Fair Tax Solution for Ford, Delphi & American Manufacturing

Supporters of a Legislative package commonly called the FairTax, point out that no other tax reform and replacement idea comes close to providing the economic benefits for American working families and the growth of American Manufacturing like the Fair Tax HR 25/ S25. Major U.S. Manufacturers like Ford Motor and Delphi Corporation are facing difficult challenges and are planning or proposing major changes in order to compete in the global marketplace and to compete within the American marketplace.

Talk Radio has been a buzz on the plan by Ford to cut 30,000 jobs and close several facilities. For months, cities with Delphi Parts plants have be stewing over negotiations and plans that want to cut wages and possibly close facilities. Though part of the solution is to be more efficient and certainly to produce what the customer wants to buy, the other part of the debate is unfair trade practices and unfair labor wages in these competing countries.

Radio Talk Show host Neal Boortz is one talk show host that has discussed the solution for American Manufacturing repeatedly. He has also written a New York Times best selling book, “The FairTax Book” in conjunction with Congressman John Linder of Georgia. The book lays out the problems with our archaic income and payroll tax system and than reviews the benefits of the Legislative Replacement package sponsored by Congressman Linder and based on the 10 years of work and research conducted by Americans for Fair Taxation.

On Television, CNN's Lou Dobbs and Bill O'Reilly show their outrage on how American Manufacturing Jobs are leaving American Shores but provide no comprehensive solutions in their form of “sound bite journalism”. They and many other Americans misunderstand and dismiss the serious grassroots support and supporting research for a solution that will truly help the "little guy" and restore good paying American Jobs. (The Fair Tax HR 25/ S25. www.fairtax.org)

The solution for Ford, Delphi and American Manufacturing in general is not trade barriers or tariffs but is fair trade. But how do you get Fair Trade when competing countries do not pay a Fair Wage. American Workers do not need to compete globally by lowering their wages to such Draconian levels. Fair Tax supporters point out that the solution for better paying American manufacturing jobs at home is to have the lowest taxes on American Manufacturing companies.

American Manufacturing goes where it costs them the least to do business. Even with the higher costs of fuel to ship those goods from overseas, the low wage is what helps some countries compete and it is the Lower business taxes that helps other countries compete.

In Europe, Ireland has had the strongest economic growth and best employment numbers because they have the lowest taxes on business (Corporate tax 12 %). The Solution for America is Lower Taxes on American Manufacturing not Lower Wages on American Workers. The incentive for business to stay in America and not outsource is lower taxes on Corporate earnings with less tax compliance costs.

Ultimately, It is the consumer that pays the business tax in the end on all products and services. Business taxes like business costs for manufacturing are just worked into the price. The Consumer pays the tax not the business.

What if the United States had the lowest Corporate tax in the World? Would not business flock here to manufacture? What if instead of the Bahamas being the Offshore tax haven for business or Corporate headquarters that for Tax purposes those businesses made New York, or California, or Chicago their Corporate home and their preferred place to manufacture from and ship around the World?

There is such a tax plan in Congress waiting in the wings to rev up our Economy, by providing the right incentive for American Manufacturing to stay in America, for Good paying manufacturing jobs not to be outsourced, for American Families to have more take home pay, to make U.S. Soil a Tax free zone for business that can export products around the world Tax-Free. This is how we save American jobs and this is how we compete against substandard wages paid by our global competitors.

The Legislative Package in Congress has been around for several years; it is well researched and has sound economic data to back it up. It is commonly called the FairTax and has over 45 Co-Sponsors in the House and Senate. The bills are HR25 and S25. According to the Fair Tax Scorecard 155 Legislators are leaning in favor. Last Spring 75 Economists sent an open letter to Congress and the President in favor of the Fair Tax. They were joined by Alan Greenspan’s testimony in favor of a consumption tax as a replacement for an Income tax.

From an American worker stand point, the key point is that the Fair Tax helps save American jobs and promotes American Manufacturing that stays on U.S. Soil. It allows American workers to take home an average 30% larger paycheck each and every week by eliminating any federal withholding for income tax or payroll tax from an American workers paycheck. American workers take home 100% of their paycheck!!

American Manufacturers have the incentive to stay in the US and not outsource because they pay no Corporate tax. New American Manufacturing is created because Capital investment in the US is tax-free. Building new plants in the US will cost them less because of lower taxes. The Exports they send overseas pay no tax and are cheaper for sale in the global marketplace. This allows American Manufacturing to compete globally because of lower taxes and not lower wages like Delphi is trying to accomplish.

The Fair Tax is a revenue neutral replacement of the individual and corporate Income tax; payroll tax, capital gains tax, the Alternative Minimum Tax (AMT) and the Death Tax (Estate Tax). It is replaced with a National Sales Tax on retail purchases of all new products and services and supports the funding of the National Budget including Social Security and Medicare.

