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 Sean Fagan on May 24, 2009 at 12:02am

I've added this comment just to keep the discussion on the main page for a while longer.

Actually I'm kind of disappointed it hasn't gotten a response - I think it is worthy of discussion.

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Permalink Reply by micheleking on June 1, 2009 at 12:35pm

meant to say the other day, perhaps folks couldn't find the discussion is why it got lost.

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Permalink Reply by Jeff G on May 24, 2009 at 8:02am

Sean,
Simple question, but the answer may be complicated. You are correct that their is no way to do both. Let me explain the situation. While most will quote either no price change (non-accommodation) or a full price change (full accommodation), the likely outcome is some varying degree between the two.

Price and wage changes after the FairTax would largely depend on the response of the Federal Reserve monetary authorities. Non-accommodation of the money supply would suggest retail prices and take home pay (net pay) stay the same—embedded taxes are replaced by the FairTax. Full accommodation would suggest prices and incomes (split with business) rise by the exclusive rate (i.e. 30 percent)—all embedded taxes become windfall gains. Partial accommodation would suggest a varying degree in-between.

In the latest Boortz and Linder FairTax Book, they subscribed to the idea of a partial accommodation. David Tuerck of BHI also states in one of their research papers that "The monetary authorities would have to consider how the degree of accommodation, varying from none to full, would affect the overall economy and how it would affect the well-being of various groups such as retirees." Each models would effect the economy and individual groups in a different way; for example, a full accommodation would have a negative effect on retirees as it devalues their savings to some degree (which may influence if they have more or less purchasing power after implementation).

Under a partial accommodation, businesses could provided employees with gross pay (including income tax withholding and the employee share of payroll taxes), and then use the rest to reduce costs. This reduction would be from the removal of the remaining embedded costs, including corporate taxes, compliance costs, and the employer share of payroll taxes. This cost is estimated between 10-12% inclusive, which would result in an after tax price increase of about 15-17% exclusive. What makes using accommodation models a little more difficult is that people often forget to factor in positive purchasing power changes due to the decrease costs, which greatly effects the real burden. Here is a explanation of that topic, though it is long.

So, what is the best way to present it... I don't know. For certain, don't imply that you get your cake and eat it too. It may be easier to start with non-accommodation (prices stay the same and they take home net pay) as it may be easier for people to understand, but I think the likely outcome is a partial accommodation (prices increase by a certain amount and they take home gross pay), so I would try to explain how that would work (depending on how much time you have with the person).

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Permalink Reply by Nancy L. Gatchel on May 24, 2009 at 9:30am

Jeff, the first paragraph in your post is the simple answer and that's why stick with "virtually no change in prices". Some will be lower, some slightly higher. Variables, and all that.

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Permalink Reply by Sean Fagan on May 24, 2009 at 11:29am

Wow, that's a pretty heady answer!

Are you by any chance the poster of the information in the discussion link Jeff? I found it very interesting - even if it did require me to do a lot of thinking.

One of the common themes I saw in the comments was "the man in the street" - and that is exactly who this topic is addressed to - yep, Mr. Joe 6pack himself, and let me apologize right now for the use of that term. I strongly believe Mr. Joe is the economic backbone of this country and I mean no disrespect.

My post was meant to bring attention to promoters of the FairTax that they were possibly offering to much "pie in the sky" kind of stuff. Getting rid of the IRS while keeping pretty much everything else the same just speaks tons to me. When you start talking about how it will also "fix" all these other things, then I have to think it is too good to be true - and that's what "the man in the street" will think as well, including the mass media and every other opponent of the FairTax.

I think it is time for us to get back to the basics and present the FairTax in the manner it was originally intended - getting rid of the IRS with little or no impact on Mr. Joe 6pack, funding the Government at the current (revenue neutral) rate and bringing foreign investments back to the US.

Thanks for commenting Jeff!

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Permalink Reply by Jeff G on May 24, 2009 at 7:58pm

Sean, yes - I wrote the purchasing power post that was linked in my reply. Thanks for the complement.

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Permalink Reply by Ron Wenrich on May 24, 2009 at 9:19am

One of the problems with the embedded tax question is what happens to that tax dollar once it becomes no longer a tax. I've seen where people think that the embedded tax will disappear, and go into labor's pocket. In essence, prices remain the same after the tax, and labor gets a 20% raise in pay through no income tax.

