Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

FT and Embedded Taxes (Econ Question)

FairTax proponents argue that all embedded taxes are ultimately passed on to consumers by corporations, but it would seem to me that, at least based on economic theory, that they’re only passed on to the extent that the consumers are willing to tolerate the overall price of the product (supply and demand).

In other words, if the embedded taxes, plus the company’s profit margin are too much, consumers may potentially stop buying a product. To combat this, many companies end up lowering their profit margins to ensure that they’re able to sell their products.

In essence, if tax rates increase the price of a product will only increase to the extent that consumers are willing to tolerate the price? This seems to mean in theory, that not all embedded taxes are automatically passed on to the end consumer.

Thoughts?

Thanks!

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Permalink Reply by Todd McLaren on May 7, 2009 at 10:49am

Thanks for this Ron. One of the arguments in the Hewitt book is that the 20-25% of embedded taxes includes labor rates that *can't* be taken out of the equation in order to lower prices.

I'd sure like to see a detailed chart of what costs and taxes are charged in the production and manufacture of any specific real-world widget--in order to show to the number wonks who won't accept the 20-25% embedded tax figures.

In any case, the increased purchasing power is what is important.

****Another question, kids: I see one of the potential drawbacks of the FairTax a rapid increase in inflation due to an influx of so much cash into the economy. (Too much money. What a problem!) Does anyone have a reaction to that concern?*****

Thanks.

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Permalink Reply by Art Villa - Global Perspective on May 5, 2009 at 3:48pm

To me, it is very simply. Embedded taxes (mainly "Corporate" and "Payroll" taxes) and the cost of tax compliance add to the cost of doing business and, therefore, must be priced into the product/service offering. If competitive market conditions do not allow for higher prices (increased globalization as an example), one of the following will happen:

1. The company will move U.S. taxable activity (jobs, subsidiaries, etc.) away from the U.S. to stay competitive which punishes the U.S. workforce.
2. The company will lobby for special treatment from the Federal Gov't in order to regain lost competitiveness which rewards corrupt politics (special favors for campaign contributions) and punishes companies who do not lobby for special treatment.
3. The company will ultimately get squeezed out of existence period which punishes company ownership and the U.S. workforce.

Any way you go, it is bad for weath creation in the U.S. (unless, of course, you are a politician, a lobbyist, or a special interest).

Thanks,

Art

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Permalink Reply by micheleking on May 11, 2009 at 4:45pm

Where is the chart?

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Permalink Reply by micheleking on May 28, 2009 at 10:18am

Mr. McLaren, There was discussion on "forum Okay folks so..." Talking about the Fed Res $ authority. Perhaps you were already on there, saw a number of Mac's. I am not familiar w/ the term "accomodation" from Fed. The fella went on to explain the 3 types and I got that okay.

The latin makes me think that this $ will have "to fit" somewhere suitable. How does the fed accomplish this? (Oh, 'eck! Plueeze don't send out greenspan! to lower/raise int. rate.) What about the monopoly $ they've been printing as of late?

W/ FairTax i also see mad cash out there fast. Perhaps for a few weeks folks will be too shocked to understand they are not in Wonderland and the $ is real, but that won't last long. Many of us po' folk will be making up for lost time.

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Permalink Reply by Randy Stone on May 28, 2009 at 10:27am

Yes, they are. If a company has any expense (taxes or otherwise) that will be recovered through income. If not, the company will go out of business. On the smaller profit margin, it is true that they take a hit there, but remember that as long as there IS a profit, ALL the expenses are passed on.

One note for thought....If the profit margin minimzes, don't you think, that is when a company will move overseas to get away from the higher tax to bring the margin back up? Along with it also goes the jobs! Bring on the Fair Tax!