Posted on 11/10/2005 3:18:48 AM PST by Man50D
Your first example has aggregate after tax profit from all layers at almost 65% ($42.93 out of $66.44). Even the second one with far reduced profits has the aggregate after tax profit as 43%. Total corporate profits as a percentage of the GDP are around 10% (or maybe a little less). And I would need to check if that amount is before tax or after tax.
If you include the 80% aggregate cost of domestic labor and accumulate the employer's half of SS and Medicare on that, you'll get an embedded tax figure closer to the 8% I calculated. If you add together the employee's half of payroll taxes and the employee's income tax you'll get a figure close to Jorgenson's 22%.
Good post. Thanks.
I agree. However some of the early threads on the Fair Tax combined the two. People would have gotten their current gross pay as the new net and after tax prices would have remained the same as current retail prices. You can't get both. I would love it if that were true, but you can't get the best features of both extremes.
This is stream of consciousness.....pardon the rambling nature......I need to think about this some more and post a more coherent rant.....later.
I've not read the study, but as a FairTax supporter, Jorgenson's methods strike me as bizarre. Salaries and wages are set by the intersection of the supply and demand curve, not the tax bill of the employee. The tax bill of the employee is of no concern to the employer and any suggestion that the tax bill of the employee is transfered into a product cost is just, well, crap.
If the tax burden was transferred, think about what that would mean: wages and salaries would be set by the employees tax burden. Workers doing the same job would be paid different salaries, based on their associated tax burdens. Each worker on an assembly line would get a different paycheck. Clearly, that's not the case.
Here's my view: The 22% embedded tax rate is a short hand way of explaining two critical concepts simultaneously: revenue neutrality and the incidence of the corporate tax. While the standard explanation is not absolutely correct, Nominal price is a term that the majority will understand. Very few people have the background in economics or care to examine the proposal at any depth. So speaking in terms of real prices or real wages or purchasing power would just cloud the issue. Most simply want to know whether they will be better or worse off. That's why Nominal price is the best way to explain the following:
Because the FT is revenue neutral, it will extract no more from the economy than the current system, meaning the net purchasing power of the American people will remain unchanged, the tax wedge is unchanged. The incidence of the corporate tax is impossible to quantify or predict. When the corporate tax is repealed, pre-tax prices will probably drop a little, wages will probably increase a little, and stockholders return on investment will probably increase. When the personal income tax and the FICA/Medicare tax is repealed, take home pay will increase. The net effect is that when the tax is imposed on the goods, the purchasing power, or the ability to purchase a standard market basket of goods will remain unchanged. The difference is that the tax burden is fully visible.... no hidden tax component in price, no downward pressure on wages or return on investment.
Because the FairTax repeals the most regressive tax we inflict on ourselves, the Payroll tax, those at the lowest end of the earning spectrum will see an increase in purchasing power. Conversely, those at the upper end of the spectrum will effectively have all of their earnings subjected to the FICA tax. Likewise, those earning their beer money from tax free sources like Muni bonds or drugs/prostitution, will now pay their fair share of the tax burden when they spend their money. If memory serves, Ta-Ray-za Heinz Kerry Heinz paid an effective rate of 13% under the income tax scheme.....lower than my effective tax rate.
Someone has to pay the tax, but who? To the extent that individuals currently pay income tax / FICA / Medicare tax, they will pay tax when they buy goods. The nominal after-tax price of their market basket of goods will increase, but their purchasing power should keep pace. The people who will suffer a reduced purchasing power are those at the upper end of the earning spectrum. Is this clear as mud?
No system is perfect, but the FairTax is the best alternatvie I've seen.
If you include the 80% aggregate cost of domestic labor and accumulate the employer's half of SS and Medicare on that, you'll get an embedded tax figure closer to the 8% I calculated. If you add together the employee's half of payroll taxes and the employee's income tax you'll get a figure close to Jorgenson's 22%.
Actually Jorgenson's remarks as regards his 1996 Ways&Means testimony, which is what this all refers to, only accounts only for a generic NRST that replaces income taxes alone, and does nothing as regards SS/Medicare taxes.
According to Jorgenson's later characterisation much of the real gain arises from efficiency gains in reducing deadweight losses that are part & parcel with the high marginal tax rates of the 1996 graduated income tax that his model implemented a NRST replacement for.
