Posted on 05/14/2006 1:59:13 PM PDT by RobFromGa
FAIRTAX: A Primer Now that the author of the bill, John Linder, admits in his co-authored book "The FairTax Book" that there in no such thing as "Keep 100% of your paycheck, while prices stay the same", let's examine where that leaves the FairTax:
WAGES: It has been made clear by many proponents of the FairTax that they are expecting 100% of their current gross pay, and that many employer/employee wage relationships, including those for government workers are controlled by contract. So, we'll assume every wage earner gets to keep 100% of their current gross pay. Everyone can figure out for him or herself what that gives them in terms of a take-home pay increase.
BUSINESS COSTS: If we assume that businesses get to keep their half of the payroll taxes (7.65% of all payroll costs up to first $95k per employee), plus taxes on corporate profits (average <2% of Cost of Goods sold) and some tax compliance savings (being generous we'll call this 1% savings), this gives the business about 8% of cost savings with which to potentially reduce prices.
PRICES: For domestic goods, if we assume that the entire 8% is passed along to the consumer, this means that pre-tax prices will be 92% of present day prices. That $10 twelve pack will now be $9.20. Of course, the twelve pack of imported beer is still $10 pre-tax. Once the 30% FairTax is added, the price of the domestic beer will be $11.96 and the price of the imported beer will be $13.00 even. So, domestic prices will go up about 20% and imported item prices will go up about 30%.
GOVERNMENT EXPENSES: Since the government expects this plan to enable them to purchase the same things they purchase now, they will need to raise sufficient revenue in order to achieve purchasing power parity. Since they will be paying the 30% FairTax on every item, we can assume that for stuff they buy, they will see the same 20% price increase on domestic items and 30% increase on imported items as other end consumers. So they will need to increase their dollar intake by this 20%+ to enable them to buy the same amount of stuff. And, of course all government salaries will have the 30% FairTax paid on the salary, less the employer half of the payroll taxes, so this is a net 22.35% increase in the cost of the entire payroll of the US government (and states too, but that is another can of worms).
ENTITLEMENT COSTS: Since the social security payments are linked to CPI, when this 20%+ price rise slams through the economy all the social security checks will have to be raised to cover this massive FairTax caused inflation. They will rise by at least 20%, and a litle more because the basket of goods will include some imported items like oil. Medicare/medical expenses will have the FairTax added, for a 20%+ increase.
GOVERNMENT PURCHASING POWER PARITY: with the cost of Payroll, plus everything they buy, plus the entitlements, all going up 20% plus we can assume that the governement will need to collect approximately 20%+ more of the new inflated dollars in order to buy what they are today with today's more stable dollars.
FAIR TAX RATE: Assuming nothing else changes regarding purchasing behavior, size of the government, etc. this means that the 30% FairTax would need to immediately raised 20% (to 36%) just to bring in all the inflated dollars that are required to fund the govt at present level. The price of domestic beer is now $12.50 and the import is $13.60.
SAVED MONEY: All dollars that are post-tax savings would be devalued by the FairTax inflation by 20% in terms of what they can buy with their hard-earned and saved money.
Does this sound like a utoia to anyone? Isn't it very likely that a 36% sales tax will cause consumption to suffer and/or transactions driven into a barter system or the black market where they cannot be taxed. And every dollar that is taken from the legitimate economy is another increase that is needed in the FairTax rate in order to feed the government the amount of money it needs.
Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?
Many of your brethren disagree vehemently.
Can you really describe any of those markets as "competitive" ?
"Status"-type items contain very high profit margins, which also means very high taxes embedded in them. This means the maker has leeway in pricing. He will be able to afford to reduce his price by 10% or whatever is required so that he still has the same customer base. The customer base is entirely dependent on the 'perceived value' even for 'status' items. There are always alternatives. If there weren't, that would mean even under today's system the maker could charge whatever they wanted.
If twenty thousand people will pay $300 for a particular model of Rayban's, why not charge $500 a pair ? What is stopping Rayban from doing that ? They are attempting to maximize their profits while maintaining market share against the perceived value of their customers' alternative choices. If Oakley also raises their prices, then they'll look for another brand. If all sunglass makers raise their prices, their customers will decide sunglasses are not as important and will switch to some other status symbol -- Razor cell-phone, Prada shoes, Rolex watch, whatever.
Is it your position that prices are the result of such collusion? How did the original $10 price get settled on?
Won't those same factors result in a new price eliciting max profits?
Any savings must be realized in lower prices, higher wages, and improved ROI - all benefiting individuals. To the extent that price competition dictates resources, the savings will be used there - analagous for higher wages and ROI.
It is competition that will decide ultimate sell price.
[Like the way Exxon/Mobil is being punished in the marketplace? ]
Oh, they are. It will take a while for them to feel it, but they are definitely going to feel punished 5 years from now. People are parking their SUVs, paying attention to gas mileage on new car purchases, reading about ethanol, biodiesel, electric vehicles, wood-burning stoves, solar energy, etc.
The American per-capita oil usage will not rise over the next ten years as fast as it did when oil was cheap during the last ten years. That is how the consumer will punish the perceived gouging by Exxon/Mobile.
In truly competitive markets, punishment is swift. In non-competitive markets, punishment just takes longer.
Not about the real price.The real price would not change.Many of your brethren disagree vehemently.
"Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?"
You got that right. There is no point in discussing the FairTax at all without the absolute prerequisite of repealing the 16th Amendment.
Flat Taxation neither rewards or punishes, it it simply the reasonable cost of day-to-day life, security, and non-interference in the affairs of business. I can't even comprehend 180 million people becoming registered federal government tax collection agents.
Just state and local tax collection is bad enough, notwithstanding if I get lied to regarding tax exempt status, I pay the tax and a hefty fine while the schmuck skates away.