But, in Fair Tax: The Truth Boortz pointed out that you can't use that dollar twice. Either the dollar comes out of the labor portion of the product, or it goes into labor's pocket as take home pay. You can't spend that dollar twice.

Corporations will also have to face what to do with their saved tax dollar. Do they reduce profits, invest it in their operations, give some to labor, or return it as dividends? There's no easy answer, and what works in one industry might not in another. But, they can only spend that dollar once. They can't reduce costs by that dollar and give more to labor.

Jeff G has given a very good answer. I agree that there will be a probable rise in prices after the tax if figured in, but also a rise in consumer purchasing power.

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Permalink Reply by Randy Stone on May 24, 2009 at 10:16am

How will I spend my money after the Fair Tax? (and there will be more of it). How will I spend my money as a business after the Fair Tax? (or how will I do my buget for the business).

Well, the answer is quite simply "the same". I will always use the same budget at home as I do now, with no exception. That will be different than than you may do yours or maybe not.

My business will have a "business plan" for each year as I do now. As some expenses may move around, they will still be there. I plan to give employees the matched payroll taxes as part of their income. We are a small business and that money in our budget is payroll expenses and it will not change as we go to the Fair Tax. Not every business will do the same, but remember that most will give annual increases in pay and the savings will quickly be gone anyway.

If my suppliers of raw materials or products do lower prices from their current prices, then I can lower mine. I think with the inventory grace period, most will remain the same. After that, each business will have a plan/budget to take them forward.

Each business will have to watch what others may do so they can remain competetive anyway. Much like they do now. Supply and demand will always play a big part of pricing no matter what.

So, in my mind, personal and business practices will be the same. I will live within my budget and be happy with it. How you spend your money or operate your business may be different, but we all pretty much are creatures of habit and we adapt slowly to changes.

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Permalink Reply by Randy Stone on May 24, 2009 at 10:45am

Basically, I do see my payroll expenses remaining the same with my plan. THAT means even more money in the hands of my employees and it gives them more purchasing power. I am a retailer and that would be my goal. To put more money in the hands of consumers.
That does not mean that my expenses will not go down from all the other taxes and related expenses. But like I said above, I am at the end of the line and it will depend on all the suppliers position themselves as to whether my prices have room to go down.
I do not think this is spending the same dollar twice, part of it goes out and some stays in.

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Permalink Reply by Larry Walters on May 24, 2009 at 10:43pm

I don't think the chances of companies increasing employee benefits is that good. In doing that it would put them at a price disadvantage to competitors who decide to keep lower pricing.

Considering pricing in general, it will depend on the industry whether prices are less, the same or higher under the FairTax. Those businesses whose embedded costs are 20%, 21% would probably high higher prices. Those with embedded costs at 25%, 24% probbly have slightly lower.

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Permalink Reply by Dennis Wall on May 25, 2009 at 7:44pm

The taxes that are now taken out of our checks are part of the embedded taxes in the cost of goods and services. The employer and the employee will have to work out who gets these dollars. If the employee gets them then prices will go up on what they produce. If the employer saves these dollars then his prices will remain the same, simply speaking. Maybe the employee can keep a fifth and the employer four/fifths. Your company is in competition with other companies and we must keep this in mind. Ten dollars in your pocket is worth more than fifteen dollars promised when and if you go back to work. Right now when you work overtime you basically take home the same amount per hour on overtime as you did the first 40 hours. The government is the one that gets time and a half. Under the FairTax you will truly get time and half or doubletime because there is no taxes taken out of your check. So you get a raise even if the employer keeps all of these deleted taxes. Plus you get a raise with the "prebate check". All this needs to be worked out in the private sector, by "We the people" not the government.

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Permalink Reply by chiefcook on May 25, 2009 at 8:46pm

I disagree with the thought that an employer considers the employee taxes as part of their tax costs.

If an employee is paid $10 per hour, they get a gross pay of $400 for a 40 hour work week. That is the "payroll" to the employee. There are additional expense factors that the employer incurs. This includes the employer tax costs for 1/2 of SS & Medicare, worker compensation and any other fringe benefits. The total Labor costs may be $14.00 per hour. The extra $4.00 includes the employer embedded tax amount (not the full $4.00) but does not include the compliance cost of accounting and other expenses.

Dale J included both the employer and employee taxes in the original calculations of embedded tax costs. This was later removed when Larry K did the recalculations of the embedded tax costs. The difference amounted to approx 0.9% difference.