So when these costs are abolished, the FairTax is added and returns the prices of consumption goods to - you guessed it - exactly where they are today. The difference is, of course, that people who are purchasing these things keep every last penny of their paychecks. For low-income families, this would mean an immediate average increase in pay of 25-30 percent.
One "little" problem. Dr. Jorgenson's study which calculated the 22% embedded tax included the employees' income and SS taxes (both halves) as expenses for the employers. Therefore for prices to stay the same after the Fair Tax is added, each employer will have to keep the pay the employees would have paid in for income taxes. Employees will keep their entire paychecks, but those checks will be smaller than their current ones.
I expect that pay will be harder to change than prices, so employees will continue paying employees their current salaries and pre tax prices will drop by a few percent (for reduction of corporate income, the employers' half of SS and reduced compliance costs) and the post tax prices will be about 20% higher than the current prices.
I like the Fair Tax, but I don't pretend that it is some type of water carburetor where you get something for nothing. The feds still extract about 20-25% and there is no way to do that painlessly.
I too like the idea in principle but agree that the transition would be, shall we say, awkward. The feds taking your money will never be painless but it could be made less painful and more fair.
Part of the unfairness: People who get a lot of their incomes via cash, e.g. waiters, tend to pay less than their fair share. Also, some of the rich are able to underpay because they keep huge sums offshore and don't pay income taxes on this money.
(Denny Crane: "I Don't Want To Socialize With A Pinko Liberal Democrat Commie.Say What You Like About Republicans. We Stick To Our Convictions. Even When We Know We're Dead Wrong.")
One "little" problem. Dr. Jorgenson's study which calculated the 22% embedded tax included the employees' income and SS taxes (both halves) as expenses for the employers. Therefore for prices to stay the same after the Fair Tax is added, each employer will have to keep the pay the employees would have paid in for income taxes. Employees will keep their entire paychecks, but those checks will be smaller than their current ones.
Essentially correct in that the NRST replaces the current income & payroll taxes, an in that it is wash overall.
There are gains however in the overhead and deadweight costs associated with the income/payroll taxes system that are substantially reduced under a retail sale tax system providing increased cost efficiencies allowing some lowering of prices with tax that otherwise would not exist. That provides an overall increase in the individuals purchasing power.
What I see as the most likely scenario is that gross wages stay pretty much the same as most are earned under contract and not subject to change on a whim.
I would expect total amount paid (accounting for tax) for consumption would fall 5-10%, while we receive our full checks with no withholding plus whatever FCA sales tax rebate provided for in the bill a household qualifies for.
This is a COMPLETE red herring. Has Dr. Jorgenson, as well respected as he is, EVER RUN A BUSINESS?
I calculate 20-30% in embedded CORPORATE INCOME AND SOCIAL SECURITY (NOT PAYROLL) TAXES in what my suppliers of parts, sub-assemblies and raw materials pay to me, and what theirs pay to them. THAT'S where the embedded taxes come from NOT from MY payroll NOR THEIRS. In fact, I plan on paying my most valuable employees, the essentially irreplaceable ones, EVERYTHING they're getting now PLUS everything the government is getting in their name, be it FICA "contributions" or withheld taxes. So this entire payroll argument is a bogus distraction from my viewpoint.
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As has been shown seveal times on these threads, there is plenty of room in prices presently for a good-sized decrease due to the cascading, embedded business income taxes - not even considering compliance costs or wage/withholding taxes. This leads to the reasonable conclusion that prices will drop more than the few percent you envision evebn without the removal of the ER portion of withholding.
It's not just corporate taxes, but business taxes that embed these costs which will be removed with the elimination of the income tax. I think that prices including the FairTax will change little if any - and the workers will have a lot more in hand to pay for things.
Take a look at one of the examples and use your own numbers for tax rate and net profit rate to see the effect that income taxes have on price..
This lends an advantage to non-unionized labor. (Easer to convince workers to keep take-home pay constant to their take-home pay under the income tax.) Especially for companies wherein a majority of its products are sold in countries other than United States.
It will take a few years for pay to normalize in each industry's labor market.
A wash, but with a monthly prebate check.
In essence the issue of prices and take-home pay is akin to stating the FairTax in inclusive or exclusive terms. Each issue has has two views or talking point to express an end result that remains constant for each issue.