Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122
Ok folks, so what's it going to be?
I thought I would just throw this out to the general membership.
One of the basic tenants of the FairTax is that it will replace the already embedded taxes on the costs of goods and services, thereby having no or little impact on the pricing of the same goods and services after implementation of the FairTax. Everyone here should know this talking point - producers/manufacturers will lower their prices in such a way that the price of their goods while be about the same.
Yet, I have seen and heard arguments that these same producers and manufacturers could also offer pay raises to their employees, increase benefits to their employees, add more employees (jobs) and even increase the amount of dividends paid to their stockholders. This is what anyone would call "having your cake and eating it too". Seems to me that we've gotta be consistent - either drop prices or do all of these other goodies, I don't think there's enough room to do both.
One of the basic tenants of the FairTax is that it will replace the already embedded taxes on the costs of goods and services, thereby having no or little impact on the pricing of the same goods and services after implementation of the FairTax. Everyone here should know this talking point - producers/manufacturers will lower their prices in such a way that the price of their goods while be about the same.
Yet, I have seen and heard arguments that these same producers and manufacturers could also offer pay raises to their employees, increase benefits to their employees, add more employees (jobs) and even increase the amount of dividends paid to their stockholders. This is what anyone would call "having your cake and eating it too". Seems to me that we've gotta be consistent - either drop prices or do all of these other goodies, I don't think there's enough room to do both.
Replies to This Discussion
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Permalink Reply by Jeff G on -
Chiefcook, could you provide the link to analysis by Kotlikoff where he recalculated the embedded tax costs? I'm not sure I've read that. Thanks
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Permalink Reply by Sean Fagan on -
As far as "The employer and the employee will have to work out who gets these dollars." - I don't think there is much to work out. Under the current system, the federal income tax is withheld from the employee so those dollars go back to the employee. The employee's share of social security and medicare (7.65%) also gets returned to the employee and the employer gets to keep his share (also 7.65%) of the SS and Medicare taxes. If an employer attempts to keep any of the dollars that should go back to the employee (essentially cutting the employee's wages) two things would happen - 1. the employee screams bloody murder and 2. the employee walks out. This would also negate one of the biggest promoting tools of the FairTax - employees getting "their whole paycheck".
So, what's the bottom line? I'll use our business as an example and keep things simple. Our business (a "S" corp) pays my wife (also the owner) a monthly salary of $4,000. We write her a check for $3,418.37 (4,000.00 -275.63 FIT, -248.00 SS, -58.00 Medicare (using current tax tables)). Our business also coughs up $306.00 for its share of SS and Medicare taxes. Under the current system, our income statement has two entries - $4,000.00-Salary expense and $306.00-Payroll tax expense and we get to deduct both of these items from our business income that we pay taxes on at the end of the year. Under the FairTax there would be only one entry on the income statement - $4,000.00-Salary expense (she really does get her whole paycheck since we don't pay any benefits). While we get to pocket our share of the payroll taxes, we also "lose" the deduction for payroll taxes. Oh wait, that's right, we don't need it anymore because we won't pay taxes on the additional $3,672.00 annual income we'll experience from not paying payroll taxes any more. As a result, we're able to immediately lower our prices by 7.65%.
Ok, so where are the big savings? Where does the other 15% in price reductions come from? Well, lets not forget that my wife (who is also the sole stockholder) is no longer paying taxes on her salary which amounts to almost $7,000 a year, but even more importantly she also no longer has to pay taxes on the annual income of the business itself - last year that amounted to a little more than $34,000 which puts us into a higher tax bracket. Simply put, the other 15% comes from the tax savings on the business income.
Clear enough?
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Permalink Reply by Dennis Wall on -
I think I may have caused some confusion with my post of "employer and employee working out who gets these dollars". Let me start with I support the FairTax one thousand percent. I just joined you guys the day I posted the comment. I am an employee and not an employer. And I agree that if our government gave up ownership of those tax dollars taken out of my check they would rightfully be mine to keep. But these dollars are a part of the embedded taxes in the cost of products. My employer is in competition with other companies as all companies are and if I give up some of these dollars "which I have never had anyway" my employer will be more competitive. I am just saying you would still be better off after the FairTax without those dollars than you are now because of the prebate check and keeping all of your overtime or bonuses. Yes I would love to have those extra dollars but just give me the "FairTax" that is my main priority.
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Permalink Reply by Sean Fagan on
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Dennis,
Thank you for your comments and welcome to Fair Tax Nation. We are happy you are here!
Perhaps I did misunderstand the intent of your original post - but since it gave me cause to write that rather lengthy explanation, which I am pleased with, don't worry about my confusion.
I would like to disagree with you about the taxes withheld from your paycheck are part of the embedded taxes in the cost of production. Why not? Because it is your money, not the company's (the government also does not "own" those tax dollars, they are yours - the government just takes them before you get them). Only the employer's share of the payroll taxes can be considered as part of the embedded taxes. Refer back to my example and take note that only our share of the social security and medicare taxes (the $306) is on the income statement. As I suggested, the largest portion of the embedded taxes comes from the income taxes on the business. We paid an additional $8,600 in taxes on that $34,000 of income - 25%. Now add in our cost of compliance (accountant, tax attorney, etc. - "embedded costs" if you will) and that all just adds even more savings.
You are definitely right about being better off with the FairTax!
