Posted on 09/22/2005 12:29:37 PM PDT by pigdog
Under HR25, the IRS is both defunded and eliminated as part of the bill and the income tax records are required to be destroyed. It's in the bill.
The state sales tax aauthorities that presently collect sales taxes in the states are the ones who would aaadminister thr FairTax in their state. That's in the bill, too.
"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 specific issue I am addressing in my example is the theory that prices would immediately drop for all businesses and industries. In my research for how it would affect my industry, I do not see an immediate price impact reduction in the construction industry. There are too many services involved and to many business to business transactions that occur to build a new building. On top of that, the margins are so narrow and the cashflow is so low and the risk is so high, I believe there will be a long pause if the prices actually ever do come down. The price reductions to offset the 23% tax on the final product to the "owner" (my assumption that the end user or owner of the product pays it) will likely take a long time to be realized by the end user. Meanwhile, tack on 23% to the cost of a $200 Million project and most owners are going to balk at the cost.
Maybe I have this all wrong. Will there be tax on new construction? If a builder sells a house to a home owner, then I assume we tack on 23%. When an owner contracts out the construction of a new commercial building, he/she is not "selling" the product but paying for a product none the less.
Ask Neil. I would really like to get an answer on this. I am sure there are several other industries that this might apply to.
Thanks.
The TIC (Transitional Inventory Credit) is the one situation where prices could immediately drop.
The removal of embedded tax costs (the second factor mentioned in helping reduce prices) would be a broader and longer lasting effect. It would also take longer to come fully ino play but I think would show up in prices in the short term rather than long term. Certainly that will vary by industry but it will occur fairly rapidly, though not as immediately as the TIC.
You still seem to assume that the $200 million project will be taxable. There is a good chance it will not since it sounds almost certain this would be for busines use and therefore not taxable to the buyer. The use of the property involved by the purchser is important in determining its taxable status.
Let me see if his clarifies anything about the construction instances you posed since the use of the building must be considered ...
a) If a builder sells a house to someone who will live there (an end consumer's home), the consumer would be charged the FairTax rate (it may be less than 23% BTW by the time the bill is passed).
b) If a builder sells a house to someone who will be renting it to others (a landlord), there is no tax since the landlord is using it for business purposes - and he will charge tax to the renter.
c) If a builder sells a commercial building to a business for use in the business, there is no tax.
Perhaps it would help if you could be more specific about the exact meaning of your statement "When an owner contracts out the construction of a new commercial building, he/she is not "selling" the product but paying for a product none the less." That sounds like it falls under c) above as I interpret your meaning.
Also, you mention "Ask Neil". I don't know who you might be referring to - please advise.
In addition, I meant to mention that you should not overlook the effects that reduced interest rates would have on a large sized project such as he $200 million one you mention.
Here's a link to some helpful information about that aspect of cost reduction:
http://www.fairtax.org/pdfs/interestrates.pdf
lurking bump
"Perhaps it would help if you could be more specific about the exact meaning of your statement "When an owner contracts out the construction of a new commercial building, he/she is not "selling" the product but paying for a product none the less." That sounds like it falls under c) above as I interpret your meaning."
Here is an example of typical contract structure for a commercial building. I large box store retailer purchases property (which must have existed and is therefore not "new"). He contracts with a General Contractor to build a building on that site. The GC then contracts out to about 40 other contractors to put the work in place. Each of those contractors contracts to 5-10 vendors and suppliers. And so on....
The building will be used to sell stuff. But it is a new building. Someday that building will be sold but will be used. Under the new tax system, only end user personal consumers pay the tax. That means that MOST products in all industries will not be taxed as they are part of the chain on its way to the end user. It is mind bogelling.
Let's get this straight:
1. Prices from the elimination of so-called embedded taxes would fall by 23%. (let's skip the tax-inclusive vs. tax-exclusive problem) The fairtax would then raise that price back to where it was. (Fairtaxers claim that prices would stay the same.)
2. Meanwhile, my income tax goes to zero.
3. If prices stay the same, and I pay no income tax, how does the government get revenue?
Sounds like a lot of SOMETHING FOR NOTHING to me!
An income tax diminishes income. There are many examples of this. This was one reason why Reagan became a Republican, because of high marginal income tax rates that were affecting him. Look at Europe's high rates, and how the US is (comparatively) better off.
A sales tax diminish sales. There are many examples of this too. Look when (New York state?) reduced the sales tax on clothing. Sales increased dramatically. Look at the difference between Oregon and Washington. One has an income tax, one has a sales tax.
A 23-30% sales tax will DEFINITELY hurt sales. To not understand that woefully underestimates incentives/costs and people's/consumers/taxpayers reactions.
If I re-sell at my flea market, is the new IRS going to track me?
That would apply to the suppliers to your contracting organization also - they would not be charging you (nor would they be paying) any FairTax.
