Posted on 09/02/2007 6:42:46 AM PDT by Man50D
You are correct. My math was indeed faulty.
A 21,000 car today contains about 23% in hidden U.S. taxes that the Fair Tax will remove. This will drop the price (assuming the manufacturer passes on all of the savings) to $16170. Add the Fair Tax of 23% and the car is back up to 21,000.
(No, that's not an error. The Fair Tax rate of 23% is not applied like a sales tax even though it's called a sales tax. It's applied like an income tax.
For example, a $100 item on the shelf contains $23 in Fair Tax. Ergo, 23%. The item without the tax is therefore $77. A tax of $23 on a $77 item is a 30% sales tax.)
Back to the cars. So a domestic car stays at at 21,000. If the import it competed against was also priced at $21,000, its price will be going up to $27,300. (That price contains 23% or $6,300 in Fair Tax added to a $21,000 car.) The price of the import can't be reduced because there are no hidden U.S. taxes.
"All of a sudden the US economy gets a big shot in the arm because domestic cars are now competitive with the foreign"
They sure are! What used to be head-to-head competition is now a blowout! $21,000 for domestic vs $27,300 for foreign? A no brainer!
Now, between us boys, how long do you think Detroit will keep its cars at $21,000 when imports are at $27,300? Hell, they can go to $26,300 and still undercut them foreigners by a thousand bucks! And that gives them $5000 per car to give them union boys a big raise and the whiny stockholders some dividends.
Am I right?
Well, it puts to rest the argument that criminals and illegals and foreigners are not paying taxes today but they will under the Fair Tax. They ARE paying taxes today.
It also explains where the manufacturer gets the money to reduce prices.
Hmmmmm. That's all I can think of.
Good reporting. However, when interest rates drop, I have never seen the cost of a car drop. Usually such a drop is when the new models come out or sales are sluggish.
The government has mandated that cars meet a certain gas mileage. In response, local governments raise local gas taxes to make up for lost revenue - including talk of using satellite tracking.
In summary, there is no tax some politician didn’t like. Taxes are like a balloon, squeeze one place and it pops out elsewhere. But if it makes the dreamers happy, have at it.
“Now, between us boys, how long do you think Detroit will keep its cars at $21,000 when imports are at $27,300? Hell, they can go to $26,300 and still undercut them foreigners by a thousand bucks! And that gives them $5000 per car to give them union boys a big raise and the whiny stockholders some dividends.
Am I right?”
Maybe...The union boys got a big raise when they no longer have to pay income tax. And union wages in the US auto industry, along with really lousy management, are why US cars became uncompetitive. The other part of this - I believe foreign manufacturing costs, especially in the Far East, are less, and they have room to maneuver on price. This is even true where the foreign manufacturer is making the cars in Marysville, Ohio (Honda) etc. They make a lot of their parts (and profit by inflating parts cost to the US plant)outside this country...that is how they keep profits in Japan and pay little income tax in the US.
On to fallacy #2 - that prices will remain the same and you'll have your entire (gross) paycheck. Well, no. It's either/or. (C'mon, you knew deep down it was too good to be true.)
Remember I said the manufacturer had 23% in hidden taxes with which to reduce his price? Well, that 23% includes withholding -- plus the employee portion of FICA and Medicare (7.65%) plus the employer portion of FICA and Medicare (7.65%) plus corporate income taxes. (Keep in mind that labor costs are only about half the cost of the car -- materials and overhead represent the rest.)
This had been a basic argument on this board -- how much is there in hidden taxes (I've seen claims as high as 32%) and how many of those taxes will be kept by the employer and used to reduce the price of the product (before the Fair Tax is added).
The other side of the argument, the one you alluded to, is where the employee gets his gross pay (his withholding and his portion of FICA) and the employer only keeps his portion of FICA and corporate income taxes. In that scenario, the general concensus on the board has been that represents about 9% of the price of the product.
In that case, a $21,000 domestic car will reduce to $19,110 -- add the 23% Fair Tax and the price is now $24,843. Still under the import. And, again, that's assuming the domestic manufacturer will pass on the entire 9%. He's not required to.
But you do have more to spend. How much more depends, of course, on how much tax you're currently paying (after deductions).
Under the "I get my gross paycheck", I've demonstrated that domestic goods will go up around 18% (for example, the car from $21,000 to $24,843) and imports 30%. Assuming you buy the same amount of each, that means an average price increase of 24%.
"I believe foreign manufacturing costs, especially in the Far East, are less, and they have room to maneuver on price."
Sure, foreign manufacturers may have some flexibilty. But any "maneuvering" will cut into profits. Or quality. Plus, foreign governments aren't going to be real happy with what the Fair Tax has done to their competitiveness. Your attitude may be, "Good, see how they like it !", but I'm saying they may retaliate with a tariff on our exports to their country. I doubt they're going to just sit there and watch their factories close.
Then there are the cars with foreign names that are produced domestically.
