself, studying the fairtax.org website, and reading the House Ways and Means Committee testimony of Dr. Jorgenson back in 1995 and 1996 as well as your most recent testimony, I am disturbed by the way the FairTax plan is being presented.

I don't think you fully understand the "embedded taxes" concept-- you are double counting this money by both giving wage earners their full 100% paycheck and still expecting their employer to be able to reduce their prices by about 23% on average.

Let's look at a wage earner-- call him George-- that grosses $1000 per week under our current system. You claim that, under FairTax, George will keep all his income (the full $1000) plus everything he buys at retail will cost about the same as George pays now. This is implausible.

Businesses will not be able to pay 100% of their paychecks to their employees, because they need these "embedded tax" savings to be able to lower their selling prices.

Let's look at George's purchasing power, now and under FairTax:

George currently gets $1000 a week from which his employer withholds $200 in FICA and fed taxes and $50 in state taxes, leaving George with $750 to spend. Right now, let's say loaves of bread are $1. Today, George can buy 750 loaves of bread for $1.00 each with his take-home pay.

Under the FairTax, you claim George will get his whole check, which is the same $1000 less George's $50 state taxes, for a take-home of $950. If your FairTax logic is correct, the price of the bread will quickly drop to about $0.77 (when Bob's Bakery gets rid of his "embedded taxes") and when they add the 30% FairTax at the register the final price will still be $1.00. George can now buy 950 loaves of bread with his $950 take-home.

You have increased George's purchasing power by 200 loaves of bread which is a 26.7% increase in his purchasing power. And you claim that FairTax will do this on average for every wage earner in America.

This is dishonest to make everyone think they will get a 25%+ increase in purchasing power. ("Get a 25% pay raise, and prices stay the same")

It is obviously illogical that every wage earner in America, with no change in productivity can increase purchasing power by even ten percent, let alone 25%.

The fallacy in your understanding of the "embedded taxes" is that Bob's Bakery cannot give his employees their full paycheck AND still reduce his costs by $0.23 per loaf of bread as you claim. He can do one or the other, but not both.

The baker could reduce his price by about 25%, but only if he keeps his bakery employee taxes that are currently withheld and going to the government. If he gives these "embedded taxes" to his employee, then his overall labor costs haven't gone down and he has no saving to pass along in his prices. His only big difference is he writes a check to his employee for $950 instead of two checks- one to his employee for $750 and one to the IRS for $200.

If our baker instead kept the taxes, his labor cost would now be $800, and the baker could now maybe drop his price to around $0.77 per loaf as you expect. George would still have his same $750 take-home income and he would still be able to buy 750 loaves of bread for $1 each ($0.77 cents price plus $0.23 taxes). George's purchasing power would still be 750 loaves of bread as it is now.

I think this is the honest way to look at the FairTax plan, but this is not what you are claiming.

The only other alternative is that George gets his full $950 and the price of bread drops to say $0.90 to reflect Bob's Bakery's savings on the employer portion of FICA (7.65%) for his labor costs and a few percentage savings for IRS compliance costs. When sold, the $0.90 loaves of bread will get $0.27 FairTax added for a total selling price of $1.17. Under this scenario, George has $950 take-home, which allows him to purchase 811 loaves of bread, a slight increase in purchasing power which is mainly due to the elimination of the employer portion of the FICA. (assuming Bob's Bakery kept that employers half of FICA which is really his employees money but that is another discussion)

But this second "inflationary" scenario would put retired persons, or anyone with accumulated wealth or any person on a fixed income at a relative disadvantage to wage earners because things would cost more in absolute dollars. So, this scenario won't work in practice.

Please think about what you are promising here when you say that people will get their whole pay checks and at the same time all prices will be about the same. It cannot happen-- there is no 22-25% "embedded tax" savings once you give wage earners their entire paycheck.

