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

23% Tomato or 30% Tomato

Question: I did some math. We believe that there is an embedded cost of 22% in the cost of everything that we buy. That means that by enacting the fair tax a $100 item would cost around $78. A Sales tax rate of 23% of that 78$ would leave the final price at $95.94. Thats a $4.06 drop in price even with the fair tax. Am I wrong?

This is an example used to explain the 23% tomato or 30% tomato. I did the math and here is the controversy. If you divide 77 dollars by 23 you get a round about percentage of tax of 30%. That ould be true if the tax was exclusive, meaning it is added to the price of the item, but sine the fair tax is inclusive the above sample that I gave should be true.

Allow me to better explain. If the cost of the item under the current tax code is 100$, removal of the embedded costs which is estamated at 22% would leave the price at 78$ without the tax. Multiply 78$ by .23 (23%) and you will get the amount of taxes collected to be $17.94 cents. Add 17.94 cents to 78$ and you get $95.94. Thats a $4.06 drop from the income based price of a 100$ or 4.06% price drop even with the Fair Tax.
Am I wrong?

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Comment by John Gaver on July 30, 2009 at 12:23pm: The cost of the products that we now buy includes an average of around 22% embedded tax, from all levels of corporate income tax and payroll tax, throughout the manufacture and distribution chain.

If there were no income tax or payroll tax at any level of manufacture and distribution, the cost of a product that sells for $100 today, would be only about $78.

The FairTax uses the embedded tax method of calculation, since the current cost of products includes an embedded tax. That way, everything "appears" to be the same. The price tag continues to read $100 and that is what the consumer pays.

The difference between the income tax and the FairTax, is that the with the FairTax, the tax is all taken out at one and only one point - at the cash register.

Now, if you want to use the tax exclusive method of calculation, then the price tag on the product drops from $100 to $78 and a 29% tax is added to it, bringing the total back up to that same $100.

So, it boils down to this:

Income Tax: Price Tag = $100 incl. tax, Added Tax=0%, Final Cost = $100
Tax inclusive: Price Tag = $100 incl. tax, Added Tax=0%, Final Cost = $100
Tax exclusive: Price Tag = $78 excl. tax, Added Tax=29%, Final Cost = $100

The point is that either way, the cost to the consumer remains the same. That way, the FairTax is revenue neutral.

Competition will drive down retail prices to their natural level of around 22% below their current prices. However, the reduced compliance costs will probably drive the retail prices down even lower.

The consumer will end up paying no more and probably a little less, for everything that he buys. But the real beauty of the FairTax is that the consumer gets to choose when he pays tax and how much tax he pays, by deciding when to spend.

Comment by Richard & Daphne on July 22, 2009 at 4:38pm: I answered this question earlier, but cant find it now...Ifsome wants to sell something with percentage added, they Take their cost and add the "imbeded tax. Say they want $100, then they ADD the imbeded tax of 22% making $122. This means the total is cost is 122% for the sale price. Now someone has something for sale at $100.. That means that the sale $100 sale price divided by 122=$.819 or 1%...If 1% = $.819, then 100% of Cost = $81.90... Thus the add on of 22% =$18.10. Again, The 22% added to COST equals the sale price.. sorry to say your arithmetic was faulty, but intrest is more complex than most people believe...Remember do not take percents of percents it gets you in trouble.