According to the Legislation, the national sales tax will be included in the price tag you see on a product and will be broken out as a separate line item on your receipt so that Americans know how much they are being taxed and how much they are sending to Uncle Sam with every purchase.

American Families do not have to wait until April 15th to get a refund of their own money. Middle Income Families will take home an average 15% more because of no Income tax withholding and an additional 7.65% because of no payroll tax withholding. Under the Fair Tax, the tax collected replaces the income that funds the national budget and replaces the payroll taxes that fund Social Security and Medicare.

The Fair Tax Legislative package is much more than just a national sales tax it is a package that also has a Prebate (rebate) system that truly untaxes the poor and treats everyone equally and fairly. No forms to keep, no receipts to log in or file. Everyone gets the same prebate check based on family size and valid Social Security cards for each family member.

Maid or Millionaire; the simple way to be sure no one pays a national sales tax on the essentials is not complicated exemptions but to simply send each household a monthly check (debit card) to cover the national sales tax on all spending up to the poverty line for that Family size.

Health and Human Services calculates the poverty line for a married couple with 2 children at $25,660 for the year 2005. The Fair Tax assumes every family of 4 will spend at least that much and sends them a prebate to cover the national sales tax on every dollar up to $25,660. The Inclusive tax rate is 23% or $5,902. The Fair Tax sends each month $492 (5902/12). If that family makes less than $25,660, they still receive the monthly check for $492.

It is a fact, if you make more you spend more. Under the Fair Tax if you spend more you pay more. With the Prebate, the Fair Tax is progressive in that the net tax rate for those American families at the poverty line is a true ZERO; for those at twice the poverty line the net rate is about 11.5%; at 4 times poverty that family is about 17.2%; and the wealthy at 10 times the poverty line and higher, average between a 20 to 23% net federal tax rate.

The Fair Tax truly untaxes the working poor by eliminating the payroll tax of 7.65% and allowing the working poor to take home 100% of their paycheck and receive an additional $5,902/ year to cover the National Sales tax on essentials like clothing, food, housing, or daycare. (Family of 4)

Trillions of Offshore dollars that wealthy individuals and wealthy Corporations hold offshore because of America's current tax laws will return to US shores under the Fair Tax. This capital will find a tax free zone in America and want to invest in American Manufacturing and business that will not only sell to Americans at home but to the entire world. American Exports will not have the 23% national sales tax on them for export. These exportable products will also drop in price because we have removed a major cost element from the supply chain. With no business income or payroll taxes, the cost of those products will go down. With no IRS you reduce the compliance costs dramatically for complying with the IRS rules and regulations. This savings throughout the supply chain will also be reflected in a lower price at home and for export.

It depends on the economist and it depends on the economic model but the estimated price drop on products and services is between 10 and 25% on average. Something you bought for $100 under the income tax will drop to somewhere between $75 and $90 dollars. When you add in the National Sales Tax the final price will be between $97.50 and $117.00. (30% exclusive tax rate equals 23% inclusive or income tax equivalent rate)

Under the Income tax a lower middle income tax family had to earn $129 in order to take home $100. This is based on a 15% income tax withholding and a 7.65% payroll tax withholding.

Under the Fair Tax you take home more money and you have more money to spend even after buying the same items and paying the Fair Tax. You take home $129 and spend $117 with the Fair Tax to buy the same $100 worth of goods you bought with $100 in take home pay under the archaic Income and payroll tax system. You are $12 ahead and on top of that will receive the monthly Prebate check.

Under the Fair Tax Legislative package you lower taxes on business; you give them the incentive to produce and manufacture here within the US and not in China or India, or Mexico.

The way to compete in the 21st Century is not to cut our wages in half. The way to compete in the world is to provide the incentive for business to do business inside the US.

The Fair Tax Legislative package does so much in so many ways. Our American Economy will boom when American manufacturing is growing in the US. The Fair Tax is the best vehicle to do that.

When the Lobbyists and their paid economists come out against it beware. With out the convoluted tax code, Lobbyists, Congressmen, congressional aides and "K" Street will lose a lot of their power and influence. If they come out against it than it must be good for average American families.

Every Politician that came out in support of this idea last election cycle won. This is a winning issue for politicians and when average American people are presented all the facts of the Fair Tax 80 to 90% love it. Get the Facts at www.fairtax.org

If Average American workers can get people like Lou Dobbs and Bill O'Reilly to truly study all the facts that support the Fair Tax, perhaps we can get them to join the over 75 economists that wrote a letter to Congress last Spring in support of the idea. The Fair Tax is the most comprehensive solution to aid American Workers, American Families, American Manufacturing and the American Economy.