The principle is (which is clearly stated in the bill) that a thing is to be taxed at most once and only once - when it is sold for end consumption. Your chain of construction contracting would be outside that end consumption and therefore not taxable. The fact that someone pays for something is not the deciding factor, but the use to which the property (in this case) will be put and the intended use by the buyer. If used for business purposes in selling to others at retail, there is clearly no tax until the end of the chain - when things are sold at retail to end consumers by the retailer. The property would just be one thing used in furthering that business objective of the big box retailer.
The fact that it is a new building is not the consideration at all. And you're right ... none of the GC's subcontractors and/or their vendors will be paying any FairTax as things progress "up the chain". That's why it is important to grasp the idea of how embedded business taxes (not just corporate taxes) are removed from this process and how that can drop prices fairly rapidly as the process gets underway.
The earlier-mentioned TIC (Transitional Inventory Credit) is a Day 1 thing while the embedded tax reduction will happen in the first very few months - but it certainly will happen and it will eventually help your general contractor reduce his costs. Whether (and when) he passes this on to his big box retail customer is, of course, up to the contractor ... but - as you observe - there is some determined competition to consider. So it will be with other industries as well.
I hope that helps explain things. It is very helpful to keep the general principles of interpretation in mind since these are guidance to the legal system in considering any legal actions at a later time:
`(a) In General- Any court, the Secretary, and any sales tax administering authority shall consider the purposes of this subtitle (as set forth in subsection (b)) as the primary aid in statutory construction. `(b) Purposes- The purposes of this subtitle are as follows: `(1) To raise revenue needed by the Federal Government in a manner consistent with the other purposes of this subtitle. `(2) To tax all consumption of goods and services in the United States once, without exception, but only once. `(3) To prevent double, multiple, or cascading taxation. `(4) To simplify the tax law and reduce the administration costs of, and the costs of compliance with, the tax law. `(5) To provide for the administration of the tax law in a manner that respects privacy, due process, individual rights when interacting with the government, the presumption of innocence in criminal proceedings, and the presumption of lawful behavior in civil proceedings. `(6) To increase the role of State governments in Federal tax administration because of State government expertise in sales tax administration. `(7) To enhance generally cooperation and coordination among State tax administrators; and to enhance cooperation and coordination among Federal and State tax administrators, consistent with the principle of intergovernmental tax immunity.""`SEC. 1. PRINCIPLES OF INTERPRETATION.
And, YES, you're quite right - the tax philosophy is SO different from what we have had for almost 100 years that some have a very hard time grasping (or even believing) it.
Boortz glosses over this topic on pg. 169 of his book. I paid a BIG chunk of money in income taxes to convert to a Roth after 1998. Now I am supposed to roll over and pay an additional 23-30% sales tax when I spend it??
It certainly isn't "something for nothing" as we'll see ...
First of all - the embedded tax costs are not "so-called", but real and yes, they will fall when income tax is eliminated. I have never said this would be 23%, but IMO it would be somewhere in the range of 15-25% or possibly more depending on how the economy bumps upward. The decrease will be substantial, though, and it will help reduce prices.
The offset, of course is that things sold at retail will carry a 23% tax inclusive tax which raises the prices back up to about where they are presently; perhaps a little less, perhaps a little more(remember the FairTax is revenue neutral).
And, yes, your income tax has gone the way of all good things while your income is increased by not having to have income tax withheld on wages and by investment income not being taxed.
The government tax revenue comes from the tax on retail consumption sales and it is actually boosted even more by being able to obtain tax revenues from the "illegal economy" (drug dealers, illegal aliens, unreported cash betting, unreported tips, and even from visitors from other countries) all of whom will buy things at retail.
In addition to the above, foreign capital will be attracted into the country as a serious tax haven and this will help "boom" the economy even more creating even more tax revenue. The problem is likely to be one of us as taxpayers and voters insisting that spending be cut. Being in a position to do that with a tax like the FairTax is a good problem to have since the tax money is no longer taken by coercion up front.
But "something for nothing"??? Not on your life - just the working of a robust economy for a change, unhindered by tax policies.
I believe that you are not considering the entire tax dynamic when you say that the FairTax will hurt sales.
Keep in mind that prices will be reduced prior to the FairTax being applied and then be increased back to around what the were and you will have more money in hand to buy things with - no income tax, receipt of the prebate, a wider tax base with consumption rather than income, and a greatly expanding economy. Since the FairTax is revenue neutral there will certainly be little or no overall damage to consumption. The basic revenue amount is the same, it is being obtained differently ... BUT the tax will now apply to a part of the tax base that had not been taxed before to any great degree - the illegal economy.
Rather that hurting sales these things should, along with an expanding economy, greatly help sales.
I suggest you spend more time studying the bill itself. There are a number of definitions in the bill.
