Replies

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.

I'm not responding to lewislynn's claims, I'm responding to yours. Yours are incorrect.

First, there is no difference (other than one you contrive) between an employee and a self-employed businessman. Both get compensation from their activity in the business sector; both pay wage taxes; both pay income taxes as individuals. To suggest that some fictitious difference is a valid reason to expect a self-employed businessman to relinquish a portion of his gross pay that his employees do not relinquish is patently unfair, not to mention unsupportable.

In reality, maintaining constant purchasing power is NOT (and never has been) the goal of business, government, or individuals. And that goal is not achievable unless the FairTax does not alter the distribution of the tax burden. As we all know, the FairTax DOES alter the distribution of burden so constant purchasing power for all CANNOT be a goal of the program. That you can show an example of a situation in which a businessman COULD lower his price to maintain constant purchasing power does not make such an outcome a desirable or likely goal for that businessman.

That you IGNORE the problem of the businessman who can only maintain constant purchasing power by RAISING his prices further than the average suggests the usual cherry-picking that anecdotal analysis requires.

You also IGNORE the fact that if a businessman does indeed reduce his prices more that the saved tax costs that he is actually eroding the tax base used by the FairTax folks to calculate the rate (thereby necessitating a higher rate.)

In the aggregate, prices will increase from 20% to 30% ... yes 30% (not including issues regarding the false claim of "revenue neutrality".) We've been through this before, and you've even agreed in the past that there are situations where a 30% increase will happen (remember that imported case of wine with the free shipping?)

The problem you have is not the averages, it's the distribution of cash flows; they are not uniform. By the nature of income tax, cash in excess of the averages resulting from the elimination of the income tax will go to those business sectors where profits are high and competition is low or nonexistent; cash short of the averages will go to the most competitive, least profitable businesses.

In short, those with least incentive to reduce prices get the extra cash; those with the most incentive to reduce prices get screwed.