Posted on 09/15/2005 7:03:21 AM PDT by groanup
THE FAIRTAX --- STRAIGHTENING OUT SOME CONFUSION
When Congressman Linder and I were busy researching and writing The FairTax Book we knew full well that it would one day become the focal point for those opposed to this tax reform idea. We tried, therefore, to make sure that our numbers and claims were correct and consistent with the research that went into the drafting of HR 25.
On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck. Those who have much to lose if the FairTax were to become law will focus on these areas in an attempt to undermine support, so let's put their objections and distortions to rest by addressing those matters here and now.
We explained in the book that the FairTax plan was revenue neutral. By this we meant revenue neutral for everyone ... the government, businesses and individuals. You can't put more money in the pockets of one without taking money out of the pockets of another. The harsh reality is that politicians would not support the FairTax if it meant less revenue for the federal government; business leaders would not support the FairTax if it meant a decrease in corporate earnings and profits, and the people would most certainly not support the FairTax if it meant a decrease in their income. Taking an snapshot view of our economy, an increase in income in one of these sectors would necessarily mean a decrease in another. This is why the FairTax was designed to be absolutely revenue neutral – leaving everyone pretty much where they are in terms of income or revenue. To put it more bluntly, there is no free lunch in the FairTax plan. There is no "something-for-nothing."
This brings us to the question of embedded taxes in the cost of consumer goods and services, and your paychecks.
As explained in The FairTax Book, there are taxes embedded in everything we buy. Every entity which provides a product or service in the design, production, marketing, distribution and sale of every consumer good or service will incur some tax liability as they perform their particular function. This tax liability will be incorporated into whatever these individuals or business entitles charge for their services, and will all passed through to become a part of the final cost of the product or service.
Now here's what we didn't explain well in the book.
Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer's product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.
The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%. In some industries, such as leather goods, the embedded tax is smaller. In other industries, such as homebuilding and construction, the embedded tax is higher, but it averages out to somewhere between 22 and 23%. With the passage of The FairTax Bill, those embedded taxes disappear. These embedded taxes include the combined tax burdens of all entities involved in bringing those goods or services to market, and that includes you, the employee, and the taxes you incur as a result of your employment.
We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So ... what does this mean to your paycheck after the FairTax becomes law?
When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay – the amount you can put into your bank account – will not decrease, and may actually increase.
On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax. Once again, a zero-sum, revenue neutral game.
Now, let's elaborate on the "keep 100% of your paycheck" line that appears in The FairTax Book. It is certainly true that after the FairTax becomes law there will be no more withholding from your paycheck for any federal taxes. What you earn is what you get. This is not to say that your gross pay will equal what it was before the FairTax. This will depend on what your employer does when the embedded costs represented by the tax burden you have passed on to your employer disappear. One thing is certain: You will suffer no decrease in real or net earnings --- the amount of each paycheck you deposit into your bank account every other week. The "keep 100% of your paycheck" concept can more easily be applied to those who either change jobs or come into the labor force after the implementation of the FairTax. A new worker will negotiate a wage with an employer knowing that the amount negotiated will be the amount that worker receives every two weeks ... no deductions. Likewise, when you change employers you, too, will negotiate a wage that will not be subject to withholding, and you will get 100% of your wages in each paycheck.
Some of you reading this amplification of the principle's of the FairTax may have come to a rather interesting and accurate conclusion. The reality is that in America we're already operating our federal government off a consumption tax. A convoluted and impossible to understand consumption tax, but consumption tax nonetheless. We say this because ultimately all taxes paid by businesses or individuals eventually make their way through our economic system until they are embedded in the cost of some consumer item or service. In other words, taxes, like that other stuff you've heard about, roll down hill. At the bottom of that hill we find the retail sale and you, the ultimate consumer.
As we said in the book, and as we repeat here, the FairTax is not a "something for nothing" scheme. It was designed to be and, in fact, is revenue neutral. Having said that; the non-government economists who studied the FairTax play are nearly unanimous in their agreement that the implementation of the FairTax will lead to unprecedented economic growth in the United States. We will see economic growth in our economy of such magnitude that it will, sooner rather than later, lift all boats ---- including yours.
Bingo. Even the sales tax advocacy groups admit this.
True, but any currently hidden tax collected from an income tax paying customer must make up for any taxes not paid by a person avoiding income taxes such as a prostitute or drug dealer...you are not even treading water...
wouldn't I just buy everything from the black market and save 22%?
How would you save 22%? The black market has to aquire their supplys to sell to you, they either pay the tax on that or take the risk of theft/embezzling/fraud etc. to give you a 22% lower price. I doubt that very much.
