You are downplaying the reduction in material cost. You are also excluding significant reductions in the cost of services.
Your shoe manufacturer is likely buying leather, materials/oils for tanning/conditioning rough leather and dyes/polishes for finishing, supplies and maintenance for machinery, packing and transport services and advertising services, accounting/tax services, perhaps marketing services. Your shoe manufacturer is also required to buy insurance and pay state business fees and taxes; let's call these administrative costs. Overhead includes leases (inclusive of property taxes), utilities and depreciation reserves.
Each of the material and service providers to the shoe manufacturer will have the same opportunity to lower their costs.
In the Income tax world a price model for a moderately labor intensive shoe manufacturing business consisting of 45% payroll, 28% shoe materials and supplies, 16% services, 3% administrative costs and 8% profit can be broken down as follows:
Federal taxes as a percentage of payroll and price:
Federal taxes as a percentage of profit and price:
Federal payroll tax compliance as a percentage of services and price:
The total percentage of price thus far attributed to federal payroll and income taxes, and compliance costs is 20.1%.
Turning to materials, the material supplier of leather hides is considered to be moderately labor intensive as the animals used are considered as inventory materials to that business. Using the same percentage breakdown for material pricing as the shoe manufacturer, the total federal payroll and corporate income taxes, and compliance costs is also 20.1% of material price. Applying this percentage to the shoe manufacturer's price breakdown percentage of 28% for materials, the material supplier's payroll taxes, corporate income taxes and compliance costs form 20.1% of 28% or 5.6% of the shoe manufacturer's price.
Turning to non-federal tax services (70% of 16%), the shoe manufacturer's service providers should be considered to be very labor intensive as labor is a large percentage of those service businesses (e.g., transport, advertising, marketing). A price model for these service businesses consisting of 65% payroll, 12% supplies, 12% services, 3% administrative costs and 8% profit can be broken down to show a total percentage of service pricing attributed to federal payroll taxes, corporate income taxes and compliance costs to be 26.1%. Applying this percentage to the shoe manufacturer's price breakdown percentage of 11% for non-tax related services, the service provider's payroll taxes, corporate income taxes and compliance costs form 26.1% of 11% or 2.9% of the shoe manufacturer's price.
The total federal tax and compliance contribution from the material suppliers and service providers is actually more because they also utilize supplies and services. To analyze the complete supply chain involves what is called in mathematical parlance a system of finite difference equations. However, each variable is actually a statistical random variable, so the statistical model is based on what are called structural equations. That is one method for approaching the analysis.
For purposes of this example, we have already at least a federal burden forming 28.6% of the shoe manufacturer's pricing. Statistical analyses involving other manufacturing businesses using a full supply chain bring the total federal burden estimate to more than 32% of pricing.
In the world of the FairTax, allowing that the shoe manufacturer's employees will keep their gross income, the employer's share of FICA (7.65%) along with the other percentages of corporate income tax and compliance costs will be eliminated. For the example above, the percentage eliminated from pricing under the FairTax is 11.05% (6.9/2 + 2.8 + 4.8). Adjusting material and service burdens for elimination under the FairTax yields respective results of 3.1% and 1.4% of the shoe manufacturer's pricing and this brings the subtotal of price reduction to 15.6%.
Yet 15.6% is a minimum as it excludes suppliers and service providers further down the supply chain. For example, if a material supplier to the shoe factory' material supplier is also able to eliminate 3.1% of the primary material supplier's 28% material cost, then the reduction in shoe pricing is an additional 1%. The further the analysis traverses down the supply chain the smaller are the reductions to the pricing of the business under investigation, in this case an example of a shoe manufacturer. However, supply chains are typically very deep. In this example, a material supplier of leather hides must buy feed for livestock. A feed supplier must buy fertilizer. Fertilizer manufacturers must buy a variety of materials, etc.