I pay sales tax in advance on uncollected debts, and get treated like a criminal when I ask for my money back. If I collect on a bad debt, I owe the sales tax on the full amount of the original sale, not on the pittance I collected after legal fees and expenses.
None of the FT's can tell you how they propose to stage a mass re-education of the public sector to change the wrong headed thinking that creates onerous bureaucratic rules like these.
The rules and regs will spin and twist and get perverted by the powerful to retain their positions.
I joked with someone that all the proposed "registered collector" numbers will begin with the number "666" and I thought the poor guy was going to have a stroke right there.
The only thing that changes with a Flat Tax other than a lower tax bill sent in with a post card, is 55,000 pages of tax code become waste paper.
That isn't the way you laid out the rules for your game. If I drop my price to $9.50 all at once, I get all your customers. You don't get any back until your price is below my price.Sorry. I should have been more clear. If when have the same price we split the market.
Or did you mean that we took turns -- I drop a penny, then you drop two pennies to get your customer back, then I drop two pennies to get him back to my side ... and so on until we've both hit the lowest price we are willing to go ?No. You drop a penny, take my customers and then I drop a penny and get them back.
Having only two competitors in a market is not realistic in terms of the 'competitive market' where I think prices devolve to the lowest level.It doesn't matter how many competitors there are. None of them profit by making it a race to the bottom.
New entrants fail all the time because established competitors are willing to underbid them to keep them out of the market. If there is a large pool of potential new entrants, the result is perpetual low prices.If there is a large pool of new entrants into the market and replace the supply that left, how is the company going to make more money by lowering prices? They would just be selling the same amount at lower prices. Then the lower price would just be temporary.
That could be because it's never been done.
Flat Taxation neither rewards or punishes, it it simply the reasonable cost of day-to-day life, security, and non-interference in the affairs of business.
Why is the flat tax different in these respects than the income tax we have? If the flat income tax neither rewards or punishes then does the income tax we have? Does the nrst? You're a little loopy here.
And why do you oppose an imaginary foe? What you imagine is, well, your imagination. Silly, really, reading posts like this.
Aren't you the one who opposed the nrst due to a lack of a transitional credit on embedded tax on inventory held at changeover? Then you read section 902- "Transitional Credit". I suppose you imagined the problem and failed to look at the nrst to see that problem is addressed. Some imagination you got.
It's not a race to the bottom - it's a race to maximize profits.
When a business lowers price, it's not to reduce profits and race to the bottom. Good grief.
The reduction is an effort to maximize profit. If maximum price brought maximum profit then we'd see prices increase without bound. But we don't see that. That's because max price does NOT necessarily bring max profit.
So your "race to the bottom" saying is for dunderheads. It's a race to max profits.
Do you not agree that profits may increase by lowering a price?
And probably for good reason - but you're wrong, Every VAT started as a simple "sales tax" - everywhere.
Why is the flat tax different in these respects than the income tax we have? If the flat income tax neither rewards or punishes then does the income tax we have? Does the nrst? You're a little loopy here.
Nice bit of pretzel logic here, wtf are you talking about?
And why do you oppose an imaginary foe? What you imagine is, well, your imagination. Silly, really, reading posts like this.
Imaginary? is your 1040 imaginary?
The rest is even worthy of a reply.
Uh, no. Wrong. Just wrong. Like most of what you say - ignorant.
Sayz youz, eh?
Look-it-up.
You are ignorant of the VAT's conception.
You really don't know much at all.
Further, the countries that have vats combine them with income taxes - see Europe.
I think you need to look it up young un.
The point is, that if the RayBan company keeps all its Income Tax cost relief under the FairTax and raises it's price 30%, it may not suffer the "punishment" you think it will: price is not that important to the customer; if it was, Maui Jim would be out of business ... same product, twice the price of RayBans ... today! (Not to mention Evian water, or iPods)
You haven't addressed any of the issues that prevent me from supporting a Flat Income Tax.
And you do realize that most of the 55,000 pages are concerned with simply DEFINING income, right ? That is where the politicians get their power, and unless that is defined ONCE, simply, and then the power to refine is taken away from the politicians, those 55,000 pages will back in a decade.
[It doesn't matter how many competitors there are. None of them profit by making it a race to the bottom.]
No, but the collusion/trust/price-fixing that might exist in a two-competitor market doesn't exist in a larger market.
[If there is a large pool of new entrants into the market and replace the supply that left, how is the company going to make more money by lowering prices? ]
The established seller hopes to gain that market share and increase profit by increasing volume. If he can do that and establish some brand loyalty, he can capitalize on *brief* periods of higher prices and higher volumes. It is those brief periods that attract new entrants, though, so over the long term, the average of prices always returns to the level where profits are just barely worth running the business -- ie, the profit exceeds costs plus risk as compared to other investments.
I've worked in a very competitive business for 20 years. As much as we always promise we won't participate in cut-throat competition, it always turns out that way. We try to focus on our new designs where profit is higher because head-to-head competition doesn't yet exist. But the edge doesn't last long before competitors have alternatives to offer customers and the cutthroat competition cuts the profit again. We stay in a market until the net profit is down to 8%-9% and then we exit. That is the reality I've observed over 20 years.
The point of far stricter and stronger limits on spending automatically requires a simple(r) definition of income, or the taxing authority would have to spend far too much of their budget to collect it (like it does now).
Look at how income is defined in the nations using the flat tax and you will find amazingly simple rules, that maximize not only collection, but perceived fairness. Most do not tax savings, or retirement income at all. There are no withholdings or exemptions ( voluntary withholding is allowed in some cases ).
Nothing good happens until you muzzle the pit bull, because its the only way you can trust it not to bite you.
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