FairTax Update -

Nealz Nuze Archives ^ | September 20, 2005 | Neal Boortz

[ancient_geezer]

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:

• search: "national sales tax" OR "national retail sales tax" OR "fairtax"

[Tenacious 1]

"Not as much of a problem as you may imagine. In fact, you'd probably be better off to wait until the FairTax is in place. Here's the way it shakes down."

I have researched since we last debated this. There are some holes and as Neil admits, it isn't perfect. But I am now an advocate. I disagree with the notion that prices will immediately drop. And I also believe there wil be a hiccup in the economy as consumers "reload." The hiccup will come from (In my opnion based on my own research) three effects.

1) Producers will balk at being the first to "dramatically" reduce prices (before tax prices) as they cannot forecast future costs until current inventory is depleted. Further, there will be incentive to make the money available while hedging bets on consumer suspicions about product costs. They may be concerned about an immediate drop in sales while consumers wait out the price correction for the added tax.

2) If prices take 3 months to "correct" for the tax, consumers are not going to immeidately see disposable income SAVINGS to buy the immediately more expensive products. The price jump might be intimidating at first while only adding %15 to their takehome pay.

3) Finally, (I have not seen this in any publication) price reduction due to "hidden/embedded taxes" are only going to be immediately recognized in labor related taxes. The raw material suppliers to production lines are not going to be able to immediately calculate the complete savings. Remeber, energy is taxed, insurance is taxed, leases and mortgages are taxed, fuel is taxed, etc. All of these factors build up to costs that companies must cover in the price of their goods. The price drop might take a while to get manageable.

While the price correction is being driven by supply and demand to make sales, companies are only going low prices as much as they can continue to forecast profits. That chain starts at the very bottom of several companies. At the same time, consumers get excited about extra income but may start saving it faster than they spend it. Saving money is good but it does not drive the economy. Spending drives the economy.

[Tenacious 1]

Add me to the ping list, please.

[ancient_geezer]

U'r on the pinger, Welcome aboard.

[pigdog]

I don' know if you noticed in the bill the provision for the Transitional Inventory Credit which gives those with inventory on hand the opportuniy to drop prices on that thing 23% on day 1 of the FairTax. that's quite a good impetus. Here's a very helpful post on the matter from an earlier thread:

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

From H.R. 25, found at thomas.loc.gov:

"....`SEC. 902. TRANSITION MATTERS.

`(a) Inventory-

`(1) QUALIFIED INVENTORY- Inventory held by a trade or business on the close of business on December 31, 2006, shall be qualified inventory if it is sold--

`(A) before December 31, 2008;

`(B) by a registered person; and

`(C) subject to the tax imposed by section 101.

`(2) COSTS- For purposes of this section, qualified inventory shall have the cost that it had for Federal income tax purposes for the trade or business as of December 31, 2006 (including any amounts capitalized by reason of section 263A of the Internal Revenue Code of 1986 as in effect on December 31, 2006).

`(3) TRANSITIONAL INVENTORY CREDIT- The trade or business which held the qualified inventory on the close of business on December 31, 2006, shall be entitled to a transitional inventory credit equal to the cost of the qualified inventory (determined in accordance with paragraph (2)) times the rate of tax imposed by section 101.

`(4) TIMING OF CREDIT- The credit provided under paragraph (3) shall be allowed with respect to the month when the inventory is sold subject to the tax imposed by this subtitle. Said credit shall be reported as an intermediate and export sales credit and the person claiming said credit shall attach supporting schedules in the form that the Secretary may prescribe.

`(b) Work-in-Process- For purposes of this section, inventory shall include work-in-process.

`(c) Qualified Inventory Held by Businesses not Selling Said Qualified Inventory at Retail-

`(1) IN GENERAL- Qualified inventory held by businesses that sells said qualified inventory not subject to tax pursuant to section 102(a) shall be eligible for the transitional inventory credit only if that business (or a business that has successor rights pursuant to paragraph (2)) receives certification in a form satisfactory to the Secretary that the qualified inventory was subsequently sold subject to the tax imposed by this subtitle.

