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.
I can't understand how but on two occasions when I started to post the above, pigdog's name was in the To: place although it was sitetest's post that I was replying to. I made sure I pressed the correct reply button but pigdogs name popped up. Sitetest, maybe you have been hacked. :-)
Dear Mind-numbed Robot,
I didn't say that rich folks don't buy stuff that will be taxable. What I said is that overall, their purchases will be a much smaller percentage of their income than the non-rich.
Thus, family of four with $60,000 in annual income will likely spend better than $50,000. Family of four with $6,000,000 in annual income will likely spend some hundreds of thousands, or even into seven figures in "retail" consumption. And a large chunk will typically be non-taxable stuff. But probably close to half, or more, of that income will be re-invested. By the way, rich folks don't keep a large portion of their assets in "the bank." What happens with the bulk of the re-invested assets is that they go to business for investment. Which is good!
But that money doesn't directly generate any taxes under the NRST. It needs to work its way through to the retail purchaser, or the employee spending his (gross? net? Boortz certainly didn't seem to know) income on taxable purchases. And frankly, in the CURRENT system, that money gets taxed even earlier in the cycle, in the form of corporate income taxes and personal and payroll taxes on the employee.
Anyway, if half their money is re-invested, probably $3 million goes untaxed. Under the income tax, the $6 million will be taxed, probably around a total rate of about 20% - 25%.
Another place where we lose revenue is when the very rich change their investment portfolios. Wealthy Mr. Smith thinks IBM's not going to market perform, so he sells 50,000 shares, and pays federal 15% capital gains tax. He takes the proceeds and buys 250,000 of some microcap company that has a new method of building widgets.
Under the NRST, that tax is no longer paid. Another way the rich get richer.
Overall, taxes on the rich will decline dramatically. Not for every rich person, but for the rich as a class.
Works for me.
"I am confident the tax money to run the government will be there."
Of course, there's always the middle class to pay.
And pay.
I don't really see the tax base expanding enough to: 1. get more low-income folks netted out of the tax scheme (through the "prebate"); 2. dramatically decrease taxes for rich folks; and 3. Not hit middle class folks hard.
Not everyone can be a winner.
sitetest
Don't forget about the brake on the economy of compliance costs...currently poured down the toilet and non productive. Turn that into productive investment and each class of people will have to pay a smaller share. The economy gets better and all boats rise.
Until little people have money to save and invest either in investments or themselves, their opportunities are limited. Work more hours, get higher pay per hour, spend less money and save it. Give them a little more money up front and an incentive to save and invest with almost no taxes and see how they prosper. Who cares if the rich get richer as long as the poor get richer? Take the brakes off!
The very rich don't pay their fair share now through avoidance and foundations, just look at Mrs Heinz-Kerry.
Make America truly a land of opportunity for its citizens.
The rich will always spend less of their total than the poor. That is a no brainer. What is a mistake, in my opinion, is to care about it and to consider it wrong. What is the purpose of being rich? Why try to be rich? What is the penalty for being poor? Why try to work your way out of being poor?
The left solves the problem by taking from the achievers, the rich, and giving to the non performers, the poor. That minimizes the advantage to being rich and it aleviates the burden of being poor. That is not natural. The government has no place deciding who should have what.
You keep saying you don't begrudge the rich their success but at the same time you bemoan that they have more money than the poor. What is with that?
It is a well known axiom that if some higher power took all the money in the world and distributed it evenly among the population, in short order 20% of the people would have 80% of the money. That is with no cheating, stealing, or double dealing. That is the difference between the doers and the others and natural human commerce.
Shortly after than the 80% of the money owned by the 20% would be redistributed so that 20% of that 20% would own 80% of that money. So at the end of that short cycle, 4% of the population would own 64% of the money.
That is with a hypothetical fixed amount of money. We know that is not true in the real world. That hypothetical pie grows so that even though the money is redistributed all, even the p[oor, are able to do better. Henry Ford paid his workers a high salary for the time. He didn't have to, he wanted to. He wanted them to buy his cars. Smart businessmen do that and only the smart survive.
That is a natural progression among human beings of different talents and different desires. What makes the pie grow is that the people with the bulk of the money put it to work to make even more. That makes more money available to the others. They get their share according to their ability, how hard they work, and how lucky they are. Same with the rich folks.
Why should the government interfer with that?
Did you read anything I wrote? If they are making money its a business with a profit motive and result..Evidently profit is the only difference. So now I must keep records of my expenses and revenues so that I can show the government how much profit I've made.
I agree and I have seen some good points regarding these aspects on these threads by those opposed to the NRST. I understand and accept that full gross pay and a 23% price decrease is not possible. However, it is not an either or situation. In my opinion, if pay did reach 100% gross, we would still see some price reduction. The result would be a slight increase in purchasing power, but not an exponential (doubling) increase.
This doesn't kill the idea for me. I would still prefer the NRST over any income tax.
If I may be so bold as to slightly modify this to read:
I understand and accept that full gross pay and a 23% price decrease is not immediately possible. I will concur with that.
Perhaps that is what the entire argument is all about as I have no doubt that 18 months after the fairtax becomes the law of the land both of those things will have been realized.
Dear rolling_stone,
I've rolled around with this part of the conversation more than once with other posters. As a small business owner, I don't find that tax compliance costs me very much. There are whole other sets of governmental compliance burdens that I bear, some direct, some indirect. They have to do with regulations concerning safety and health, wage, overtime rules (very complicated and ambiguous, those), rules about offering health insurance, anti-discrimination laws and rules, rules affecting how I may hire and fire.
