Fair Tax - Straightening Out Some Confusion

Nealz Nuze ^ | 9/15/2005 | Neal Boortz

[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.

[SolidSupplySide]

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.

Looks like you're a dynamic economic thinker.

[ancient_geezer]

Gotta be a better way than a prebate.

Alternatives

1) let Congress & lobbiests decide what to except from sales tax playing the same games the do today with income deductions and tax credits.

2) no rebate no exceptions in products and let liberals kill any chance of passage for taxing them poor folks.

3) require folks to track purchases and report them to the government to claim refunds or report household income to qualify for special treatment, issue tax exception cards etc. (keeping an IRS in family finances)

4) treat each citizen the same and rebate sales taxes by an an amount based on household size rather than qualifying by income or wealth.

5) Other, please specify your poison.

[SolidSupplySide]

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.

Do I have an incentive under the rebate scheme to claim more kids than I have?

[goldstategop]

The point is there no TANSTAAFL under ANY tax system. The Fair Tax simply brings all the formerly hidden taxes out in public sight. You know exactly how much your tax bill's gonna be. It doesn't take an army of accountants to figure it out for you. Perhaps that's why accountants and lawyers loathe the Fair Tax. They'd have to look for more honest work.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[Eagle of Liberty]

Hmmm....

I am actually guessing one of the reasons why the prebate is included is to specifically tackle #2.

I don't like any of those alternatives. Can't we just exempt all food and call it even?

[ancient_geezer]

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.

And let yourself be audited frequently for compliance as businesses under a retail sales tax get to do.

Then find yourself rapidly classed as a hobby under such circumstances and endup paying the tax owed as a consumer rather than a business operating for a profit.

[goldstategop]

No one can be disadvantaged under a Fair Tax. That's the point in the level that's set. You could set it a lot lower but it won't fly in the real world. Politicians will never support putting the government on a diet. Just ask Tom DeLay about his punch line.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[SolidSupplySide]

And let yourself be audited frequently for compliance as businesses under a retail sales tax get to do.

Man, it's gonna take an army of IRS agents to audit every person to see if their tax information is legitimate. Sounds like what we have today.

[Dead Corpse]

Are you still trying to deny what even Boortz has admitted?

That is like the MSM trumpeting that Bush admitted he was at fault for the Katrina SNAFU.

Keep it up. You are making us look GREAT!

[goldstategop]

Excellent point. In our free market economy, employers want to attract and keep talented people. If they pay them less, its the employer who loses. So I don't believe the claims of Fair Tax opponents employers would pay their employees less than they do now. When it comes to getting paid for one's work, workers also have the power to decide for whom they will work.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[Dead Corpse]

You don't have to register for the prebate. If you don't want the check, don't apply for it.

Try that with the current IRS and see how far you get.

[SolidSupplySide]

Excellent point. In our free market economy, employers want to attract and keep talented people. If they pay them less, its the employer who loses.

Doesn't that apply today?

[ancient_geezer]

I am actually guessing one of the reasons why the prebate is included is to specifically tackle #2.

Yes it is.

I don't like any of those alternatives. Can't we just exempt all food and call it even?

You mean congress gets to define food, and the more food exempted the higher the tax rate on everything else?

Is caviar food? or maybe those non-nutritional fat producing hamburgers should be classed as a health risk instead of food, or ...

Looks like a great way to create an endless opening for special interest legislation to me.

[Dead Corpse]

Let's see.... audit a couple million businesses? Or audit a couple hundred million income tax payers AND businesses? Which would be smaller?

Keep it up. You too are doing your part to make the Fair Tax look awesome.

[Always Right]

Do I have an incentive under the rebate scheme to claim more kids than I have?

Yes, the rebate goes up with family size. They did eliminate the marriage tax penalty, perhaps because of me. Each child claim must have a SS#, which will reduce the chance of two or more people claiming the same kid as their dependant.

[goldstategop]

Yes. Remember a consumption tax puts power into the hands of workers and consumers. If they're not paid well, government revenues suffer and businesses lose profits from not being able to sell their good and services. So there's an incentive to make sure people are able to buy the things they need and corporations make a profit and the government is funded. After an initial period of uncertainty, considering its advantages, we'll wonder how we ever got along without the Fair Tax in the first place.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[SolidSupplySide]

Yes, the rebate goes up with family size. They did eliminate the marriage tax penalty, perhaps because of me. Each child claim must have a SS#, which will reduce the chance of two or more people claiming the same kid as their dependant.

So that sounds about the same as the income tax, too.

[rolling_stone]

....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.....

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.

No I am not caught up in a static analysis, you are caught up in resisting change. There will be adjustments and changes in behavior as with any law, but that is true now, look at how popular large SUVs were because of the depreciation deductions..look at other social engineering in the current law. Under the Fair tax there will be no social engineering and people will buy what they need and not for tax purposes. There will be some people trying to abuse any system, but it will be far easier to catch less people than more people.

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.

What makes you think the amount of fraud will increase from what we have today? Have your read the analysis of expected fraud? It seemed to me to have been well taken into consideration.

[SolidSupplySide]

There will be some people trying to abuse any system, but it will be far easier to catch less people than more people.

There will be less people under a Fair Tax?

[rolling_stone]

Less collection points...