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.

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Permalink Reply by micheleking on June 1, 2009 at 12:06pm

Mr. Fagan, guess I'm just thinking pass fairtax now-tax amnesty remainder of yr, but that's not the legis. So we all start w/ clean slates Jan1. Still wonder how low a % the other bus. owners think they can go right away. Especially Miss FairTax!

As long as I can remember bus. tax is 25%. I was looking at the "S Corp A" example you gave, 5/29. Thought this was the equation: ? X 15% = $34,000.

(I see now where y'all have answered back to ea other. I get mixed up w/ discussion when they go out sequence. The lites is on...ain't no body home.)

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Permalink Reply by Matthew Czarnek on June 1, 2009 at 2:14pm

A large reason for the savings is because we would be getting rid of the IRS and the money people spend calculating taxes. Spendings on the IRS account for approximately 20% to 25% of what people pay in taxes which is where the 'extra' money comes from.

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Permalink Reply by micheleking on June 1, 2009 at 3:21pm

Mr. Czarnek, I suspect I blew it somewhere trying to figure out the gross $ of S Corp A paying $34K in business taxes. I got the 15% + 7.5% =22.5%, close to the guestimated 23% FairTax bit.

Of the 100% business tax cost: 25% compliance, 25% bus. (operation?) payroll, what is the breakdown?

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Permalink Reply by Sean Fagan on June 2, 2009 at 8:26pm

Don't strain your brain too hard Mr. King. Actually, an S Corp does not pay taxes on income to the IRS (at least not directly). An S Corp's income/earnings are proportionately distributed to its stockholders according to the percentage of the stockholder's share of the company.

For example, since my wife is the sole shareholder, she receives a schedule K-1 (with $34,000 in Box 1) from the company when it files its 1120S, she then reports that $34,000 on form 1040 line 17 and subsequently pays the tax on that amount. If she had only 50% of the shares then the amount would be $17,000.

I would venture to say that a majority of S Corps are small "mom & pop" businesses like ours. The advantage is that you don't pay any social security or medicare taxes on income from the business - otherwise you end up paying 15.3% in "self employment" taxes (both employee and employer shares of the payroll taxes).

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Permalink Reply by Sean Fagan on June 1, 2009 at 7:00pm

I clipped this from a post by Dennis on page 2 of this discussion...

"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."

Take the 15%, and add the 7.65% in corporate payroll taxes (their share of Social Security & Medicare) and you come up with 22.65% - exactly as Mr. King calculated. He also correctly stated that this was close enough to the 23% often quoted by the FairTax as to not make much of a difference.

Now, as Mr. Czarnek pointed out, there will also be a huge savings in compliance costs as well. Don't know for sure what the percentage is - but just imagine not having to pay a whole staff of tax lawyers and accountants, not to mention the amount of time spent on just figuring out what the tax impact would be if you do "X".

This would seem to indicate that companies could indeed reduce their prices by the 23% and then maybe have some left over in compliance savings to pay more dividends or other such things. My guess is they would replace all those tax folks with people who would actually produce something.

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Permalink Reply by Dennis Wall on June 1, 2009 at 7:38pm

On your price changing and how you will convert over. Jan 1 income,payroll taxes etc. will no longer exist. You will have an inventory of product that has embedded taxes still in it. You will sell all of this product at the old price ( or any price you like cause you will be in a free country again, ha!) The government will give you credit for taxes already paid. As your new inventory comes in without embedded taxes and at the cheaper untaxed price then you will be required to add the FAIRTAX to it and pass it on to uncle sam. Its in the second book I think. The paper work may be a little intensive during the switchover I think cause you will get some product that may have partial embedded taxes in it. But I guarantee you are gonna be loving every minute of it, cause the future is bright!

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Permalink Reply by Sean Fagan on June 2, 2009 at 8:07pm

All of our stuff is imported so while we pay import fees (duties - and yes, of course, they are added to the retail price) we don't really have inventory with embedded taxes (at least not US taxes anyway). Unfortunately, duties will not go away under the FairTax.

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Permalink Reply by Nancy L. Gatchel on June 5, 2009 at 10:16am

I've lost a lot of faith in the Brooking's Institute after reading FairTax: The Truth. Those FairTax books have been real eye openers.

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Permalink Reply by Beverly Martin on June 10, 2009 at 3:47pm

Nancy, for those who live life in their cars, they can get FairTax: The Truth as a cd. And yes, it is an eye opener. I loaned a Senator in MO both my book and my cd to help educate her. Wonder if she ever listened. I couldn't just give it to her because she could (As did one Senator) return it saying it was a conflict of interest for her to accept a gift!!!

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Permalink Reply by Beverly Martin on June 10, 2009 at 3:44pm

Sean, I haven't been able to respond because I have been working 8 to 14 hours a day on the rally we are having in Columbia this Saturday. It is my understanding that employees would have a choice in how they would use that tax replacement/elimination. I think this would depend upon the business and its individual busines plan. I like the FairTax because it DOES allow the individual business owner and the employee input into the process. After reading the response from Jeff, I realize that I am certainly going to study his answer. Don't be discouraged at replies. Many FairTax volunteer activist are working their waking hours to get that rally in place and ready for Sat. zzzzz that is me and what I would like to do!

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Permalink Reply by Sean Fagan on June 14, 2009 at 2:48pm

Dear Beverly,

I have been anxiously looking/waiting for the results of your hard efforts to put together the Columbia rally. I certainly hope it was as successful as we all hoped it would be.

Before I put my foot in my mouth again - I would like to ask you for a clarification of your remarks; especially what you mean by "...employees would have a choice...".

Thanks, Sean

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Permalink Reply by Randy Stone on June 10, 2009 at 6:02pm

On the topic of the payroll taxes a business pays...the 7.65% is a percentage of actual payroll dollars spent.
It is not a percentage of gross revenues of the business. SO...you can not add the 7.65% with the 15% to say it is close to the Fair Tax 23%.

The percentage would be a varied result based on total revenue of a particular business and the payroll they spenf to get it. Actual percentages will more than likely be much lower than the 7.65% if added to actual tax percentages.

If a company brings in $100,000 a year and the payroll they spent that year was $20,000, then their payroll tax percentage would be 1.5%, (not 7.65%)

Just thought I would trow that out there.