In the final analysis the FairTaxt is a giant step towards you gaining increased freedom, financial security and privacy.
It was not a suggestion, it was an assumption. Jorgenson made that assumption to make his modelling easier. It was the cleanest way to extract all the taxes out of the price and keep everyone's take home pay the same. If Jorgenson had to model price increases and increases in take home pay for certain people, it would have made the model more complex. He would have to model behavior of people who seen the buying power of their nest egg dwindle. The real world effects are complex as most people (workers) will probably see more buying power while business owners and retirees will probably have less buying power.
"The real world effects are complex as most people (workers) will probably see more buying power while business owners and retirees will probably have less buying power."
Not surprisingly, I disagree. Those retirees having a substantial portion of their nesteggs in equities would do extremely well with the appreciation in the values of those equities. That is because a faster growing economy would lead to faster growth in corporate income, which is the basis for equity values. In most cases, I would expect that retirees' incremental valuation increases would be more than enough to offset what they pay for their consumption - unless they are consuming at extremely high levels far out of proportion to their means.
For the discussion of these hidden taxes a aggregate profits is a meaningless concept. Each level is considered as an entity. You have misunderstood the example and what it represents since labor is included as part of the net profit determination and does not need to be separately presented. Remember it is not "aggregate profits" or even "aggregate taxes" we are talking about but the taxes that cascade from level to level by being embedded in the price mechanism for each level.
The term "tax cost as % of sell price" at the end of the cascaded chain is the amount that could be removed without the income tax. Note that this is an example of the mechanism involved. The numbers used are not presented as and sort of representative number. That's why I urge others to use the example with numbers they believe are valid. It is the hidden tax mechanism that is important here.
In addition, corporate taxes or profits are not being discussed as I said in the example, but business taxes or profits since there are many other business entities other than corporations. Also profits as a percentage of GDP are not meaningful to the discussion either since taxes are calculated and paid on the particular businesses profits subject to tax and the tax rate that pertains. FYI, in 2001 the average corporate major industry tax rate was 34.3% for Form 1120 filers of that category.
I think you also missed the comment in the example that payroll/withholding taxes are not included in the example (nor are compliance cocts) - only business income taxes.
Sounds like a good explanation.
L6 sale to consumer = sextuple taxation.
Not sure what you mean. If you studied the example you'd see that the l6 figure for "tax cost as % of sell price" was the was the amount of accumulated tax that had cascaded and embedded itself into prices at L6. It is not, however, a tax of that level (or any other) six times.
L6 is intended to be the level at which the thing is sold at retail. It is the (hidden) tax paid at that particular level expressed as a percent of the selling price and represents the potential for lowering prices by that amount. Keep in mind these numbers are merely examples and I'm not trying to say that these are any sort of definition of how much prices will be affected. My interest is in showing the mechanism.
Anyone wishing to can make his own copy of the spreadsheet and by selecting "tax rate" and "net profit %" can derive a L6 number (or even use more or fewer levels) that he believes is representative of the actual situation.
Does that clarify anything for you?
The fist business, the seed grower is taxed> the farmer that purchase the seed is paying tax on the tax the seed grower was taxed (also pays tax on his wheat harvest)> the flour mill that buys wheat from the farmer pays tax on the tax that the farmer paid on the seed growers tax. as well as paying tax an the farmers tax and also pays tax on his flour manufacturing, etc, through six levels. Basically what the spread sheet accounts for.
Yup, you've got it nailed.
Maybe I should redirect Dimples to you for an explanation since he can't understand it at all, poor thing:-)
Just kidding - I wouldn't do that except maybe to Looey.
"Great fleas have little fleas upon their backs to bite 'em,
----- with apologies to Jonathan Swift: Poetry, a Rhapsody
And little fleas have lesser fleas, and so ad infinitum.
And the great fleas themselves, in turn, have greater fleas to go on;
While these again have greater still, and greater still, and so on."
(but in reverse, mebbe???)
Paraphrasing a line from the movie Armageddon. Steve Buscemi sitting in one of the seats on the space shuttle just prior to lift of turns his head to the guy next to him and says, "How does it feel to be sitting in a rocket about to blast off into space that has 270,000 parts made by the lowest bidder?"
FairTax Sale...
Get Two Space Shuttles For the Price of One!
Why will business owners have less buying power? They will not pay any entity level taxes...no compliance costs....so their buying power will increase. What am I missing?
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