`(2) TRANSITIONAL INVENTORY CREDIT RIGHT MAY BE SOLD- The business entitled to the transitional inventory credit may sell the right to receive said transitional inventory credit to the purchaser of the qualified inventory that gave rise to the credit entitlement. Any purchaser of such qualified inventory (or property or services into which the qualified inventory has been incorporated) may sell the right to said transitional inventory credit to a subsequent purchaser of said qualified inventory (or property or services into which the qualified inventory has been incorporated)...."

Because of the foregoing section, prices can be reduced by 23% ON DAY ONE, without any reduction in the profit margin of the business. This will provide great incentive to reduce prices by that amount, allowing net nominal price to remain constant. Competition will inevitably result, and most, if not all of this credit will be passed to the consumer. Of course, businesses may choose to utilize the value of that credit to boost employee pay or to retain it all to boost return on investment for the shareholders or to reduce prices...or some combination of the three options. It will be up to the market to allocate the incidence of the credit.

As the economy adjusts to a new equilibrium, the invisible hand of the market will likewise allocate the incidence of the consumption tax. Whereas consumption taxes are thought to be fully incident on the consumer, that is false. * Consumption taxes, like corporate net income taxes, can be incident on any one or combination of three groups: Consumers, employees, owners. As nominal prices rise, some reduction in consumption is likely. That will effectively push some of the burden back onto employees in the form of reduced wages, and back on to owners in the form of reduced return on investment. This is critical to understanding why the FT is superior.

The key points to remember are these:

1. The FairTax is calculated to be revenue neutral. This means the size of the 'tax wedge' is unchanged. Total purchasing power of the American people will remain unchanged.

2. There will be shifts in the incidence of the tax. Those who currently make their living from tax-free investments/sources like municipal bonds (Ta-RAY-za Heinz - Kerry - Heinz), drugs, prostitution, illegal aliens, will see a reduction in their purchasing power under the FairTax. For the first time, they will be paying their fair share. Those who are currently paying income taxes (middle America) will continue to pay taxes in the form of the consumption tax.

3. The WTO has been at war with the US for years. (Please see: Domestic International Sales Corporation, Foreign Sales Corporation, Extra-territorial Income Exclusion) The WTO has categorically refused to allow the US to 'border-adjust' the cost of the Corporate Net Income Tax from the price of exported goods. By contrast, the WTO permits the VAT (another consumption tax) to be border adjusted fully. Because the incidence of the VAT is allocated in the same manner as the CNI, This artificial distinction puts US goods at a distinct disadvantage in the world market. Please see above.*

4. The FairTax broadens the base over which the Social Security tax is imposed. We must broaden the base and increase the incidence of this tax if we are to 'save' social security---a questionable goal at best, but that's another rant.

5. The pay-as-you-go nature of the tax will eliminate the need to lien/levy private property to enforce the tax. The FairTax will strenthen private property rights. Sure there will be cheats, but audit and enforcement will be directed at retail outlets who conspire with consumers to evade the tax.

The FairTax is not perfect, but it's the best of all the proposals I've seen thus far, and I've been watching the Fundamental Tax reform movement for over a decade now. If you have a better system, I'd really like to hear about it.

316 posted on 09/16/2005 3:20:11 PM PDT by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)"

As for the removal of business income tax costs from prices that will happen quite rapidly - and it is not dependent upon payroll reclines at all. Here's one example of how the embedded tax mechanism works - #96 on this thread:

http://www.freerepublic.com/focus/f-news/1486100/posts?q=1&&page=51

Once the income tax is gone the market will move to correct for its demise quite rapidly I think and in fact the smarter retailers will jump the gun on the FairTax by offering lower prices before the FairTax even takes effect since there will be a run-up period after the law passes and before it is legally in force.

[groanup]

I see the big circle around the IRS. Either that or it's "I Want to be a Fireman When I Grow Up" by B. A. Squirrel.

[pigdog]

Truly funnie!!