Sincerely,

Rob xxxxxxxxx
XXXXXXXXXXXX


TOPICS: Your Opinion/Questions
KEYWORDS: fairtax; irs
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To: Ditto
From an employee standpoint, where the business does save considerably in on the employer portion of wage taxes which you didn't mention. You seem to not be aware if the 7%+ for the employer portion of employee wages which is over and above the employees gross pay, and in "Bob the Baker's" case, the 15%+ of his wages that currently go to FICA & Medicare. How come you missed that part?

I did include that, that's how I reduced the cost from $1.00 to $0.90 with the FairTax-- most of that was clearly stated as the employers portion of FICA. So that was covered.

You also seem to ignore all the supplies that Bob the Baker buys and the average of 15-20% embedded income and wage taxes in those.

For this part of Bob's cost I allowed that the his suppliers would be able to reduce their prices by the same 8% that I think Bob will be able to reduce his prices by. I did this by assuming that the FICA savings of 8% would be saved on his entire cost structure instead of just his labor costs, so I assumed that he would save 10% across the board-- labor, purchased supplies and overhead, and profit. So that was covered.

BTW. You business wouldn't have anything to do with Taxes, would it?

No, but I do have to pay them. I'm in sales, and I sell a non-financial service to other businesses.

121 posted on 08/23/2005 10:47:50 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: pigdog

Dear pigdog,

Certainly your spreadsheet shows "embedded" taxes of 17+%.

And it shows "embedded" net profits of nearly 70%. LOL!!!

That's because, after your initial input of $1, all the rest of your inputs have been either profits or taxes. ROTFLMAO!!!

In Level 6, you show a business entity that has a total pre-tax profit margin of 29%, but no costs other than the cost of the initial input to that level. LOL!!! Of COURSE you're going to cascade such ridiculous amounts of tax.

What else do you expect?

Why don't you create a spreadsheet that shows the actual profit and taxes of real businesses? Like manufacturers:

General Electric: ~ 2% of revenues in federal corporate income taxes
Dell: ~ 2% of revenues in federal corporate income taxes
Boeing: ~ 0.3% of revenues in ALL (federal AND state) corporate income taxes
Lockheed Martin: ~ 1% of revenues in federal corporate income taxes
Whirlpool: ~ 1.5% of revenues in ALL (federal AND state) corporate income taxes

Like distributors/wholesalers:

TechData: ~ 0.2% of revenues in federal corporate income taxes
Ingram Micro: ~ 0.17% of revenues in ALL (federal AND state) income taxes

Or retailers:

Wal-Mart: ~ 1.6% of revenues in federal corporate income taxes
Sears: Less than 0.5% of revenues in ALL (federal AND state) corporate income taxts
Target: ~ 1.8% of revenues in federal corporate income taxes

Or the corner appliance store: 0% (because it's a proprietorship or a Subchapter S corporation, an LLC or a partnership).

Sprinkle some of those tax rates, which go from 0% to about 2% of revenues, into your spreadsheet, and watch what happens to the accumulated "embedded" taxes.

Also, in the REAL world, pigdog, companies ADD VALUE to their inputs before selling them to others. Even Wal-Mart's cost of goods sold is 76%, meaning that the other 24% of the selling price is the value that Wal-Mart's adds to the product when selling it to the consumer. That isn't all profit, pigdog. In fact, a relatively small part of it is profit. Most of it is the "cost of doing business."

Wal-Mart's actual pre-tax profits are about 5.6% of their revenues.

In the REAL world, companies don't enjoy 29% net pre-tax profit margins, all without adding any value whatsoever.

Now, as to the taxes paid by folks like me, who own small businesses that are not incorporated as Chapter C corporations. Here's the amount we pay in federal corporate income taxes: $0. As a percentage of revenues, that's 0%.

I get 100% of the income of my business to me.

I file a business tax return, just like a C corporation (though I think I use a different form). But whereas the C corporation pays corporate income taxes on profits, I pay $0. Again, as a percentage of revenue, that's 0%.

Then, I file my 1040, and report my personal income, on which I pay personal income taxes on my income.

Only one level of taxation, the personal level.

