"You forget that Bob the Baker pays income tax on his profit from sales"
Bob the baker is probably a sole proprietor or his business is a partnership, or an LLC, or a Subchapter S corporation, in which case, Bob pays personal income and payroll (although they're called self-employment) taxes on his income, which is the profit that he takes from his bakery. But in these cases, Bob pays no corporate income taxes. At all. Only Chapter C corporations pay corporate income tax, and most small businesses (in fact, most businesses) do not choose this form. In fact, in 2000, of 27 million business entities that filed a business tax return, only 2.2 million were C corporations. The rest owed no business income tax.
So, he is in the same position as any other wage earner - he pays personal income taxes, but not any kind of business income tax. He fills out a 1040 for his personal income taxes, like anyone else.
If Bob doesn't get to keep his personal income taxes, like everyone else does, then that puts Bob at a disadvantage to everyone else.
That probably isn't good for encouraging the formation and maintenance of small businesses.
posted on 08/22/2005 8:09:40 PM PDT
(If Roe is not overturned, no unborn child will ever be protected in law.)
"So, he is in the same position as any other wage earner - he pays personal income taxes, but not any kind of business income tax. He fills out a 1040 for his personal income taxes, like anyone else. "
It doesn't matter what kind of taxes he pays now, he still pays them. He wouldn't under Fairtax.
Calling a tax a business tax, corporation tax or personal income tax doesn't change the fact that Bob is still paying taxes.
posted on 08/22/2005 8:35:45 PM PDT
Bingo sitetest. "Fairtax" is a fad which will kill small businesses like mine.
It doesn't' actually matter how you file as a small business!! Whether you are an LLC, a Soleproprietor or anything else, you don't pay taxes. Let's take an example with Bob the Baker:
Bob sells 1000 loaves of bread at $100 each (it's really good bread)
His revenue is therefore $100,000.
His total expenses are $50,000
His profit is $50,000 and he is taxed a personal income tax of 15% and therefore pays $7,500 in taxes. Now at first glance it seem that Bob has$42,500 in take-home pay but we must remember that he is a small business and there is research to show that for every $100 in taxes small businesses pay they spend $724 in compliance costs (figures according to The Tax Foundation). Well let's say the baking industry is simpler than average and that Bob only spends half of that, or $362 per $100 in compliance costs. Well that's an additional $27,300 in compliance costs. You may think that's ridiculous but talk to some small business owners. I speak with them daily and yesterday spoke with one who said he spends an entire month out of the year working on taxes. That's in addition to the time he has to spend quarterly, the amount he has to pay his accountant, AND all the time he spends worrying about the tax implications of every decision he makes. This is real time, effort, energy, and money that could instead go towards GROWING his business.
So... his true take home pay: $15,200.
Along comes the Fairtax....
On the first day the Fairtax goes into effect Jill's bakery lowers her prices 23%. Bob lowers his price to $77 per loaf as well to stay competitive. Bob still sells 1000 loaves for revenue of $77,000
Bob's expenses (rent, supplies, flour) all decline by about 23% as his suppliers realize the tax and compliance savings.
True take home pay: $40,500 (over 2.5 times what it was before).
The bottom line with the fairtax is that true profit is true profit. It doesn't matter what kind of corporation you may be or even a sole proprietorship. You could be an LLC and pay out the 40,500 as a salary with no taxes or you could be a sole proprietorship and just take the 40,500 with not taxes. Under the current structure people constantly game the system (creating a corporation and then using corporate dividends to then avoid taxes) for their advantage and constantly worry about the structure. The current system is actually the must unfair to small businesses because they bear most of the burden of tax compliance and have the fewest resources to avoid it (unlike the major corporations which can hire tax evasion experts).
Your statement that "If Bob doesn't get to keep his personal income taxes, like everyone else does, then that puts Bob at a disadvantage to everyone else." is simply a misunderstanding of the full picture. Dig deeper.
We have to remember that to a small business the tax burden is more transparent. They, the sole employee (very small company), has to pay the standard federal taxes, social security, and Medicare out of their gross wages like the rest of us, but they also have to pay the employer match half of the social security and the unemployment tax.
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson