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To: Kellis91789
To be "fair" (after all, this is the "FairTax" we're talking about) you should treat the self-employed businessman just like a wage-earning employee:

Under Income & Payroll Tax


Non-wage Costs: $300K
ER Payroll Tax: $12K
Owner comparable Gross Wage: $288K
EE Payroll Tax: $12K
Income Tax: $60K
Take Home Pay: $216K
Gross of Prices to customers: $600K

Under FairTax


Non-wage costs: $274K (only 8.6% available cost decrease)
Take Home Pay: $288K (EE/owner gets to keep PIT and EE FICA ... that's what the FairTax book told him anyway)
Gross of Retail Prices to customers: $562K
FairTax collected: $169K
Gross of tax-inclusive prices paid by customers: $731K

Increase in prices: $131K / $600K = 21.8%

Purchasing Power delta: (288/216)/(1.2) = 1.1

Note, purchasing power for this individual rose 10% because he was an extraordinarily high income earner (> 96% of all earners.) He may (or may not) choose to lower prices more depending on his competitive pressures and business needs.

Interestingly enough, if this businessman DOES lower his prices further, he is eroding the value of the tax base needed to raise the required revenue: prices lowered by MORE than the saved tax cost = smaller FairTax base = less FairTax collected => Higher rate = higher prices. Either way, the customer is going to pay the 20% price increase.

If this businessman was of more modest means, his prices would still increase about 20%, but his take-home would have not risen as much:

Under Income & Payroll Tax


Non-wage Costs: $300K
ER Payroll Tax: $6K
Owner Gross Wage: $75K
EE Payroll Tax: $6K
Income Tax: $6K
Take Home Pay: $63K
Gross of Prices to customers: $381K

Under FairTax


Non-wage costs: $274K (only 8.6% available cost decrease)
Take Home Pay: $75K (EE/owner gets to keep PIT and EE FICA ... that's what the FairTax book told him anyway)
Gross of Retail Prices to customers: $349K
FairTax collected: $105K
Gross of tax-inclusive prices paid by customers: $454K

Increase in prices: $73K / $381K = 19%

Purchasing Power delta: (73/63)/(1.2) = 0.97

To break even, this businessman would have to increase prices further (another $3K). That would bring his price increase to 20%.

You have incorrectly assumed too much non-wage price reduction, 100% compliance with "net-zero-purchasing-power-delta" target by highly profitable businessman (read that "businessmen in noncompetitive markets") and ignored the net purchasing power decrease of highly competitive (low profit) businessmen.

Yet another example of how anecdotal analysis does not tell the whole story.

77 posted on 05/15/2006 3:19:47 AM PDT by Dimples
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To: Dimples

Of course anecdotal analysis is weak, but enough of it gives an empirical weight rather than just theoretical assumptions. I wish each person that looks at the FairTax would run their own real-life numbers rather than buying into just logical arguments. I did ask lewislynn for specific numbers and he told me to go ahead without them.

But you didn't read lewislynn's claim that my example was refuting. He did not claim that he should get to keep his PIT and Employee-side payroll taxes [(EE/owner gets to keep PIT and EE FICA ... that's what the FairTax book told him anyway)]

He claimed he would need to increase his prices by 30% to maintain HIS PURCHASING POWER.

I allowed for a 10% price drop and you allowed for 8.6%, but I allowed lewislynn a full 20% increase in take-home, not the 18.7% that an 8.6% price drop affords. So using your 8.6% figure and 18.7% increase in take-home spendable income:

Under FairTax




Non-wage costs: $274K (only 8.6% available cost decrease)
Take Home Pay: $254K (18.7% increase to maintain purchasing power then subtract $2K FCA)
Gross of Retail Prices to customers: $528K
FairTax collected: $158K
Gross of tax-inclusive prices paid by customers: $684K
Increase in prices: $84K / $600K = 14%

Your other examples are also flawed. You start from the assumptions that a business-owner will see the same retention of current taxes paid as an employee, while their situations are very different. Your examples do not address lewislynn's argument about how much his charges need to increase for the small businessman to maintain his personal purchasing power. Retaining the taxes currently paid is irrelevent to answering that question. If he made $100K and his present taxes were $40K, that $40K would play no role in how much increase in take-home pay he needed to maintain the purchasing power of the $60K he currently gets to spend. The only relevent figures are the $60K and the percentage price increase of 18.7% (assuming your 8.6% price drop) and the FCA amount. In that case his gross pay can fall from $100K down to $69K [1.187 * 60 - 2] and his purchasing power remains the same as before.


94 posted on 05/15/2006 9:57:53 AM PDT by Kellis91789 (I don't make jokes. I just watch the government and report the facts. --Will Rogers)
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