When the proponents of the NSRT are talking about doing away with the corporate income tax, that's because they're acknowledging that corporate income is taxed TWICE. Once at the corporate level, at a top marginal rate of 35%, and then a second time, as personal income, when it is paid to the shareholders as dividends, currently at a top rate of 15%.

But I don't pay any corporate income taxes, thus, I have none embedded in the cost of my services.

You can assert "that's different" all day long, but you've offered no coherent, consistent, or even minimally-logical argument as evidence why my personal income taxes are any different than one of my employee's personal income taxes.

We're both gonna need them to pay that hefty 30% national sales tax.


sitetest


122 posted on 08/23/2005 10:55:50 AM PDT by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
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To: RobFromGa

And did you add the 15% on to Bob's take-home for his full portion of FICA?


123 posted on 08/23/2005 10:57:59 AM PDT by Ditto ( No trees were killed in sending this message, but billions of electrons were inconvenienced.)
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To: WildBlueYonder
Embedded taxes refer to those taxes which are spent for components or products bought by the retailer (for instance, if I'm a baker, when I buy sugar for my cookies, I have to pay a sales tax on that sugar, plus the sugar's embedded taxes from the sugar refinery, which must buy the sugar from the cane producers, who must buy it from the cane farmers, who must buy land for their farms... etc etc.) All of those individual taxes add up and divide out>

First as a business you don't pay any sales tax on the sugar so there is no money to be saved there. The sugar refinery has maybe 22% embedded tax costs but they are mainly the income taxes and FICA taxes paid to their employees. This money is going to be paid to the employee not retained by the business as a cost savings according to the FairTax proponents. So, at most the sugar refinery drops his price by 10%(by keeping the employer portion of FICA and a few percent compliance costs). The cane producer is in a similar boat, as is the cane farmer.

So if you look at the whole chain- the cane farmer save 10% of his costs so he drops his price 10% to the cane producer who is able to save 10% of his costs (which includes the ten percent he saved on the stuff he bought from the cane farmer) so he drops his price 10% to the sugar refinery aho is able to save 10% percent of his costs (which includes the ten percent he saved on the stuff he bought from the cane producer) and so he is able to sell his sugar to the baker for 10% percent less.

124 posted on 08/23/2005 11:01:36 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: sitetest; RobFromGa
On this subject of a small business owner being worse off or at least not being able to lower his prices any:

Rob gave the tax cost savings of FICA and compliance 10% so let's start there. We know that the wage earner will be no worse off because he increases his take home by 25-30%. The owner, OTOH, is Sub S and pays his taxes with a 1040. Well, if the owner is 10% better off then so are his suppliers. That doesn't mean anybody will lower prices yet, however. But if there is a price war among the owner's suppliers he may get his cost of goods down 5-10%.

Outside the sub s the owner pays say 30% in income and business tax. He now gets to keep it all. But suddenly prices everywhere go up by 30% - a wash for the owner. How will he be able to decrease prices?

I think the answer is that he can decrease prices somewhere between 10% and 18% with no effect to his net income. Any other price decrease would put him at a disadvantage to the wage earner unless he is a very smart businessman.

Why would a sub s be in favor of the fair tax if all of the above is true (and I'm speculating, the actual benefit may be much larger as is presented on the fair tax website)?

Getting the IRS out of the boardroom, out of the office,out of your file drawers and out of your income. Paying taxes at the point of purchase with money you have already made, not paying as you go and creating huge corporate investment in the US that is here now are just a few of the things that lead the list as I see it.

125 posted on 08/23/2005 11:01:37 AM PDT by groanup (shred for Ian)
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To: Ditto

No he kept his portion, and I assumed the business kept the "employer's" portion.


126 posted on 08/23/2005 11:02:22 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: Ditto
You are operating under the assumption that the witholding on employee wages are the only fed taxes paid by a business.

Let's see your list of fed taxes paid by a business.

127 posted on 08/23/2005 11:05:16 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: RobFromGa
No he kept his portion, and I assumed the business kept the "employer's" portion.

So you switched him midstream from an S corp to a C corp? If he's an S corp, the money is his.