If you are re-selling in the flea market as you state, that would by definition be a used item and used, formerly taxed things are not taxed under the FairTax so the answer to your question is NO - on 2 counts:
1) There is no longer any IRS. It is eliminated along with the income tax (and defunded fo good measure) and income tax records are required to be destroyed.
2) Since you would be selling a not-taxable item no one would be "tracking" you at all - that's called "freedom" since presumably right now under the income tax even those used things you resell could be considered as earning taxable income (I know how the IRS agents I know and love would interpret that).
That depends ...
First of all not all distributions from Roth IRAs are free of tax. Check the tax laws more carefully and you'll see that is so.
Secondly, if you spend whatever you withdraw under the present income tax even if none of the withdrawals are taxed by income tax laws, you will still be paying a substantial "hidden tax" in the form of the cascading, embedded tax costs that boost the prices of all that we buy right now.
Under the FairTax this embedded tax cost is eliminated causing prices to drop (prior to applying he FairTax) so with that plus the prebate you probably are just about on an equal footing from the standpoint of purchasing power. But don't kid yourself, those hidden taxes presently are real and cost you money - you just may not think of them..
"The specific issue I am addressing in my example is the theory that prices would immediately drop for all businesses and industries. In my research for how it would affect my industry, I do not see an immediate price impact reduction in the construction industry."
When I studied this issue, it became rather obvious that the major variable in determining the level of imbedded taxes in a product is the number of levels in the supply chain. Big ticket items, such as real estate construction and automobiles, have deeper supply chains and therefore higher levels of imbedded taxes, assuming that those supply chains are in the USA.
"A 23-30% sales tax will DEFINITELY hurt sales. To not understand that woefully underestimates incentives/costs and people's/consumers/taxpayers reactions."
“In both Europe and Japan, incentives to generate the personal savings necessary for funding investment in new factories were emphasized. Consumer credit was limited, and in Europe retail stores operated on restricted hours and not on weekends. Sales and value-added taxes were levied on consumption, while interest income on savings accounts and stock dividend payments were exempted from taxation. In tandem with this effort to stimulate savings and investment went the provision of various incentives to spur exports……...
In contrast to Europe and Japan, the United States came out of the war as a major producer in almost every industry. It had no concerns about production. But its leaders were haunted by the fear that, absent wartime demand, the economy would lapse back into the depression from which the war had jolted it. America thus adopted a strategy of spurring consumption. Home mortgages were made easier to obtain, with interest being tax deductible. Credit cards were made easily available, and interest on consumer credit purchases was also made tax deductible, while interest and dividends earned on savings accounts and investments were fully taxed. So while Europe and especially Japan focused on saving, investing, producing, and exporting, America’s growth policy was one of borrow, spend, and consume.”
Pps 11, 12. Three Billion New Capitalists – the great shift of wealth and power to the east, by Clyde Prestowitz
As Prestowitz points out, our current tax system (well, actually our entire economic system) encourages borrowing, spending and consuming .... and it works VERY well, perhaps too well. Our massive and growing trade deficit and our virtually zero national savings rate are testament to that. The economic trends that we witness are simply not sustainable. We have two choices.
1. Ignore the warning signals and wait until the trends produce massive economic damage and pain, or
2. adjust all our economic systems (including our tax system) to align better with the environment of the 21st century.
Prestowitz does a good job IMHO of explaining how we got into this mindset of encouraging consumption as the major foundation of our economic philosophy. It may have been appropriate for the post WWII timeframe, but it is going to cause massive economic pain if we don't adjust soon.
"First of all - the embedded tax costs are not 'so-called', but real and yes, they will fall when income tax is eliminated. I have never said this would be 23%, but IMO it would be somewhere in the range of 15-25% or possibly more depending on how the economy bumps upward. The decrease will be substantial, though, and it will help reduce prices."
AFFT has commissioned new economic studies on the issue of imbedded taxes, as well as other aspects. It looks like the new studies will support about a 10 - 12% decline in pre-tax prices (of US produced goods, of course).
AFFT has commissioned new economic studies on the issue of imbedded taxes, as well as other aspects. It looks like the new studies will support about a 10 - 12% decline in pre-tax prices (of US produced goods, of course).So the AFT is paying for more studies to show embedded taxes after their last one was shown not to be too positive? Are these studies going to include personal income and payroll taxes like the last one? If they do, is the AFT going to tell us (unlike the last one). Are you using Jorgenson again? If not, why not?
A 7-8% drop is a given. Taking it up to 12% can only come about by some rosy assumptions, but not completely out of the question. But even with their 12% will result in more than a 14% (.88 x 1.3) after tax price increase. I usually figured a 17-20% increase, but if they claimed a 14% increase I would not consider them liars like I do when they claim a 0% increase.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.