[Logical me]

Thank you. This explains much. I'm going to hold off and see what happens. My old clunker will run for a while. Thanks again.

[pigdog]

If you' beg, borrow, or steal (or mebbe buy) a copy of THe FairTax Book it would help understand even more I think - or check the wealth of information on the FairTax website:

http://www.fairtax.org/research.html

or even read a few pages of the bill itself (it's an easy read and is actually shorter that the book, but the book is more entertaining):

http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

[ancient_geezer]

or check the wealth of information on the FairTax website:

Some more useful links with lots of information:

http://www.fairtaxvolunteer.org/smart/industry_impact.html

http://www.fairtaxvolunteer.org/smart/rebuttals.html

[Tenacious 1]

I am aware of that provision and read it again to see if I missed it. I interpret it this way. There is a credit to be given to any business up to 2008 if there can be proved a loss of revenue based on previous (embedded) tax obligations once said inventory is sold. In otherwords, the government would be encouraging businesses to recognize savings immediately with current inventory for the new tax system. You surmize that this would encourage business to get an edge on their competition by undercutting them in price wars. Consider the cash flow in any business and then reconsider what industries your summation might not work for.

The construction industry fights a lot of layers and is almost all service related. It is also a very high risk, low profit, fiercly competetive industry. I am a part of it. I have tried to calculate this tax benefit for the construction of say a $100 Million new construction project. First, who pays the 23%. If a brick is a brick when it is sold as the final product to the consumer (mason) then is the whole building taxed per cost of construction to the owner at 23%? If I read the law right, there is no tax when a company buys the brick from the manufacturer. The manufacturer has lots of overhead wrapped up in equipment, buildings, materials, labor, legal, Admin, insurance, etc. Does he immediately lower his/her price? Take on up the line. He buys pigment for his different brick from a supplier that also has a factory but owns several mining operations and trucking companies. Dial in on the Trucking Companies. Then move to the trucking manufacturers. Move to the steel suppliers. Move to the miners, to equipment manufacturers...... Now, back to the brick. Multiply this complicated process times about 500,000 other parts, peices, materials and services and pretend you are the at risk General Contractor hoping to clear 1.5% profit at the end of the year (and that is realistic). The GC cannot afford the cashflow associated with dropping price to beat the competition to an "estimated" level of what will be the future cost of doing business.

This is the industry I know best but I am sure there are other ugly examples out there.

I will wait for your response.

[groanup]

My take is a bit different than what you may hear from some of the other FT's. I don't really think prices will come down all that much simply because of leeway from imbedded taxes. I believe that, since workers have more take home pay, and since producers of goods and services will lose the annual cost of tax planning, tax avoidance and just plain tax, that we will see only a small and temporary increase in prices.

Now is that a bad thing? Sure. The problems I foresee are many: 1. Revenues to the treasury will drop because people will tend to buy used or would have bought as many durable goods as possible before the implementation. 2. Retail sales will suffer and could be a drag on the economy. 3. A lot of people will be able to adjust their lifestyles upward immediately by several methods including finally buying that plasma tv but buying it at the pawn shop so the savings rate will probably stay the same or even go down.

BUT. Retailers with inventory will adjust their prices downward to move that merchandise. Used goods merchants will quickly run out of stuff which they will want to replace quickly (they want to stay in business right?) so there will be an immediate floor on the price of trade-ins and used goods. So the spread between the prices of new and used goods will narrow.

The average worker now has a lot more money coming in every month. If his TV is getting snowy AND his carburetor is having problems he has a lot more options and a lot more money than he had before. He can buy a used TV. He can defer the TV until next month and fix the carb. The one thing he has now that he didn't have before is a choice. Before, he lost 20% of his paycheck before he even saw it. Now he has all of his money and can opt to pay his fed gov taxes when he wants to.

