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.

The current system isn't a "house of cards", it's a slaughter house.

I take it then that you want two slaughter houses imposed on us??

I just wish that these so-called 'Fair Taxers' would just ONCE comment on the transition phase between two different tax systems. Or else you will end up paying BOTH.

OXYMORON CHECK: 'Fair Tax'

I'm a big FT supporter but I think Boortz is dancing with a hyena here.

He is attempting to shoot straight and he seems successful. He did however, fail to list compliance costs as an embedded cost of the present system. Not only is that a big cost, it is also one thing that makes the present system so odious. Not only is the gathering and keeping of information a burden but the information itself which is supplied to an already overly Big Brother government is almost a complete outline of a persons personal history. And some folks worry about the Patriot Act??.

1. So you want to protect your own ass at the expense of others. You get your tax write offs but we get the slippery end of the stick. Thanks. Don't do us any more favors.

Yes, that is my right to stick up for my interests. There are millions of Americans who do not make out with the fairtax.

2. BS. You are, once again, misrepresenting what is being stated.

No, you fail to understand the signficance of what is being stated. The debate over whether employee taxes were included in Jorgenson's 'embedded tax' number has been a huge point of contention. One that totals more than $1.3 Trillion a year. This one slight of hand amounts to fairtaxers misrepresenting the economic impact of the fairtax by nearly 10-15% of our GDP.

Does anyone think corporations will not keep the money for themselves?

They could do that yes. They could also continue to pay you your current gross salary but not have to pay the matching employer taxes. Or they could lower the costs of the goods or services they provide to the consumer.

They could do some combination of all the above. We have to remember that all they dynamics will change, but basic capitalism will not. If an employer chooses to keep all the extra money, but some other corporation doesn't and decides to pass on that money to employees and/or lower the costs to the consumer, then that makes employment at the other firm more appealing and makes that firm's product more appealing to the consumer.

All the dynamics will work themselves out it the free marketplace. It may not happen overnight, but they will level out.

I'm a big FT supporter but I think Boortz is dancing with a hyena here.

I'm not sure what "dancing with a hyena" means (should I?), but it seems clear that Boortz didn't understand Jorgenson's research when he wrote the book.

He says in his "Quick Review" that "We all get virtual raises, since payroll taxes are no longer siphoned from our checks" and "The price of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax." This isn't a matter of "present[ing] with more clarity." It's very clear in the book what Boortz believed - it just wrong.

Instead of admitting that his big NY Times #1 bestseller is flat out wrong about a critical issue, he's now just trying to spin it.

I had little respect for Boortz before and I have even less now.

I wonder how Fair Tax proponents will react to this startling confession.

Not at all most likely. I my own little self pointed this out several times on these threads and that had little impact on support for the plan. The elimination of the cost of withholding, the cost of complying with the present system, and the elimination of business decisions made strictly for tax purposes more than offset that. With the elimination of those costs it is possible for prices to be lowered. It most fields competition will see to it. Add to that the prebate on the taxes paid for necessities and the consumer is back even in his everyday life but with a much improved attitude toward the world and our government.

Yes, that is my right to stick up for my interests. There are millions of Americans who do not make out with the fairtax.

Sticking up for your interests is one thing. Screwing the 100-200 million of the rest of us just so you can keep playing the current system is despicable.

No. It represents your misrepresentation of the facts so that you can keep playing the current IRS system to get your tax breaks. For still others, they LIKE a progressive tax scheme.

Keep cheerleading for keeping the current IRS system in place. That'll win your side a lot of converts 'cause everyone loves the IRS.

You discount the broadening of the tax base. The Fair Tax will not only capture the underground economy, tax cheats, and others when they spend their money but it also takes an equal amount from the average family. A family of four with one wage earner has one income taxed. (Two wage earners don't make any difference for this example.) However, that one wage earner buys for four, so his family now has effectively four tax payers.

High wage earners usually also buy more even if it is just for themselves. The rich certainly do. For one who has an interest in fairly viewing this that is not hard to see.

Sticking up for your interests is one thing. Screwing the 100-200 million of the rest of us just so you can keep playing the current system is despicable.

Your cheerleading a 30% sales tax making phoney claims is despicable.

No. It represents your misrepresentation of the facts so that you can keep playing the current IRS system to get your tax breaks. For still others, they LIKE a progressive tax scheme.

No my facts are rock solid and undeniable. BTW, go visit the fairtax FAQ, they admit the fairtax is a progressive tax scheme too.

I just wish that these so-called 'Fair Taxers' would just ONCE comment on the transition phase between two different tax systems.

So unless the transition phase is pain-free, it is not worth doing a reform? The reason we are in the situation we are in the first place is because politicians fooled people into thinking that only the rich would be taxed. Now, we have this awful system. It has to be destroyed. It will probably be painful no matter how we do it, but it must be done.

The Fair Tax will not only capture the underground economy, tax cheats, and others when they spend their money but it also takes an equal amount from the average family.

Correction: The Fair Tax will not ~~only~~ capture the underground economy, tax cheats....

When I do a service for $130, I can legally only keep $100 and must remit the $30 to the state. I have $100 to spend. When a drug dealer/prostitute get $130 they keep $130 and have $130 to spend. They cheated the fairtax system $30.

I already pinged pigdog much earlier

"dancing with the hyena" means you get eaten when the music stops.

I'm beginning to believe that Boortz and Linder mis-spoke entirely and missed by a mile the greatest benefit of the fair tax. I don't believe that once the IT is eliminated that employers are going to make some arbitrary decision on how much to pay their employees. They pay them their gross - PERIOD.

The net result is that everyone's income goes up. The employer no longer has compliance costs, FICA, income tax liability. The employer will have SOME room to lower prices. I think that is in the neighborhood of 10-18&.

If all goods and services suddenly become tagged 20-30-% higher in price due to the NRST, there will be a transition period where retail sales will lag. In order to jump start those sales, sellers will lower prices.

Joe Blow has his whole paycheck which is probably 15-20% more than it was before.

But,guess what, if Joe's car needs repair unexpectedly he can defer paying taxes for a month or more. He can buy used and he will be getting his pre-bate for necessities.

Under today's system Joe doesn't have a choice. He has to pay those taxes every month. So he has to give up something, maybe his monthly contribution to his IRA. Under the FT he can give up paying Uncle Sam for a while.

If we assume that the "average American" spends his entire paycheck on goods and services and also assume that "the fair tax" will increase the cost of what he buys by 22%, then the "average American" will need a pay-raise of 22% just to stay even.

Us fair taxers are accused of double dipping on this issue and now that has been clarified you aginners are guilty. It is not logical to assume that prices will be unaffected by reduced costs. The market takes care of that.

However, for the sake of discussion, assume you are correct. After a short while the market will again level things out. If prices go up and people can't buy then products will sit on the shelf and services will go unused. That will cause prices to drop and the increased economic activity will cause a greater demand for labor. That in turn increases what employers will pay for workers and things are settled back down again.

Let the market work. It is self-correcting and eventually benefits everyone. The Fair Tax does that. The present system is indirect central control and top down government management of the economy. That is a failed system everywhere it is used because it is designed to benefit the controllers, not the consumers. The market is the Golden Rule in operation, by necessity.

Example. I make around $1200 a week, but due to taxes my current take home pay is about $900. After the NRST, if my pay is re-adjusted to $1100 a week, but I'm taking home ALL of it, I'm $200 a week to the positive.

In the case you describe, prices must go up. The only way prices don't go up under the so-called "Fair Tax" is if employers reduce your gross pay to your current net pay. And if employers reduce your gross pay to your current net pay and prices don't go up, you are in the same position you are today.

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