Fair Tax - 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.

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.

He's not MY expert and I doubt that you have any proof that he was paid as you claim. In addition, all he said was that for the purposess of his model he assumed that wage were removed. That's not at all the same as saying that they will be taxed undet the FairTax. The main focus of his projection was, after all, the longer range economic effects on the economy and there is nothing in his model at all that shows he concluded in the model that wages were reduced or held at present net levels.

They could just as easily have been raised to 100% of gross pay which if you'd stop to think about it is by far the most likely result due to outside influences on the employer if for no other reason. Even so, it is pretty clear that with the removal on the business tax costs that prices will decline with the advent of the FairTax. The only unknown is how much. My bet is in the 15% or greater range for price reduction. We'll have to wait and see.

I don't get to follow these threads during my workday..

But I got to thinking about the fact that Under the Fair Tax system.. the cost of a stamp would raise to about 9-11 cents per stamp

28%= 9 cents
29%= 10 cents
30%= 11 cents

Remember the Postal System is a Service.

I just thought it was interesting when you get to knocking around the costs of things and services of what things would cost if the system as Neal boasts is implemented.

He's not MY expert and I doubt that you have any proof that he was paid as you claim.

Well, here is a fairtax powerpoint presentation located on a fairtax website which includes background information on the fairtax. They clearly say that Jorgenson was funded by AFFT.

http://www.mnfairtax.org/resrcs/pp_pres.ppt#1

Not - that's NOT what it says at all. It says he was a participant in economic research. It doesn't say he was paid. You'll have to find his cancelled check (or something akin to that) to make such a claim and have it accepted.

Also, you'll notice that stated is a range of reduced prices (from income tax removal) of from 18-28% and NOT the 23% that has been so widely misused by FairTax opponents.

A nice ppt presentation - which I'd seen earlier, but thanks.

ROTFLOL....you can't be for real? It's a well established fact that Jorgenson work was paid for by AFFT. The link provided is more than adequate proof. A cancelled check? LOL, you are a piece of work.

But I got to thinking about the fact that Under the Fair Tax system.. the cost of a stamp would raise to about 9-11 cents per stamp

28%= 9 cents
29%= 10 cents
30%= 11 cents

Remember the Postal System is a Service

First I believe the correct percentage you were looking for was %23. Also, the cost of doing business will go down, admittedly for some more than others.

As for the U.S.P.S., I assume they get tax breaks as is, (I may be wrong about that), I'm sure they can cut spending since I used to sell them $100s of dollars of pizza, and we as postal customers picked up the tab!

So I'll give ya a penny or 2 on a stamp, by the way I thought it would be a VERY GOOD idea if I posted a link to the bill since I didn't see one anywhere else on the forum, so here it is. Its pretty straight forward considering what it is.

HR 25

BUT.....

Per the WTO, ANY system of taxation which uses income as the base is not eligible for border adjustment. A flat tax would not be eligible for border adjustment....and our goods will still be hamstrung in the global market.

We must embrace a system of taxation which IS border adjustable if we EVER want to regain our economic strength and maintain our standard of living. Any thing else is like rearranging the deck chairs on the Titanic.

Thanks for the link to HR25 - we sometimes forget to post it assuming that everyone knows how to find it (which of course isn't true).

Actually, it's quite likely that postal rates wouldn't change at all since prices for the many things the USPS buys (including the $100s of $ of pizza before the FairTax tax) will decline and then be raised back by the sales tax to about where they are now.

Whose "well established fact"?? Yours? Show me the money.

OK, here's the 'money', Money Magazine:

In an eight-year-old study paid for by AFFT, Harvard economist Dale Jorgenson noted that because the taxes paid by everyone in the chain of production are embedded in the cost of goods, prices could decline an average of 20 percent if all those taxes were scrapped.