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Permalink Reply by Dennis Wall on
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Yes you are right, all of you are right, but I am right too. Contracturaly all of those dollars belong to the employee and when it comes to union shops or large corporations there would be lawsuits everywhere if they tried to take those dollars. But lets say my wages were $100.00 per day, all of that hundred bucks is a cost to the company I work for, whether it is paid to me or the government. I am just saying these dollars are a drop in the bucket compared to what the FairTax will do for all of our prosperity. The 22% tax that the government says is embedded, I do not begin to think I know what they figured for it. But statistics I found on line @ The Brookings Institute shows of all income the US government took in, 45% was individual income tax 35% was payroll tax and 15% was corporate taxes, this was for year 2007. Maybe you guys are right but I do not care one way or the other because once the FairTax is emplemented you will have hide under your bed to keep from getting a raise or job offer from someone else. In 2007 our governments income was 2.5 trillion dollars, in the last 6 months our government has appropriated over 6 trillion to be spent and they are talking a couple trillion more with healthcare and green energy. The smartest people in this country were the ones who formed this country in 1776, they had the time. These days the smartest people in this country are not running the government but are running the business in the private sector like some of you guys, why would you take the paycut to be President or a congresman. "WE THE PEOPLE' are going to have to get this 'Giant' back on its feet and off of the "crack" our leaders are on. And the FairTax "IS" the solution.
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Permalink Reply by Jeff G on
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To your point Sean, I think employers will be contractually obligated to pay their employees gross wages. You work for gross and that is the contract you have with the employer. If it is anything less, than employers will have to renegotiate each employee contract (as we'd all adjust our dependent count to zero). I think the fed will likely allow this accommodation to occur to prevent union cries and a law suite fiasco.
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Permalink Reply by Sean Fagan on
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This would most certainly be true for large corporations, manufacturers and any union shop or company where a contract exists.
In our own small (mom & pop) business we employ two part-time employees and neither of them have a contract other than a verbal agreement and a mutual understanding. I'm rather certain we could lower their wage rate without fear of legal repercussions. Would we do it? Heck no! Since we withhold payroll taxes for the sole purpose of sending them to the IRS, pure logic dictates that with no IRS then there is also no withholding - to do otherwise would be economic suicide.
If your use of the term "fed" means the IRS then the question of allowing the accommodation becomes moot since the IRS would no longer exist under the FairTax.
Thanks again for your comments Jeff - your posts help provide a lively discussion.
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Permalink Reply by Pat Conroy on
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Here's how my company would most likely deal with the FairTax. I sell software to businesses and have 30 employees (about $120K per month in total payroll costs). Our typical sale is $10-$12K, including training. Athough we have competitors, price is not the primary selling factor in most cases. I probably would not lower the price of my software and services initially.
So, what would I do with the $9-$10K monthly savings in payroll taxes? Probably hire another employee or two and spend more on marketing. In addition, I would save money on corporate income tax. That too, would probably be used for hiring and marketing. Over time, the market would dictate what I do with pricing. Additional employees might allow me to add features and decrease my time to market that would justify NOT reducing prices.
The bottom line is that some payroll and income tax savings will be used to reduce prices immediately due to market forces (e.g., retail) and some will be used to create more jobs, either directly through hiring or indirectly through increased spending.
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Permalink Reply by micheleking on
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Don't understand why the Fed Res. $ authority has to do anything. What is this "accomodation?" I understand the 3 categories of accomodation part. Just remember that every single time greenspan spoke...ugh!
Forgot the "purchasing power" angle. thanks!
Agree very much w/ the folks that own businesses. All sound very reasonable.
Mr. Fagan, did you read "explanation" part of Mr. JeffG's thing? (My head got stuck in there last nite.) hope so 'cause I want you to help w/ my ?'s. Call it penance.
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Permalink Reply by Sean Fagan on
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Yes, Mr. King, I read it - but I must admit I'm not sure I understood all of it either. I have a feeling that JeffG might be either an economist or a finance major graduate (I did see that his wife is/was a finance major). There are a lot of heavy duty calculations in his explanation and the comments following his explanation which I find a little hard to follow at times. Again, Jeff's explanation and his answers to the comments are extremely well thought out and presented - but some of it is at a level a couple of notches above an average Joe's understanding and I would have to take some refresher courses in economics to follow all of it.
But go ahead and fire off your questions - I'll do my best to answer them.
By the way, I saw your reference to me as "the young Mr. Fagan" in another discussion. While I certainly appreciate the complement - at 59, I find it difficult to think of myself as "young"; and by all means - just call me Sean.
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i can see the immediate drop of 7.65% in prices. But how long would y'all guestimate it would take to drop the other 15%? The qtrly. pmts. go away, but that is still far away from $34K. I don't see how y'all take such a lick in the 1st place.
S Corp A $226, 667 X 15% =paid $34K bus taxes (BRUTAL!!!)
Wish I had a printer to study the math of "explanation." It's going to take me a while. Some of the ?'s I had were general. Didn't know where the figure came from. But math is math. So we oughta at least get the gist of it.
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Permalink Reply by Sean Fagan on
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If the FairTax takes effect on the first day of the year as expected, then we would begin not paying income taxes on earnings from that day as well. Assuming you're working from the budget and cash flow analysis you developed for the first year of the FairTax then you already know what to expect in earnings by the end of the year. Therefore, I myself don't see any reason why we can't implement the full price reductions from day one as well.
Where did you come up with the 15% tax rate? As I wrote in a message to Dennis a little earlier, we paid 25%.
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