Yep, I remember during one of our protracted droughts in California, we got so good at conserving water that rates were raised.
Adding a FairTax dollar to the price of a gallon of gas should make enviormentalists happy and do a lot to raise CAFE standards, boost the sale of hybrids, and development of electric cars.
Adding the 30% tax to utilities would encourage more people to convert to solar power.
All legal ways to avoid taxes.
fair tax is REGRESSIVE on Business.
It creates double taxation on supplies and products produced.
It creats a whole new federal system of paper pushing and paper pushers.
It also creates the communist style PREBATE which is a boodogle in a Democrat Party’s wet dream. Class warfare via prebate. (who determines ability? who determines need? why its your friendly neighborhood socialist government in Washington DC.)
Fair Tax = Snake Oil.
Every thing is relative. I too am paying taxes when I buy goods and services. The difference is, on a quarterly basis, I send a check to the IRS. They don't. Do you, for G-d's sake see the difference?
Ah, yes. Non-imports. Certainly.
Of course I do. But where did that money come from? Your customer! YOU aren't paying that money.
Look, what if you didn't have to send a check to the IRS? Wouldn't you charge less for your product or service? Meaning, of course, that your customer, not you, was paying that tax.
All you're doing is forwarding their money to the IRS every quarter. It's the price of being a legitimate business.
Oh, keep in mind that under the Fair tax, the criminals and illegals won't be collecting the tax on their products and services. So they'll end up cheating that tax system, too. Do you, for G-d' sake see that?
Do you see a difference in the out of pocket tax payments between a citizen and an illegal? There IS a difference.
Under the FairTax there will be none. Since everyone has to buy stuff from time to time. As a citizen I won't have to write checks to the gov't quarterly. I'll be just like an illegal, I'll only pay when I buy something.
Well, an illegal doesn't pay income taxes. That's why the illegal's services are so cheap.
If the illegal paid income taxes, he'd have to charge more for his services in order to take home the same amount as before. If he charges more, that means the consumer is paying his taxes for him.
Under the Fair Tax, yes, the illegal will be paying taxes every time he buys something. But he does that today! I just showed you that, remember? Remember you asking me why that was important?
The illegal today pays no income taxes. BUT, under the Fair Tax, the illegal won't collect the Fair Tax as part of his services. He will still be cheaper than the legal worker and will still be cheating the system.
So do I - today. Level the playing field so the illegal pays the same percentage tax as I do.
...under the Fair Tax, the illegal won't collect the Fair Tax as part of his services.
Legally he is supposed to.
For most of us, approximately 20% of gross earned income goes as federal income tax (my estimate). With long form deductions we have some control over that. Many high income persons often pay a lower percentage. If that is approximately correct, why is a Fair Tax rate of more than 15% required? Why an effective F Tax of 30%? Does F Tax apply to real estate transactions? Or only to new construction, first time sold (as in case of vehicles)?
As far as the manufacturer’s costs are concerned, materials and overhead also have some portion of hidden taxes in them. So there would likely be more than the estimated 9% you mention.
Overhead costs are reduced just by virtue of the reduced corporate accounting & legal costs when federal income tax is no longer an issue.
One other question - do the F Tax proposals do away with FICA? Where does that 16.3% fit into the equation (7.65% employer pays, 7.65% employee pays)?
One thing is for sure, the Pols WILL raise taxes if possible unless there is more than adequate income as with the Bush Tax Cut. Why? They need to spend money to ingratiate themselves to constituents to be reelected or to line their pockets should they not be reelected. Fair Tax or no, there will be taxes and the pols will pile it on.
Let's take a $100 pair of shoes manufactured in the U.S. Say the costs are 30% materials (ie., $30), 20% overhead (ie., $20), and 50% labor (ie. $50).
If we only reduced labor cost by 9% (going from $50 to $45.50) the price of shoes would drop from $100 to $95.50, a mere 4.5% drop.
We can assume materials will drop (since THAT supplier also saves money) and overhead will drop (corporate taxes go to zero and compliance costs go away). The combined drop could be as high as $9 (ie., 9%).
"If that is approximately correct, why is a Fair Tax rate of more than 15% required?"
Hmmmm. I'll combine that with the next one.
"do the F Tax proposals do away with FICA? Where does that 16.3% fit into the equation (7.65% employer pays, 7.65% employee pays)?"
Yes. FICA and Medicare go away. You keep your 7.65% portion and the employer keeps his 7.65% portion.
The employer portion of FICA (7.65%) plus corporate taxes (that go away) plus employer compliance costs (to fill out the tax forms) all total up to about 9%. That's the 9% that the employer may use to reduce his prices.
So, the employer gets 9%. You are going to get your 20% plus your 7.65%. That's 36.65% in your case. Others may get 10% plus 7.65%. Add 9% for the employer and that person gets 26.65%.
Overall, it works out to about 30% average. Or so they say.
Yeah, I did’t think you read it.
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