Let's take a look what information you can find if you wander off FairTax.org:

Consumption Taxes: Macroeconomic Effects and Policy Issues

by C. Alan Garner
Federal Reserve Bank of Kansas City
in Economic Review - Second Quarter 2005
Wages and prices. Replacing the income tax with a flat tax poses smaller challenges for wage and price adjustment than either a national sales tax or a VAT. Because the structure of the flat tax is similar to the current income tax, large adjustments in consumer prices or wages would probably not be necessary After-tax and before-tax wages would be similar before and after the tax reform, and nominal prices would be roughly unchanged (Zodrow 2002).
A national sales tax or a VAT, in contrast, would require the average price of consumer goods and services to rise relative to production costs and wages.¹⁵ A national retail sales tax is the simplest case to understand because the tax is imposed entirely at the retail level. Consumers would pay a substantially higher price for goods and services after adding in sales taxes at a rate that could easily be 30 percent or higher. Because wages are a large fraction of production costs, the price paid by consumers would increase relative to the wage rate received by workers. However, in the case of a revenue-neutral tax reform, the decline in the income-related taxes paid by households would offset the rise in consumption taxes, leaving households with the means to purchase the higher-priced goods and services. Under a VAT, consumer prices would increase relative to wages because of taxes imposed at various stages in the production process rather than just the final retail sale.
An important question from the standpoint of short-run macroeconomic adjustment is how the increase in consumer prices relative to wages occurs. One possibility is that the after-tax consumer price level would rise by the full amount of the consumption tax while wages remain constant. Another possibility is the after-tax consumer price level would be constant while wages decrease. Most discussions of transitional tax-reform issues assume the first case.¹⁶ When a VAT has been introduced abroad, authorities typically permitted an upward adjustment in the after-tax consumer price level, although efforts were generally undertaken to ensure that this one-time adjustment did nor become a sustained inflationary process (Tait).
Alternatively, the necessary increase in consumer prices relative to wages could be accomplished by holding the price level constant and reducing the wage level. Many economist, however, believe that wages are "sticky" in the downward direction. Workers are reluctant to take a wage cut, and efforts to reduce the wage rate might cause many workers to leave their jobs. The result could be a large temporary increase in the unemployment rate and lower levels of spending and output. Gravelle cites simulations with large-scale econometric models that do not assume the economy always operates at full employment. In three of the four simulations cited, real output decreased initially in response to fundamental tax reform. Although other economists have criticized such models and might not accept their conclusions, the simulations emphasize the need for further research on the short-run employment and output effects of fundamental tax reform.
Moreover, replacing all federal income taxes with a national sales tax or VAT would require much larger price and wage adjustments than other countries experienced when adopting VATs. Foreign VAT rates have typically been no more than 10 percent because the countries kept other revenue sources, such as an income tax. In most cases, the country also eliminated other consumption-type taxes, which offset some of the upward price-level pressures. Thus, the price adjustments required by fundamental U.S. tax reform would be outside the range of historical experience.

This discussion focuses on fundamental tax reform in which a national sales tax or VAT replaces all federal income and payroll taxes. The adjustment issues would be smaller if a low consumption-tax rate were enacted to replace a small part of the current tax system or to supplement existing revenue sources.
The increase in consumer prices could account for part of the decline in the real value of existing assets during the transition to a consumption tax. Nominal assets such as bonds and bank accounts would lose real value as the price level rose. With no increase in consumer prices, the decline in the real value of existing assets would occur through other channels. For example, the decrease in wealth would fall on equity owners as corporations lost expected depreciation allowances and the prices of tax-free investment goods declined relative to taxable consumer goods and services (Zodrow 2002). In practice, the increase in the price of consumer goods and services relative to wages could occur through a combination of consumer price increases and nominal wage decreases.

Statement of Laurence J. Kotlikoff,

Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research
Testimony Before the House Committee on Ways and Means - Hearing on Fundamental Tax Reform
April 11, 2000
This sentence and the one preceding it assume the price level will rise with the adoption of the Fair Tax. If the Federal Reserve used its monetary policy to maintain the consumer price level, the adoption of the Fair Tax would entail a decline in the level of producer prices and, thus, the nominal wages and capital income received by productive factors.

Response to William Gale

by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998
Federal income and payroll taxes either are or are not incorporated into the prices of goods and services. If they are embedded in prices, their removal will reduce prices. If they are not, then their removal will not reduce prices but instead returns to labor and capital will go up. If returns to labor go up, people will see their after-tax wages increase and asset values will increase since the present discounted value of the new, higher returns will be higher.
The replacement sales tax could be incident on the factors of production or it could be incident on consumers through higher prices. It cannot be both. If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation

by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779
Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.

The Price Level

Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.
A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.
Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.
Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.
Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.

Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.¹⁶ Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.

Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.

Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.

Transition Costs and Macroeconomic Adjustments

One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.⁵ While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.
Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT
Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.
These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).⁶ Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.

See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.

Prices.

Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.

Transitional Issues in Tax Reform

Price Level Effects
Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.
In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.
Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.
The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.
Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level ;and no change in payments to workers in nominal terms."
Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.
Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.

Monetary Implications of Tax Reforms

Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.
And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.
But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.

Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.

The Price Level

When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.
One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.
Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.

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