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
Whatever value might be added is encompassed by the example and the fact you can't/won't see that changes nothing. In asddition, the fact that you are not a Sub C corp changes nothing. You business still accrues tax liaibilities even though they may be paid via your 1040. The effect of those taxes still remains in the business and pretending it does not is (at the very least) shortsighted.
"Embedded net profits" BTW is a meaningless concept since these are different businesses in the example. The profits are not cascaded and accumulated (remember Nightie already tried that one), but the taxes are as part of the costs passed ahead in prices. The example shows costs that can be removed from prices - and the assumption is that profits remain. If you'd like to "embed" profits and remove them also ... well ...???
As for the C-corp figures you present, I can only offer a big yawn and say "so what". If those are correct figures (and I doubt they are), there are many tax-abatement stunts that can be used (frequently short term ones) but over a longer term the taxes would most likely go back up.
According the The Institute for Taxation and Economic Policy for 2004:
"ITEP's new report examines the U.S. profits and federal income taxes of 250 of the nation's largest and most profitable corporations over the 1996-98 period. Although big corporations ostensibly are supposed to pay 35 percent of their profits in taxes, the 250 companies in ITEP's survey paid only 20.1 percent in 1998. "
Perhaps you were able to cherry pick only those corporations (and keep in mind that many other business entities pay taxes, too) who paid very low taxes it contributes nothing to your argument except, perhaps to show your desperation by the tactic.
Actually, longer term sutudies by the IRS (I believe it was) show the "typical" (whatever that means) tax rate for C-corps is about 25% and has held right around that rate for many years with occasional slight variations.
The pot calls the kettle black...
Always Right,
I know that we don't write a check for depreciation. We do put it on our books and have to come up with that much income, or else we are loosing money.
Example, last year we made $10,000 profit, and we had $50,000 cash saved up and decided we needed a new truck. This year, we made the same money, but have to show $0 profit since we had to depreciate $10,000 on the truck.
I'm guessing here, but I seem to remember that we "pay" somewhere near $1,000,000 in depreciation each year. That is with a total budget of around $7,000,000.
"Measuring the loss in value of an asset is known as depreciation."
Incorrect. Depreciation is a means of cost allocation, not valuation. When you depreciate a building over its "useful life" (according to either tax or GAAP guidelines), it may well be worth more at the end of that "useful life" than it was when you first bought it and started depreciating it.
he has eliminated $87,845 out of his $1,000,000 business. Which is 8.8%. I allowed 10% being generous.So now his gross is $900,000 and he'll owe 23% of that to the Fairtax leaving him with $693,000 (not $900,000) net income...
His prices including the tax would have to be 17% MORE than before to break even....[29.87% + $900,000 = $1,168,830 gross]....$1,168.830 minus 23%(federal sales tax) = $900,000 net.
But even without the IRS, accountants will still depreciate. Unless you are a self-owned business, you need to track costs so you can share profits. If you just expensed out the $50,000 car in year one, you would not have an accurate picture of how your business is doing. Some depreciation is more of a tax trick, but mostly it is good accounting practice so you know the value of your business.
Miraculous??? No - just simple economics which you can't/won't understand. None of the SQL (Status Quo Lover)tribe can afford to admit that there is any such thing as embedded tax costs since it destroys your arguments about people having lower wages, prices being higher, etc. IOW - your whole premise goes to hell in a handbasket (not to mention your letter to start this vanity thread).
With embedded tax costs, you see, their removal from prices caused prices to drop and even with the FairTax added on, prices - including federal taxes - will be about the same as they are now (or maybe a bit lower since right now the revenue neutral rate runs about 19% rather than 23%). Your points have been responded to in these threads many times and always have been shown to be illogical malapplication of economics and/or logic.
There is nothing dishonest about the FairTax bill and the benefits it offers the economy. You merely choose not to believe it based upon your mistaken beliefs. Wage-earners will have more money, prices will drop, and the economy will greatly benefit - not due to YOUR business but due to the help given to export businesses, repatriated capital back into the US, and increased tax revenues gained from the illegal economy ... among other things.
