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