128 posted on 08/23/2005 11:08:29 AM PDT by Ditto ( No trees were killed in sending this message, but billions of electrons were inconvenienced.)
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To: sitetest

We're both gonna need them to pay that hefty 30% national sales tax.

Just as we need both of them to pay individual and business income/payroll taxes today to the tune of precisely the same amount of federal taxation.

The rate is a matter of the base you choose to determine it from. Whether it is from gross consumption expenditures, or the price a producer receives sans sales taxes, or the 66% tax added on us on top taxed takehome pay now is irrelavent.

The amount of tax government extracts from the citizenl remains the same.

 

The Wrong Camera: The Denominator of the
Tax Incidence Equation.

Dan R. Mastromarco;
LLM, Argus Group, Washington D.C.
Tax Analysts Document Number:
Doc 1999-32575
Citations: (October 8, 1999)

B. Use a Consistent Size Screen to Portray It.

[118] When considering the rate of a national sales tax, or any tax for that matter, one must always decide which of two distinct means of portraying this rate -- the "tax-inclusive rate" or "tax- exclusive rate" -- best expresses the tax burden. Which one we employ changes absolutely nothing in terms of the taxes that are actually raised or paid by the taxpayer under the taxing regime examined, in the same way that measuring a journey in inches or meters does not change the distance. However, how the rate is presented changes how the relative tax burden is perceived by those who wish to compare the merits of competing tax proposals. Confusion results when we compare alternatives under different measuring scales.

[119] The sales tax is particularly susceptible to this confusion because state sales taxes are normally expressed on a tax- exclusive basis, while income, estate, and payroll taxes, as well as the Flat Tax and other VATs, are normally expressed on a tax- inclusive basis. If we were to express a sales tax rate as a percent of the product price as is done in the states, we would be unfairly overstating the burden of the tax when we compare it to what it is meant to replace at the national level. Or conversely, we would be greatly understating the relative burden of the federal income and payroll taxes for those who don't have time to learn the different measuring systems.

[120] Presentation of a rate of tax on a tax-exclusive basis simply means that the rate of the tax is expressed as the tax paid over a base determined after the tax was already imposed (for example, taxable income under our personal income tax system that is net of the tax). In other words, a tax-exclusive rate would be defined as:

$ tax paid
-------------------------------------------------------------------
($ base on which the tax was imposed)-($ tax paid)

[121] The rate therefore reflects the ratio of taxes paid to what is left in the base, such as net of tax income.

[122] On the other hand, defining the rate of tax on a tax- inclusive basis simply means that the rate of the tax is expressed as the tax paid over the base before the tax has been imposed. In other words, a tax-inclusive rate would be defined as:

$ tax paid
-------------------------------------------------------
$ base on which the tax is to be imposed

[123] Since the base of the tax before the tax is imposed is always more than the base after tax (the denominator is greater), expressing the tax in a tax-exclusive way will always yield a higher rate. In other words, it will express the tax as having a higher burden. /56/

[124] Let us take the following example.

Example: An individual earns $1,000 and pays $200 in taxes
(under either a VAT, income tax, or sales tax) but spends the
remaining $800 on a stereo. Although the taxpayer will pay the
same amount of taxes ($200) out of the same amount of pretaxed
income ($1,000) a question arises as to how the rate should best
be expressed? Is the tax rate 20 percent or 25 percent?

[125] Clearly, one might say that the income or Flat Tax rate is the lower rate, 20 percent, since the taxpayer paid $200 on $1,000 of pretaxed income. That is because the income tax and VATs are normally looked at (unquestionably looked on) on a tax-inclusive basis. However, when we view traditional state sales taxes we might say that the state sales tax rate needed to raise $200 of revenues is 25 percent, even though the sales tax rate raises the same amount of revenue as a 20 percent tax-inclusive income or Flat Tax rate. The taxpayer would be considered to have paid the tax at a 25 percent rate since the taxpayer paid $200 of tax on $800 worth of goods exclusive of tax. That is because the state sales taxes are normally looked on on an after-tax or tax-exclusive basis. To use our formula for tax-exclusive representation:

$ tax paid
--------------------------------------------------------------
(base on which the tax was imposed)-(tax paid)

or,

$200/$800 or, 25 percent.