The construction industry, like everyone else, will have to adjust. But, once again, the spread between new and used will narrow. In that industry, unlike many others, as you state, the parts required are numerous and each and every maker will have a good reason and good leeway to ultimately lower prices. But just like we did in the 1970's when inflation grew far more than any 23 or 29% we will adjust. After a period of adjustment there will be a period of economic boom which hasn't been seen since the dawn of the industrial revolution.

[Man50D]

Great article! Keep up the pressure!

[pigdog]

I may have unintentionally confused things when I posted about two different things without distinguishing adequately between them.

Let me try to rectify that.

---

1) The Transitional Inventory Credit -

This is for a retailer selling goods (inventory) subject to the 23% sales tax. There is no requirement for a loss OR a profit, but merely that it be sold up until the deadline you noted and it applies to inventory on hand but not new inventory as the FairTax takes effect (since presumably income tax will have already been paid). It is important to note that this is for taxable items only and therefore does not cover business to busines sales which you use in most of your examples but only things sold at retail. I cannot tell from your description whether whatever you sell is taxable per the bill or involves selling to other businesses. If you have property already purchased and "in inventory" and you sell it to an end consumer (at retail) before the deadline, then you would indeed qualify for the 23% credit called in Section 902. This would certainly be an incentive to pass at least some part of that saving on to the retail buyer. If not, you can be sure that your competitors probably will.

The comments I made at the end of the post about retailers jumping the gun in lowering prices related only to this credit, nothing more. This is a totally separate issue from the comments relating to embedded taxes and I should not have mixed them.

---

2)Embedded taxes -

It seems to me if I read your examples right that this is what most of your examples deal with and certainly you are correct that time-wise this is quite different that the TIC above (which is an immediate credit). The embedded taxes are now in the system and it will take some amount of time for them to work through the system and see lowering of prices as the embedded taxes are squeezed out.

As that sort of price decrease occurs, then the different businesses in the chain supplying businesses such as yours will be able to lower their prices as THEIR suppliers will be able to do also. Obviously you would not need to estimate future costs and price accordingly - at least to any great degree - but you may be able to get notification of upcoming price drops from your supplier and plan accordingly. You'd have to keep aware of what you competitors might be doing along those lines but still that is not something that will happen on day 1 as with the TIC. Certainly there is a lead time involved and you at the end of the chain would normally not be the first to start dropping prices.

It will happen, though, and fairly rapidly so you'd be wise to have it in the back of your mind and be on the lookout for it.

---

I hope that helps clarify a bit of the confusion I may have caused. What sort of customers do you sell to? Are the businesses? Individuals? Both?

[FBD]

bump^ thanks for the ping

[Fraxinus]

I doubt that the IRS will actually be eliminated. It will probably morph from hassling individuals about their incomes to hassling businesses about their receipts. This will be a smaller group of people and depending upon how complicated the tax is for the retailers, may be rather difficult for them to cheat on.

What I like about this tax is that the companies that are going to take the biggest hit are those that import their products. The cost of production for them will be unchanged but their domestic competitors will have decreased cost of production.

[Tenacious 1]

"What sort of customers do you sell to? Are the businesses? Individuals? Both?"

I am a project manager (Engineering background) in the commercial construction Industry. Right now I am managing a large part of a pharmacuetical research building ($200Million) for a well known company. We get price increase notices all the time as the market demand for raw materials grows over seas. It is pretty tough to stay just barely in the green. Too much in the green and competition gets the work. Too cheap and competition gets the work because we go out of business.

[OKSooner]

Ping.

[pigdog]

It sounds as though you don't have any taxable sales under the FairTax if you're selling to other businesses who use their buildings for bsiness purposes. If that's the case you wouldn't be involved in collecting taxes from them as those sorts of sales are not taxable.

The downside to that is, of course, that you don't get paid the 1/4 of 1% of the tax revenue in return for a two line report each month.

[Paul C. Jesup]

I doubt that the IRS will actually be eliminated. It will probably morph from hassling individuals about their incomes to hassling businesses about their receipts.

Actually from what I understand, HR-25 takes the direct collect and enforcement of said collection of taxes out of the hands of the federal level and puts in state and local levels.