"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.
No, either he is paying corporate income taxes, that is, a business tax, or he is paying personal income taxes.
Are you saying that Bob is paying no personal income taxes?
I own a Subchapter S corporation. I file a business tax return with the IRS. But I pay no taxes on my business. I file a 1040, and following the same rules as any W-2 employee, I pay personal income taxes on the earnings I derive from my business.
Do I pay corporate taxes and no personal income taxes? Or do I pay personal income taxes, and no corporate taxes? I'm only paying one. The government tells me it's personal income taxes. What do you say I'm paying?
Small businesses do not pay corporate income taxes. Period.
But you're right, Bob (or me) wouldn't pay any personal income taxes, either under the NSRT.
Just as his employee, Joe, wouldn't either. And what are you saying will happen to Joe's personal income taxes? Why, they'll be returned to Joe, right?
Because there will be an NSRT on what Joe spends his salary on. On his food, on part of the interest of his mortgage (that's right, part of the interest of your mortgage will be subject to a 30% sales tax), on his car insurance, his homeowner's insurance, and his health insurance. On his clothing, part of the interest of his car payment, on his gasoline (think! we'll all get to pay 30% more at the pump!).
So, it evens out. He gets to keep his personal income and payroll taxes, and with that, he pays the NSRT.
Okay, what about Bob? Bob makes $50K from his bakery, and pays $9K in personal income and payroll taxes. So, he takes home $41K. If he has to lower his prices by the amount of his taxes, he still takes home $41K.
But now, he doesn't have what Joe has - his personal income taxes. So, how does he pay the NSRT on his mortgage, his car payment, his food, his clothing, his car insurance, his life insurance, his homeowners insurance, his health insurance, his gasoline, etc.?
That's why it's called his PERSONAL income tax, and not a busines or a corporate income tax. For Bob not to lose out, he must be treated the way any wage earner is treated.
Otherwise, Bob will say, gee, I can't afford to both stay in business and pay this new NSRT. I had to cut my prices by the amount of my personal income taxes, so I'm screwed. Bob will say, I'll fire Joe. I'm a better baker than Joe, and we'll both apply at Really Big Baking company, and since I'm the better baker, and I have some business management experience, I'll get the job, and Joe won't.
Only, woodbeez, that won't happen. Because Bob's not going to lower his prices by the amount of his tax savings.
Here's why: His little bakery did $500,000 last year. He made $50,000, which is a pretty good profit on $500,000 in revenues. He paid $9,000 in taxes. That's 1.8% of his bakery's revenues. Less than 2%. If his bread, cookies and cakes are good, no one is going to bark at not seeing his $9.99 box of cookies decline 1.8% to $9.81.
No, he's going to keep the money, because he needs the whole $9,000 a whole lot more than any of his customers need 18 cents.
And thus, you're not going to squeeze the personal income taxes paid by business owners out of the value chain.
Now, go take a look at the taxes paid by big business. The IRS says that in 2003, they paid 1.3% of GDP in corporate income taxes. That means, the "embedded tax" in $1.00 of GDP is about a penny and half.
That will go away. We will see those costs go away, certainly. Whether they result in marginally lower prices, or whether large companies take this opportunity to expand their profit margins after decades of contraction, I don't know. But it's less than 2%.
If you want to see what corporations really make, and actually pay in income taxes, go look at their financial statements. Wal-Mart paid about 1.6% of its revenues in federal corporate income taxes last year. Sears paid less than 0.5% of its revenues in federal corporate income taxes last year. TechData, a leading distributor/wholesaler of electronics, paid about 0.1% of its $19 billion in revenues last year in federal corporate income taxes. Boeing, a massive manufacturer, with $52 billion in revenues, paid about $140 million in all corporate income taxes last year, both state and federal. That's less than 0.3% of revenues.
There isn't a lot of corporate income taxes to squeeze out of the value chain. There's a little, but it doesn't add up to much.
If you don't believe me, do the research yourself.