[126] Which is the correct way of expressing this rate? To the casual observer, it is obvious which tax to prefer. All else being equal, one would prefer a 20 percent rate over a 25 percent rate. But that same person may be surprised to find out that they are saying the same thing, and paying the same tax.

[127] The problem with using a tax-exclusive basis for determining the rate of a national sales tax and a tax-inclusive base to portray the income tax is that it can be very misleading. Let us look at a taxpayer who is at the top marginal rate under each taxing scheme. The tax-inclusive and tax-exclusive rates would be compared as shown in the charts just above and just below.

[128] In the tax-inclusive chart, we see comparisons that we are used to seeing. This chart reflects the maximum marginal rate of the current personal income tax system as 43.3 percent. /57/ Here the sales tax rate is 23 percent and the Flat Tax rate is 32.3 percent, reflecting the combined payroll and Flat Tax burdens. /58/ But the tax-exclusive chart indicates that the income tax with the payroll tax bears a maximum marginal rate that is 75.8 percent of the tax- exclusive base. Even the federal individual income tax alone reflects a maximum marginal tax-exclusive base of 43.3 percent. According to the chart above, the Flat Tax bears a maximum marginal rate of 47.7. The FairTax plan bears a maximum marginal rate of 29.9 percent. In this chart, the taxes paid are calculated as a percentage of what remains after tax.

[129] In making comparisons between alternative taxing systems it is important to ensure therefore that these comparisons are consistent, fair in terms of expectations, and are well explained. Fair comparisons eliminate and do not exacerbate confusion over a relatively critical point as the means of expressing the tax rate. The only means to do so is to ensure that a tax-inclusive rate is compared with a tax-inclusive rate.

Footnotes:

/56/ When calculating the tax-inclusive sales tax base, two algebraically equivalent methods may be used. The tax-exclusive rate may be converted into a tax-inclusive rate by dividing the tax- exclusive rate by one plus the tax-exclusive rate: ti = te / (1+ te). Conversely, a tax-inclusive rate may be converted into a tax- exclusive rate by dividing the tax-inclusive rate by one minus the tax-inclusive rate: te = ti / (1-ti). Alternatively, the tax- inclusive sales tax rate may be calculated by adding the repealed income tax revenue back into the tax base (consumers, after all, would have that money to spend), whereas one would not do so when calculating the tax-exclusive base (consumers would be spending that amount on tax and it would not be appropriation to include it in the calculation of a tax-exclusive base).

/57/ The maximum marginal payroll rate is 15.3 percent, but this rate applies regressively between $0 and $72,600 for 1999. When this rate attaches, it is possible for a tax to apply at a maximum marginal rate of 43.3 percent (28 percent individual income tax rate plus 15.3 percent payroll tax rate).

/58/ While it is beyond the scope of this article, it is important to understand that the Flat Tax rate of 17 percent assumes a substantial reduction in government revenues.


129 posted on 08/23/2005 11:09:11 AM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: RobFromGa
Five types.

Income

Employement

Self Employement

Excise

Hidden or Embedded.

130 posted on 08/23/2005 11:14:55 AM PDT by Ditto ( No trees were killed in sending this message, but billions of electrons were inconvenienced.)
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To: RobFromGa
Right now the employer pays his employees less because a good part of their paycheck is with held by the government in the form of various taxes. So workers go home with less than what they would be paid if there was just one tax. Its colossal highway robbery. And its the government that's doing the stealing, not the employer. You never do get paid under our current tax system what you're really worth. The state steals from you the fruits of your labor that you ought to be able to keep. Is that fair? You'll find that if people knew the truth, they wouldn't think so either.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
131 posted on 08/23/2005 11:15:41 AM PDT by goldstategop (In Memory Of A Dearly Beloved Friend Who Lives On In My Heart Forever)
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To: groanup; sitetest; Always Right; Your Nightmare; lewislynn
Rob gave the tax cost savings of FICA and compliance 10% so let's start there.