When entire supply chains are included, and business models are treated as statistical random variables with the analysis put into a statistical context, the percentage amount of pricing that is attributed to federal tax and compliance burdens is frequently estimated to be well over 20% using conservative assumptions.
The rebate is funded by an increase in consumer spending which in turn is driven by employees keeping their entire gross incomes. In effect, money is diverted away from the federal government and put into the private sector where it is used for economic growth and increased consumer spending (this has been shown in studies to actually increase revenues to the federal goverment as it acts similar to tax cuts).
When money is circulating and changing hands in the government sector, it is often observed to be government paying itself. For example, payroll taxes taken out of a federal civil service employee's gross pay are paid back into the government even though the source of the money springs mostly from the private sector. In other words, alot of private sector generated revenue that is confiscated by the government sector stays in the government sector.
Money circulating in the private sector is efficient. Money circulating in the government sector is inefficient.
Money diverted away from government to the private sector is used to create growth leading to increased consumer spending. This actually generates more revenue back to the government.
The FairTax is a system that leads to economic growth by putting more money in the hands of wage earners because they keep their entire gross income, 'all of their paycheck'.
The FairTax leads to cost and price reductions prior to imposition of its NRST. The effect is to eliminate the federal burden of the current tax system on pricing and to replace it with the FairTax NRST. Given general price stability, the only significant change noticeable to the consumer is they will see for the first time since 1913 the true level of federal taxation. The FairTax is transparent.
The transparent FairTax will remove the capability for special interests and their paid-for politicians to manipulate the tax code, the government will no longer be able to stack the deck as all its moves in the arena of taxation will 'in view'.
The FairTax is America's Glasnost moment.
Way too high. The rate may be 35%, but, "During the 1990s, corporations as a group paid an average of 25.3 percent of their profits in federal corporate income taxes, according to new Congressional Research Service estimates." 90% of all corporations that file pay no corporate taxes. Second, Nike's profit was 5% and Wall Street was ecstatic. 8% indeed.
We can argue corporate tax rates and we can argue profit percentages, but the bottom line is how much is paid. "Corporate taxes have fallen from 5 percent of gross domestic product ... in 1946 to 1.4 percent now." Half of your figure.
"Payroll service for federal compliance estimated at 30% of 16% services, or 4.8% of price."
Well that's simply insane. First of all, you're still going to have payroll costs under the Fair Tax. The only costs being saved are not having to file a corporate income tax. You're lucky if it's half that.
So, we have 7.25% (6.9/2 + 1.4 + 2.4) plus material savings of 2.03% (7.25% X 28%) for a total of 9.28%. I said before that both sides have agreed on 9%.
That's all there is, and even that's generous. The bottom line is that it ain't 23% as you said, so prices will go up approximately 18%. For domestic goods. Imports will rise 30%. Given a 50-50 split (foreign - domestic), that's an average retail price increase of 24%. Not zero, as the author says.
Myself and others have explained all this to them before but never so eloquently as you have done.
The FairTax will eliminate insurance and state fees and licenses for business?
Eighty-five percent of shoes are manufactured in China. Chinese labor cost on shoes is one twentieth of US labor costs. The FairTax ain't gonna fix that.
GARBAGE!
You do realize Glasnost was a marketing scam too?
Glasnost was a ploy by the USSR to appear to give freedom while crackign down on subtantive dissidents.
The Fair Tax, sales tax is a complete and utter snake oil scam.
Trading one set of onerous entitlement taxation for NEW and BIGGER entitlement programs with prebates is a recipe for disaster for business.
Fair Tax=garbage=snake oil
With the help of many and despite the Freepattacks going on with this thread, I see that the Fair Tax might possibly be better than the current system, however, the feasibility legally and politically is in doubt. Without a comprehensive SS reform to go along with abolishing the current payroll tax system, I don’t think there would be enough political support to accomplish passing the legislation. I do believe that a consumption tax is feasible, but still has its problems. I think that is why this is a valuable discussion.