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.
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)
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