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.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
Man, it's gonna take an army of IRS agents to audit every person to see if their tax information is legitimate.
You mean every person's going to register for business certification so their sales can be audited? I don't think so. The number of auditable businesses is more likely to be 10% of the 120 million filers that exist today.
Course if you want to run out and call yourself a business or act like one under a retail sales tax system, go right ahead. Nothing ventured, nothing gained.
Sounds like what we have today.
If you are a retail business guess what, GASP, yes you have to account for the tax dollars you are required and paid to collect from your customers.
And let yourself be audited frequently for compliance as businesses under a retail sales tax get to do.I would set up a website called I-Review-Stuff.com. On this site I would have long-term reviews of all sorts of stuff: cars, computers, appliances, etc. I would put Google AdWords advertising on it to generate some revenue stream - although not nearly enough to be profitable. All of the stuff I review I could buy tax free.
"The most obvious is to exempt food and scrap the prebate."
Nope. The most obvious is to eliminate the prebate and lower the rate. Once you start having exemptions, the list grows and grows based on lobbying successes. Take away all exemptions and remove the power from tax policy lobbyists. Give the power back to the people.
I would set up a website called I-Review-Stuff.com. On this site I would have long-term reviews of all sorts of stuff: cars, computers, appliances, etc. I would put Google AdWords advertising on it to generate some revenue stream - although not nearly enough to be profitable. All of the stuff I review I could buy tax free.
As long as you meet engaged in for profit status, Go for it.
H.R.25Fair Tax Act of 2005 (Introduced in House)
`SEC. 701. HOBBY ACTIVITIES.
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That will work, but it makes it a tougher sale politically. I believe the prebate adds 3% to the rate.
. I wouldn't collect any sales tax - my revenues (what little there are) are all from Google - so I wouldn't even enter the collection radar.
LOL, no sales no sales tax, only problem is, no certification as a business to purchase tax free either.
It that qualification to purchase tax free that puts you in the radar beam.
That would put most airlines in the category of a Hobby. Boy will they be bummed out when they have to cough up billions and billions of dollars in sales tax for all their expenses.
It also provides a nice tool to show the effects to the population of lowering the cost of government and lowering the rate. Hey, you don't get the check but your costs are lowered.....
I see the prebate as nothing more than the pandering that is necessary to get this legislation passed. The best part is that it doesn't have a "means test." If we have to have it to get the legislation passed, fine, at least everyone is still treated equally.
With all respect, I like your points but I just dont see it the way you do...
I think demand creates black markets. And I think nearly everyone will want to save the 22% (even if some are afriad to) and hence create the demand.
I think that government will be powerless to stop it as they are with nearly every black market in our nations history.
I think that people will want to go the the black market to buy their goods forcing people who would other want to be law abiding to either close their shops or become "criminals" themselves.
I think that criminals will then run the nearly the entire retail portion of our economy, their tenticals will reach into the supply part of the economy by criminal tactics.
Some think that this one Fair Tax Law will be easier to enforce, I think the one Fair Tax Law Enforcement Department will be easier to bribe. And they will be bribed by the criminals running the retail portion of our economy, wich are there because they are providing good and services that people demand.
In summary...
Saving 22% is a HUGE temptation...
People will want to do that...
If the people want it, then the goverment will be powerless to stop it.
I think our tax law is cumbersome and has lots of problems. Im not convinced that Fair Tax is the answer and I remain skeptical... Hoping someone will show me where I am wrong...
I don't see anything that requieres the business make a profit, I read that it must intend to make a profit.
Your points are more of an admission that our government is to big. The NRST rate is simply a function of the government size and scope. If what you predict does come to fruition, then the government would not be able to operate and may be forced to become efficient, smaller and more in scope with the original intent of the fed government.
From the bill about purchasing things for business use:
`(1) received in good faith, and retains on file for the period set forth in section 509, a copy of a registration certificate from the purchaser, and `(2) did not, at the time of sale, have reasonable cause to believe that the buyer was not registered pursuant to section 502. ""`(d) Seller Relieved of Liability in Certain Cases- In the case of any taxable property or service which is sold untaxed pursuant to section 102(a), the seller shall be relieved of the duty to collect and remit the tax imposed under section 101 on such purchase if the seller--
For the bill's requirements in the case of the required receipt (and note that NOWHERE is the buyer identified in any way):
`(a) In General- For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase. For purchase of taxable property or services for which a tax is imposed by section 101, the seller shall provide to the purchaser a receipt for each transaction that includes-- `(1) the property or services price exclusive of tax; `(2) the amount of tax paid; `(3) the property or service price inclusive of tax; `(4) the tax rate (the amount of tax paid (per paragraph (2)) divided by the property or service price inclusive of tax (per paragraph (3)); `(5) the date that the good or service was sold; `(6) the name of the vendor; and `(7) the vendor registration number. ""`SEC. 510. TAX TO BE SEPARATELY STATED AND CHARGED.
It might help you if you actually read a few pages of the bill ... it's an easy (and interesting) read:
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:
This is a completely legitimate business (although not a very successful one)...Why does it matter if it's successful unless the state (turned federal) sales tax authority also audits your income VS sales?
The Fairtax would be a huge asset to money laundering since the government wouldn't care or audit where your income is from.
This isn't a hobby, it's a business.
LOL, no sales no sales tax, only problem is, no certification as a business to purchase tax free either.And who's gonna come after me? My purchases are completely legal business expenses.
It that qualification to purchase tax free that puts you in the radar beam.
I don't see anything that requieres the business make a profit, I read that it must intend to make a profit.Who's gonna determine intent?
I think demand creates black markets. And I think nearly everyone will want to save the 22% (even if some are afriad to) and hence create the demand.
And just who is going to sell to them 22% lower for the same profit that would be obtained by remaining legal and free of risk?
I think that government will be powerless to stop it as they are with nearly every black market in our nations history.
No tax system is going to stop illegal and undground trade. That is not the issue as the current system fosters a very active underground as it is with much lower risks than are associated with retail trade at the levels you imagine.
Some think that this one Fair Tax Law will be easier to enforce, I think the one Fair Tax Law Enforcement Department will be easier to bribe. And they will be bribed by the criminals running the retail portion of our economy, wich are there because they are providing good and services that people demand.
Bribery just opens the door to potential exposure, not to mention the fact that thousands of customers, anyone of whom can turn states evidence with absolutely no risk to themselves. Under the current federal income/payroll tax system, just not filing suffices quite well and no one to bribe in evading the tax with risks 10 times lower of getting caught as a non-filer hiding out among 120million tax payers today.
In short your black marketeer is taking high risks for much less than 22% potential profitability over legal operation. Remember the risk must be compensated for for a seller to make themselves available, not to mention that such operators would not qualify for taxfree purchasing that a legitimate business operates under. To qualify for taxfree purchasing status puts the blackmarketeer open to sales audit and exposure.
The profit from a black market operation in general simply would not be any greater than such is today under the income/payroll tax system.
In summary...
Saving 22% is a HUGE temptation...
People will want to do that...
If the people want it, then the goverment will be powerless to stop it.
Only problem is there is no "22%" to be realized. To gain share from legitmate businesses and make a profit compensating for risks taken as well as operating costs to remain hidden and out of government oversight eats any 22% potential in no time at all.
This isn't a hobby, it's a business.
Insufficient sales and tax collections, its a hobby, no tax free purchases,.
"Who's gonna determine intent?"
The business owner, just like today.
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