Remeber even someone operating on the black market has to have enough sales to make a living. The more customers ,the greater their visibility and risk of being caught through either informers or by direct observation by tax enforcement agents of the states.
You don't think government and legitimate businesses that are under audit and certification allowing them to purchase tax free are just going to sit by and let black markets take the retail market over do you?
Where is my logic wrong?
In thinking states don't enforce retail sales tax laws or fail to go after businesses and those who violate them, and in thinking you the customer are likely to see any benefit from buying black market to avoid a 22% tax. Guaranteed 22% is not enough to sustain a black market operation in face of the risks and costs associated with such businesses.
That can not be true. I agree that they carry some burden with the embedded costs in the prices of goods they pay, however they certainly are not carrying the same burden as a legitimately employed income tax payer.
The reason the rate is so high (30%) is simply because we have to many people that don't realize the size of the burden. The single biggest benefit to the NRST is the fact that ALL citizens will carry the burden, then realize the cost of the government they have been demanding. This will bring many people to the limited government political viewpoint that are currently demanding expanded government on the backs of the productive.
How do you propose reducing the size of government when half the population is ignorant to the cost of government?
Because of the 22% embedded taxes that are already in the price of goods and services. The end consumer pays for all these taxes in the form of higher prices. Of course this includes all the taxes paid by businesses and individuals.
The Fair Tax is easier to evade. Either a dishonest buyer or seller can evade the Fair Tax. Dishonest Buyer: Presents a sales tax exemption certificate for items of personal consumption. Dishonest Seller: Collects sales tax but fails to remit it.
There are checks on exemption certificates and on sellers, inventory vs sales, just like IRS does now.
A dishonest seller can evade the income tax by simply not filing. A dishonest buyer cannot evade the income tax.
I see how you completely avoided answering how may collection points there are for each system. obviously 80% fewer collection points will be easier to police under a Fair Tax. There are no buyers and sellers under the income tax, but for a buyer to avoid the sales tax it would take either a cooperating seller (conspiracy) or as you suggested a fraudulent exemption certificate...far harder to avoid under a Fair Tax.
The price of the goods purchased do not contain the taxes paid by individuals. It contains the taxes paid by the corp/bus. as well as their compliance costs. Yes, prices contain some taxes paid for by the company on behalf of the employee, but they do not contain the withholdings from a taxpayers paycheck.
This is the old inclusive-exclusive argument that has been dealt with many times. If you are truly interested it is in the FAQs of the fairtax.org website. If you are not interested enough to inform yourself don't complain about non-issues.
Always a good thing to do
And the only thing missing is the purchaser information. And without the purchaser information, copies of the receipt could be given to multiple people showing you paid the tax. Without this information to correlate buyers and purchasers, receipts will be ineffective. It is a neccessary step for the administration of this tax. This is one item I can guarentee will be added if the fairtax ever becomes law.
I am a Far Tax proponent and I haven't given up on it. You are insistent on a purely technical point that is correct in its limited way but moot overall. When you claim that the present system and the Fair Tax are equal in that respect you are wrong. The present system taxes only income so it can never reach those folks without catching them, arresting them, and charging them with tax evasion. That is a RICO approach and has been used but it is not feasible for the government to do that in a broad way.
You seem equally intent on denying that the NRST will recoup some of that money when the scofflaws purchase something new, as they are likely to do. To insist on that is to be ingenuous.
You are caught up in static economic analysis. A change in the tax code will cause people to change behavior. Many people will create business out of their hobbies to acquire a sales tax exemption certificate.
Dynamic economic analysis suggest the number of collection points will increase as well and the number of sales tax exemption certificates. Both developments will increase the amount of fraud.
The most obvious is to exempt food and scrap the prebate. This way the government is not sending a $300 checks every month to every bum in this country keeping him supplied with wine and crack. Would save billions in administration costs.
What's not to believe? It is in the bill. I realize Hillary may end up with copies but otherwise it will be done.
If you insist on a negative approach to this you will end up as I said in another post to you, just giving up and taking what is handed to you.
You are caught up in static economic analysis. A change in the tax code will cause people to change behavior. Many people will create business out of their hobbies to acquire a sales tax exemption certificate.The first thing I'm doing is setting up a business. A miserable failure of a business that will allow me to buy stuff tax free.
If the scofflaws purchase something new in the legitimate economy, it will be taxed in either system. If the scofflaws purchase something new in the underground economy, it won't be taxed under either system.
Underground economy transactions by definition can't be taxed.
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