I assumed that the savings would be 10% across the board. Let's assume that Bob's Bakery has a 40% labor, 35% ingredients and supplies, 10% overhead and 15% profit. Say it is a $1 million per year bakery

Labor at $400,000 the bakery saves the 7.65% = $30,600

Ingredients and supplies at $350,000 the bakery saves 10% = $35,000

Profit at $150,000 is more complicated-- the bakery saves at best 7.65% on the part of the money that he is paying himself as salary. In many cases, Bob is running multiple businesses and has hired a manager to run the bakery so Bob's day-to-day involvement is minimal and his W2 salary is small. Let's say for the sake of argument that Bob's W2 salary is $90,000 (which is also the FICA limit), so the employers portion is $6,885 savings to the bakery.

Overhead at $100,000 includes his rent, utilities and office manager/accountant (maybe his wife Pandora) and assume he can save 10% here, or $10,000.

So, our total savings right now are $82,845. If we figure that he can save $5,000 in accounting (that is 10x what I spend and my business is at least as complicated tax-wise) that means that he has eliminated $87,845 out of his $1,000,000 business. Which is 8.8%. I allowed 10% being generous.

To reduce his cost by 23% we need to find another $142,000 to get rid of. (Hint: it is all there in the income tax windfall increase the Fairtax people say are going to go to the employees. Jorgenson understood the employee income and FICA taxes are the major part of the 22% embedded costs)

132 posted on 08/23/2005 11:28:59 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: Ditto
If he's an S corp, the money is his.

You are right, it really is "his" but I was trying to give the FairTax the biggest benefit of the doubt possible. If I don't let the bakery keep half of the Self-Employment Tax and I give all 15% to the owner, then the example is even worse for the FairTax argument and the business can't save even ten percent.

133 posted on 08/23/2005 11:33:09 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: groanup; pigdog

Dear groanup,

There are no 10% compliance costs. Not as a percentage of revenues. That's so hilariously fictional that it's just not worth responding to. Not for small businesses, not for big businesses. I doubt there are many businesses that spend 10% of their total revenues on ALL their accounting functions, not just their tax compliance costs.

Groanup, here's the thing. Altogether, my accounting costs (including the time my office manager spends on these tasks) add up to maybe 2% - 3% of my total revenues. When I estimate all my "compliance costs" as a fraction of one percent of my revenues, I'm being generous. I'm not sure that there is much of anything that I'd be able to do less-expensively than I do now.

We have to gather timebills and timesheets (although most of this automated, now, thankfully). We produce invoices. I review every invoice before it's sent out. Sometimes I adjust them, and they have to be re-produced. We use stamps and envelopes to mail 'em out. Occasionally, we have to call folks to see where our money is.

We have to pay bills. We gather the bills, keep a cash flow journal, and pay them accordingly. We also have to sort our expenses into different categories. This is what I call a "dual use" function. We have to do it to prepare our taxes, but, guess what? We have to do it, anyway, otherwise, I have no overall way of knowing, as a business, what we're spending for different purposes.

We have to call in payroll every pay period. Here's another dual use thing. We have to tell them how much each person makes, their deductions from gross income, their W-4 deductions, amount of leave used, amount of leave accrued, etc. A lot of this information, the IRS gets. But, we need most of this information for our own internal uses (like figuring out if Charlie really DOES have three weeks of leave coming to him). And, there are other governmental and private entities to whom we owe the information. Nearly all the wage information must also be reported to the federal and state unemployment insurance folks. All our payroll data must be calculated and provided to our private workers' compensation insurance company once per year, when they audit us.

And here's the thing, we have ADP do most of the grunt work - the calculating of taxes, the calculating of deductions, the set-asides for cafeteria plans, electronic funds transfers, payment of taxes to the IRS, etc., etc., etc. The whole shebang. And it costs me about $1,000 per year. PER YEAR.

