The largest area of tax savings in the FairTax will be the elimination of the employer half of the SS/M payment. This is 7.65% which can be saved on the total payroll of the company. If we assume that a company's costs are all labor, with a 10% profit margin (after paying all costs of doing business), and no one makes more than $94k wages, then the potential for savings is 6.9% if the company keeps all of the "employer half". (90% of 7.65%). Then there is compliance savings which for most businesses will be below 1%. And corporate taxes are only paid by C corps. So, for most businesses the corporate tax rate is zero. So, this example gives a max 8% savings, and with a entity that pays corporate taxes it might be as much as 10% cost savings to pass along.
In the case of a business that was not all labor, say 40% payroll costs, and 50% incoming raw materials (let's say all domestic supplied, no foreign content), and the same 10% profit margins.
In this case the savings on payroll would be 40% of 7.65% which is 3% savings, plus the previously calculated max 10% savings on the incoming raw materials, which is 50% x 10% = 5% more savings, plus the 1% compliance savings and we are at 9% plus corporate taxes (in the case of C corps).
If they have more incoming raw material costs, they have lower payroll costs, and vice versa. Both areas will have about the same amount of savings, about 8%, so the percentage of raw materials to labor doesn't matter too much for a rough calculation, which these admittedly are.
I am only trying to show that the 22-23% savings numbers bandied about by the FairTax folk are a farce, and that the real potential savings are in the 8-10% range.
The basic idea is that if I am making a pizza and I save 10% on my pepperoni, and 10% on my cheese, and 10% on my flour, and 10% on my labor, and 10% on my rent-- I have not saved 50% of my costs. I have reduced my costs by AT MOST 10% in this example.
Now if these raw materials are foreign, like oil and many commodities, then there is no cost savings on that part of your cost structure.
Everything you say is correct - and the 10% savings will be allocated to lower prices, higher wages, or improved ROI according to competitiveness.
This pizza example is only one level of production. It's the savings from previous steps you ignore. Do you deny the existence of savings in previous steps of production?
Everything you say is correct - and the 10% savings will be allocated to lower prices, higher wages, or improved ROI according to competitiveness.
This pizza example is only one level of production. It's the savings from previous steps you ignore. Do you deny the existence of savings in previous steps of production?
Rob
For now I'm not going to disagree with your arguement that the savings in cost are not as high as "they" say.
I am still a big fan of the Fair Tax for several reasons.
#1. It reduces the legislatures ability and power to manipulate society.
#2. All of a sudden America becomes a big tax haven for business- as your great Friend NealB would say, all of a sudden Daimler/Chrysler becomes Chrysler/Daimler. It seems to me that this would drastically boost the economy.
#3. We will be suddenly gaining revenues from illegal immigrants, foreign tourists and diplomats, and all those drugs dealers buying 20 inch rims for their H2's and 300's.(a lot of money from folks who don't pay any taxes now) Will there be black markets? Yes but we'll have a whole bunch of former IRS agents looking for work who can go to work for Treasury chasing these down. It seems to me that enforcement would be a lot easier with Fair Tax than with any form of our current tax system.