Not that this is an important point, because there are hundreds of links which show fairtaxers quote Dr. Jorgenson as the main source for the embedded tax claims, including Linder and Boortz and fairtax.org. The extent of your denial is unbelievable. You really can't be serioius, at least I hope for your sake you are not.

Nice of you to be concerned. That's not too helpful though since it is no better anecdotal information than what you offer. The reporter writing the article has a clear bias against the FairTax and its just as likely his "sourece" is Brookings Institute.

Your claiming that to be the case certainly doesn't make it true. I'm after definitive proof - not hearsay from a questionable reporter. You'll have to do better than that.

"Nothing at all. Which is why I am commenting on this topic."

Your objection seems to be that we shouldn't pass this bill because it will lead to both types of taxes being imposed on us. The reality is that nothing prevents this from happening today, yet the bills language restricts the ability to have both an income and sales tax at the federal level. You would have more protection from a two system tax than you have today.

This has been argued here for sometime, so here is the FINAL answer, quoted from the bill itself:

"(f) FINDINGS RELATING TO REPEAL OF PRESENT FEDERAL TAX SYSTEM- Congress further finds that the 16th amendment to the United States Constitution should be repealed.

TITLE I--REPEAL OF THE INCOME TAX, PAYROLL TAXES, AND ESTATE AND GIFT TAXES

SEC. 101. INCOME TAXES REPEALED.

Subtitle A of title 26 of the Internal Revenue Code of 1986 (relating to income taxes and self-employment taxes) is repealed.

SEC. 102. PAYROLL TAXES REPEALED.

(a) IN GENERAL- Subtitle C of title 26 of the Internal Revenue Code of 1986 (relating to payroll taxes and withholding of income taxes) is repealed.

(b) FUNDING OF SOCIAL SECURITY- For funding of the Social Security Trust Funds from general revenue, see section 201 of the Social Security Act (42 U.S.C. 401).

SEC. 103. ESTATE AND GIFT TAXES REPEALED. Subtitle B of title 26 of the Internal Revenue Code of 1986 (relating to estate and gift taxes) is repealed."

BUT..... Per the WTO, ANY system of taxation which uses income as the base is not eligible for border adjustment. A flat tax would not be eligible for border adjustment....and our goods will still be hamstrung in the global market. We must embrace a system of taxation which IS border adjustable if we EVER want to regain our economic strength and maintain our standard of living. Any thing else is like rearranging the deck chairs on the Titanic.

That sure brings up lots of questions:

What is a border adjustment? What does the WTO have to do with it? What if we have a so-called 'fairtax' and Canada or Mexico doesn't? Isn't the 23% difference enough to kill off our retail sales close to our border?

Also, how does this 'fairtax' treat IRAs which have already paid tax?

"Your fair tax has yet to edited in a tax committee. You guys are dreaming if you think that your law will remain pure."

I see. So the solution to the mess that we have for a tax system is to just accept whatever congress hands down to us. After all, they are the rulers and we are the subjects, right?

“I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accept it. Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power. Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.”
Alan Keyes “The Power of the Purse”, WorldNet Daily, August 27,1999

"Well, here is a fairtax powerpoint presentation located on a fairtax website which includes background information on the fairtax. They clearly say that Jorgenson was funded by AFFT."

I must have missed that part. Page 3 says that he was an "Economic Research Participant". I don't see any indication with respect to remuneration. Can you cite the page number where I can find that?

I must have missed that part. Page 3 says that he was an "Economic Research Participant".

Gee, let's see, page 2 talks about funding research done by colleges and page 3 identifies those who participated. I know it is a difficult concept having to relate ideas from one slide to the next, but I thought maybe you were up to the task. I thought wrong.

Taxes hurt whatever is taxed. Income taxes hurt income (production). Sales taxes hurt sales (consumption). I should be in favor of a FairTax (NRST) because the United States is consuming too much and needs more income.

If you think the income tax hurts the fruits of your labor (income), then the 'fairtax' will hurt the source of your strength (food).

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