Is your example an C corp again? The C corp I work for paid nearly $300M in US Federal Income Tax in FY 04. It would sure be nice to simply add that to the bottom line, but knowing the competitive pressures in our market, I am convinced it wouldn't be possible. If your example is a C corp and taking 50k in salary with an effective rate of 15%, he's getting about $7500 increase in take home by eliminating the income tax.
Self-Employment- discussed, 7.65% returned to wage earner, 7.65% retained as cost savings
You again ignore the 15% of 50k, or $7500 in self employment tax that the S corp owner in your example will add to his take home. It is not "retained" unless the owner chooses to leave it in the business.
Hidden or Embedded- these are a fantasy of the FairTax movement,
I suppose you are like many, usually Union Democrat types, who think you can actually "tax" a corporation.
News Flash! You can't really tax a corporation. It is impossible. You can tax the stockholders of a corporation. Or you can tax the customers of a corporation. But you can not tax a corporation because it is only a legal entity and it has absolutely no assets to tax. Every penny in so-called corporate assets in reality belong to people. Those people will in most circumstances simply pass the tax burden along to their customers in the form of higher prices. When you add margin targets to higher prices through each step in the supply chain, there is without a doubt a cascade effect. If you do not believe that to be true, you must believe that no one is actually paying corporate taxes in the first place.
No, actually it is the fair taxers who are at odds with the former Harvard Economist Dr. Dale Jorgenson. Fair taxers claim hidden taxes do not include employee taxes such as payroll and their share of FICA. But Dr. Jorgenson says they do. By this misstatement alone the fair taxers create a $1 Trillion 'benefit' out of thin air.
You are far to kind in describing our fellow Americans. In reality they are blind, freakin' stoopid when it comes to the workings of an economy as well as the most basic of economic realities. This is why the politicians can so easily have their way.
right, he can only save 10% max, so adding the 23% fair tax will make the bread $1.17 which was my exact calculation in the letter to Boortz/Linder.
The price of bread went up 17%. Which is ok for the people who got the take-home increase of 25% or thereabouts. But its not so good if you have accumulated wealth that just took a 17% or so dive.
"....it has all been steered and corrected and elections have been fought and won to make changes for almost 100 years."
Indeed it has. And the result is a system which is so complex that even the professionals can't understand it.
If our tax system is such a marvel of economic incentives and so integral to our economic well-being, how is it that the American people despise it so much? Alternatively, how did the President's Tax Commission misread the sentiments of the American people so badly? You can read their interim report here
http://www.taxreformpanel.gov/index.shtml
The title of their report is "America Needs a Better Tax System".
PS: I have posed this question before on other FR threads and never gotten a response. I am not expecting one this time, either.
None of the FairTax crowd can identify any such thing as embedded tax costs that are not income or payroll taxes, so their whole program is a sham.
Nope, I agree that corporations really don't pay any taxes. Even the C corps that pay on average 1-2% of their sales as taxes jsut pass them along to the consumer. I think that the tax regulations we have now should have the corporate taxes eliminated. That is a pittance in the grand scheme of things when looking for 23% savings.
My example is an S-Corp.
"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."
If you consider the accumulating taxes which get passed up from one level to the next, that is exactly what is happening. The cumulative tax rate is significantly higher than the stated tax rate based only on taxes paid at that level with no consideration for the taxes which are indirectly paid.
You can choose your example any way you want, I wanted to bend over backwards and give the FairTax the most amount of savings possible and let the business save the same amount on the business owner self-employment FICA as the wage earner is saving the company on his employer half. If you want to take it out, there is another $6685 you need to find, or $150,000 in additional cost savings to keep bread prices stable for the consumer.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
"But even without the IRS, accountants will still depreciate."
True, but they will only have to keep track of one set of depreciation numbers, not two. There will no longer be separate calculations for tax depreciation and book depreciation when the FairTax passes.
:-)
That is a pretty ridiculous statement, it may be complex but people do understand it, and in fact become expert at it esp within their own little niches. I feel like I "understand" the present system well enough to start and operate a business just fine.
Is it perfect, or super efficient? No, it needs to be reformed and made simpler. And we need to get a handle soon on the spending side with SocSec or this whole tax reform discussion is like rearranging the chairs on the Titanic.
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