And under the NSRT, guess what? I'd STILL have to pay ADP about the same amount, because they're STILL tracking all the data, taking out folks health insurance, life insurance, disability insurance, calculating leave, forwarding data to the unemployment folks, producing the reports that I can give to the workers' comp insurance folks, and actually doing all the electronic funds transfers that result in money showing up in the bank accounts of all my employees every pay period. Maybe they'll give me ten bucks per year because they have to forward the reports to one less entity, and cut one less electronic funds transfer per month. Maybe I'll save FIFTY bucks a year!!! All right! Now we're talking about compliance cost savings!!!

;-)

We have to keep and organize receipts, bank statements, etc., in case we're ever asked about them. But with the NSRT and state sales tax folks, we're going to have to keep these records, anyway. We'll need to establish that any time we've used our sales and use tax license to avoid paying the NSRT, that that was clearly a business expense, and not something that wound up in my home for personal use. Thus, if folks somehow not paying the NSRT on gasoline (either through special credit cards? or rebates?), folks will have to have to have the same log detailing vehicle use, numbers of miles between points, dates, etc., as are required, now.

What we're doing, groanup, is playing musical chairs with our business documentation. Instead of showing all our "deductions" from taxable income on the income side of things, we'll have to show all our "exemptions" from taxable sales on the consumption side of things.

I look for it to be approximately a wash. Maybe I'll save a few pennies in compliance. Maybe I'll pay a few.

For really big companies, especially public companies, the savings are likely to be even less. The reason why is that pretty much everything they have to do to make the IRS happy, they also have to do to make the SEC and Wall Street happy. Especially with the Sarbanes Oxley Act. I talked to someone I know who is the CFO of a Fortune 500 company. He told me that the SOA has permanently added 40% to the accounting costs of his firm. Ouch.

From what I understand, that's pretty typical. A few months back, I read an article that indicated that SOA compliance costs were increasing accounting costs to publicly-held firms by an average of 44%.

But that's not from what they have to report to the IRS.

However, the point here, groanup, is that NONE of the drop in prices can be associated with the small business owner giving up his share of recouped personal income and payroll taxes.

If there are other savings, they are savings ASIDE from the recouping of the business owner's personal income taxes.

If you want to make an argument that I may be able to drop my prices because my suppliers' costs to me are lower, I'll talk to you about that. You may not like my answers, but at least it's a useful discussion.

If there are really 10% savings in my other business costs, then, sure, I may wind up dropping my prices 10%.

But your fellow NSRT proponent pigdog is saying that I'm going to lower my prices by cutting them the amount of my saved personal income taxes.

As you rightly point out, if I don't get to keep them, I'm behind everyone else. Gee, then the NSRT sure would be encouraging entrepreneurship. Not.


sitetest


134 posted on 08/23/2005 11:33:23 AM PDT by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
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To: groanup
I don't understand. How is deprecitation a repeat purchase of land. It is merely tax avoidance isn't it?

I'm not an accountant, so I don't understand it either. All I know is that if we purchase a car for $50,000, we pay that at the time of purchase. Then, next year we have to pay a depreciation amount of $10,000 (using a 5 year depreciation). And again for the next 4 years. These are dollars that come out of our budget to purchase more vehicles. As for the land, we have to pay depreciation on the upgrades that we do (i.e. pavement, buildings, etc.)

The reason we do this is because the IRS requires us to. Yes, it is funny money, but tell my manager that I need to spend $10,000 this year on something and he will not be able to because I'm having to pay depreciation.

Quick link that I found:
http://www.businesstown.com/accounting/basic-depreciation.asp

The concept of depreciation is really pretty simple. For example, let’s say you purchase a truck for your business. The truck loses value the minute you drive it out of the dealership. The truck is considered an operational asset in running your business. Each year that you own the truck, it loses some value, until the truck finally stops running and has no value to the business. Measuring the loss in value of an asset is known as depreciation.

Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in your business, you can depreciate office furniture, office equipment, any buildings you own, and machinery you use to manufacture products.
135 posted on 08/23/2005 11:38:22 AM PDT by Gvl_M3
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To: RobFromGa
To reduce his cost by 23% we need to find another $142,000 to get rid of. (Hint: it is all there in the income tax windfall increase the Fairtax people say are going to go to the employees. Jorgenson understood the employee income and FICA taxes are the major part of the 22% embedded costs)

You forgot the $100,000 Bob spends every year in tax planning, or so I have been told.

136 posted on 08/23/2005 11:43:19 AM PDT by Always Right
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To: Ditto
Five types: Income, Employement, Self Employement, Excise, Hidden or Embedded.

Income- discussed, returned to wage earner, 0% saved by business

Employment- discussed, 7.65% returned to wage earner, 7.65% retained as cost savings

Self-Employment- discussed, 7.65% returned to wage earner, 7.65% retained as cost savings

Excise- not part of FairTax replacement, 0% saved by business

Hidden or Embedded- these are a fantasy of the FairTax movement, they were originally defined as the sum of all the income and payroll and corporate taxes above, but since these have been removed from the deinition no one knows what these "Hidden" taxes are any more. No businessman has a clue where these are, or how they are going to be eliminated. They are a figment of the FairTax imagination.

From FairTax.org

Exactly what taxes are abolished?

The FairTax is replacement, not reform. It replaces federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.

137 posted on 08/23/2005 11:44:22 AM PDT by RobFromGa (Afghanistan, Iraq, Iran-- what are we waiting for?)
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To: pigdog
Regardless of what you claim, you example does not show cascading taxes. What is being taxed in your example is profits, and the effective tax rate on profit is the same in the first level as it is in last (and all levels in between). What you are mistaking for cascading is happening because each level adds profits which, in you simplistic and unrealistic model, accumulate from level to level in the price of the product. If profits accumulate and profits are being taxed, taxes will accumulate with the profits, but this is not cascading.

If your example was demonstrating cascading, the effective tax rate would be changing from level to level and it would be possible to achieve an effective tax rate higher than the statutory rate. This isn't possible with your example - as you go level to level, and more and more profits accumulate (with no value added by any company), the percentage of taxes as related to the price will approach the nominal tax rate on income, but not surpass it. If you want to call what's happening in your unrealistic example anything, call it "accumulating taxes" because they are not cascading.

BTW, in you example, every business gets to set the market price. This is not case for the vast majority of businesses in the real world - they are price takers, not price makers. If one business in your example has to sell there products at the market price (they may even have to sell at a loss), then all of your "accumulated taxes" from the previous levels would be completely wiped out. The business wasn't able add their crystal ball estimate for income taxes on to the price. They took exactly what the market would give them. Nothing more, nothing less and what they paid for the product had nothing to do with that price. If they couldn't make money selling that product, then they would discontinue selling it (and probably sell their remaining stock at even more of a loss). This is the way most items are priced in the real world of market economics, not the simplistic fantasy world of your example.
138 posted on 08/23/2005 11:45:13 AM PDT by Your Nightmare
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To: Gvl_M3
I'm not an accountant, so I don't understand it either. All I know is that if we purchase a car for $50,000, we pay that at the time of purchase. Then, next year we have to pay a depreciation amount of $10,000 (using a 5 year depreciation).

No one pays for depreciation. Depreciation is simply an accounting tool to track value and to take deductions. The car you paid $50,000 is worth $50,000 when you bought it. Using a 5-year straight line appreciation, after 1-year it is worth $40,000 on your books, and the IRS allows you to deduct that $10,000 as an expense. Your company is not paying $10,000 to anyone, just making a book entry taking off $10,000 from the value of the car.

139 posted on 08/23/2005 11:54:30 AM PDT by Always Right
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To: sitetest
There are no 10% compliance costs

I never said there was. Go back and read my post. 10% is what Rob came up with. FICA savings plus compliance. How much would Microsoft save if it didn't have to buy low income tax credits to offset its tax liability? It could put that money into short term cd's and one day get it back. The tax credits may or may not return. Also, how much would MSFT save if it could get rid of its tax department?

140 posted on 08/23/2005 12:14:02 PM PDT by groanup (shred for Ian)
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