My tax compliance costs are less than 1% of my revenues. Having had this conversation with NRSTers before, I'm willing to admit that some businesses have bigger compliance costs than I do, but I doubt it tops 2% of GDP.
And most of my tax compliance costs (as I've explained before) just won't be going away. I will STILL have to report all wage data to the federal and state governments, I will STILL have to pay unemployment insurance, and workers' compensation insurance, which require that I permit audits of my books. And in my case, because I sell only services, I will now have new compliance costs related to collecting the national retail sales tax.
Of the fraction of 1% that I currently spend on compliance, maybe I'll save some. Maybe not.
"Until little people have money to save and invest either in investments or themselves, their opportunities are limited."
As either both take-home wages AND prices will go up nominally, or take-home wages AND prices will nominally stay around the same (after taking into account the addition of the NRST), "little people" won't have any more money to save and invest. And "little people" already have tremendous incentives to save, in the forms of all the different qualified retirement accounts and other qualified savings accounts that are available.
And a lot of "little people" actually make use of these accounts. 50% of households own equities, either indirectly through mutual funds, or directly. Most households hold these assets through retirement accounts.
"The very rich don't pay their fair share now through avoidance and foundations, just look at Mrs Heinz-Kerry."
We don't really know the shape of her finances, and thus, we don't really know what she's really earning and really paying.
What we DO know is that the very rich actually DO pay most of the income taxes and capital gains taxes in the United States right now, and that this actually does, on average, come to a significant percentage of their income.
Whast we DO know is that very rich folks consume a much smaller percentage of their income, on average, than middle class folks, and thus, the NRST will be a significant tax cut for them.
Which is fine by me, as I'm working to join that class.
But if these folks, who pay the outsized portion of taxes now, have their tax liabilities drop, someone has to pick up the tab. We know it isn't the poor. So if it isn't the very rich, or the poor, guess who gets the tab?
Because it's revenue neutral, it's a zero sum game.
sitetest
Dear Mind-numbed Robot,
"The rich will always spend less of their total than the poor. That is a no brainer. What is a mistake, in my opinion, is to care about it and to consider it wrong."
I never said anything regarding the morality of the situation.
I'm looking at the practical consequences. The bill is revenue neutral. If the poor continue to pay nothing, if a few more folks near poverty level pay less than they do now, and the rich get a big tax cut, then someone's gotta pay for all these winners. If some income groups - the poor and the rich - see drops in their tax liability (and for the rich, it will be a very big hunk of the total taxes collected, as these folks pay the bulk of taxes now), then someone's taxes are going up.
Guess who is going to get socked?
sitetest
But the ball and chain has disappeared.
ok. You win. I just want the madness to stop. Did you hear about the new Dem savings plan called Amerisave?
Excellent observation - but many of the naysayers can't/won't think that far ahead.
Naw, Nightie ... the fly in your particular ointment lies in the conversions of things bought tax-free as a "business" that you convert to business use.
As I pointed out earlier, there are a lot of ways that can cause the state tax folks to visit for a nose to nose with you.
Be sure and take a pencil with you (dull-pointed, of course) so you can send us your cell number.
Observation? It is an opinion of someone who has been hoodwinked into the fairtax myth for over 6 years and now is rationalizing that thoroughly discredited belief. You guys continue to stay in denial.
The "poor" don't pay "nothing" under the FairTax. They pay taxes at the same rate as everyone else and thereby have a stake in the economy and its performance that they do not presently have.
The rich also get no "... big tax cut ..." so you're incorrect on both ends of the economy. The accumulated wealth of "the rich" becomes taxed as it eventually becomes used for consumption. In the meantime if it is invested it merely helps boost the economy by offering more opportunity in the way of new or expanded businesses or jobs for other taxpayers. That's altogether good.
"To summarize, old Boortz: embedded tax doesn't include employee's tax, more take-home pay than now, post-tax prices same as current price. New Boortz: embedded tax included employee's tax, same take-home pay as now (or possibly an increase), post-tax prices the same as current prices (or possibly more if the employees keep more than their current net)"
The older page 83 quote you give says nothing about embedded tax being included in employee's income/withholding tax (or not), but it does say "more takehome pay" with after tax prices (including the FairTax) remaining about the same due to:
"As soon as the competitive forces of the free market work their magic, as they always do, consumers of all incomes will be paying at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter, and transportation."
As for the "New Boortz" comments you quote, the only real difference that can be seen is that he now says employee income/withholding are now included in "embedded tasxes". As for the more takehome pay with after tax prices about the same (including the FairTax) - that seems to remain as it was despite your summary since he says:
"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"
... which certainly means a takehome pay increase rather than the "... same take-home pay as now (or possibly an increase) ..." that you have in your quote. If the employer is adding something to your paycheck it is certainly not going to be the same as your previous takehome pay, but instead will be more. Also in your "New Boortz" quote does he say anything about price levels after the FairTax becomes law as you state in your summary.
the only thing that can be seen from the quotes you post, it seems, is that the writer now includes employees income/withholding taxes as "embedded taxes" - which is probably not correct at all. And, in fact, that may have been his intent in the book (which was not definite as I pointed out about your page 83 quote).
So I don't see it as "finally admitting" anything except to perhaps (or perhaps not) mis-classify wage taxation. But then, Boortz is hardly an economist and does not pretend to be, so I see little of any sort of "finally admitting" in your quotes at all.
Who gets socked now? If your answer is the rich that highlights our disagreement over how much they pay in aggregate versus the middle class. Remember there are lots more of the middle class than the rich.
Indeed! I have heard it said that "there are none so blind as those who will not see!"
Exactly!
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