OPEN LETTER TO BOORTZ/LINDER (FairTax)

self | August 22, 2005 | RobFromGa

[camelman]

It doesn't' actually matter how you file as a small business!! Whether you are an LLC, a Soleproprietor or anything else, you don't pay taxes. Let's take an example with Bob the Baker:

Bob sells 1000 loaves of bread at $100 each (it's really good bread)
His revenue is therefore $100,000.

His total expenses are $50,000

His profit is $50,000 and he is taxed a personal income tax of 15% and therefore pays $7,500 in taxes. Now at first glance it seem that Bob has$42,500 in take-home pay but we must remember that he is a small business and there is research to show that for every $100 in taxes small businesses pay they spend $724 in compliance costs (figures according to The Tax Foundation). Well let's say the baking industry is simpler than average and that Bob only spends half of that, or $362 per $100 in compliance costs. Well that's an additional $27,300 in compliance costs. You may think that's ridiculous but talk to some small business owners. I speak with them daily and yesterday spoke with one who said he spends an entire month out of the year working on taxes. That's in addition to the time he has to spend quarterly, the amount he has to pay his accountant, AND all the time he spends worrying about the tax implications of every decision he makes. This is real time, effort, energy, and money that could instead go towards GROWING his business.

So... his true take home pay: $15,200.

Along comes the Fairtax....
On the first day the Fairtax goes into effect Jill's bakery lowers her prices 23%. Bob lowers his price to $77 per loaf as well to stay competitive. Bob still sells 1000 loaves for revenue of $77,000
Bob's expenses (rent, supplies, flour) all decline by about 23% as his suppliers realize the tax and compliance savings.
Expenses: $36,500

True take home pay: $40,500 (over 2.5 times what it was before).

The bottom line with the fairtax is that true profit is true profit. It doesn't matter what kind of corporation you may be or even a sole proprietorship. You could be an LLC and pay out the 40,500 as a salary with no taxes or you could be a sole proprietorship and just take the 40,500 with not taxes. Under the current structure people constantly game the system (creating a corporation and then using corporate dividends to then avoid taxes) for their advantage and constantly worry about the structure. The current system is actually the must unfair to small businesses because they bear most of the burden of tax compliance and have the fewest resources to avoid it (unlike the major corporations which can hire tax evasion experts).

Your statement that "If Bob doesn't get to keep his personal income taxes, like everyone else does, then that puts Bob at a disadvantage to everyone else." is simply a misunderstanding of the full picture. Dig deeper.

[Doc B]

"Businessess pay no taxes under the Fairtax. That is his main source of savings that he would be able to pass on to his customers."

For many businesses it is not just the income taxes that they pay but the cost of keeping records for the IRS, tax accountants, tax lawyers, and all the other overhead that is eating them up. As a part time electrical contractor my wife did the book keeping but her time is worth something. Tax accountant: $5375.13 + IRS: $3291.04 + bookkeeper + FICA was all money out of my profit that I would not pay under the FairTax. However, the money I would save by not paying my portion of the FICA would not go to my customers but to my employees. Then again, I would no longer be paying self employment taxes and that is another savings could be passed on to the customers.

[woodbeez]

I totally agree. That's why I said "main" source of savings. There are so many other sources of savings, beyond not paying income tax, as you have so clearly illustrated. I try to keep my reasoning simple for people who don't own a business or don't understand the burden of the current tax code.

I also like that you think the employer portion of FICA is simply something that you would pay the employee if you could. Most people don't get that employers consider wages as only part of the "cost" of employing someone.

[gpburdell95]

We have to remember that to a small business the tax burden is more transparent. They, the sole employee (very small company), has to pay the standard federal taxes, social security, and Medicare out of their gross wages like the rest of us, but they also have to pay the employer match half of the social security and the unemployment tax.

[sitetest]

Dear gpburdell1195,

The sole proprietor or S corp or LLC with just one worker - the owner, has the same compensation burden as for any other worker. Whether the employer side of payroll taxes eventually goes back to the worker or the customer (in the form of reduced prices), it's the same thing for the owner.

And, as a sole proprietor or an S Corp or LLC, if one doesn't officially pay oneself a salary reported on a W-2, as long as the owner pays both sides of payroll taxes, one doesn't pay unemployment insurance. That actually saves the owner a very small amount.


sitetest