Posted on 08/24/2005 9:40:44 PM PDT by RobFromGa
That's why the "businesss owner" in a capitalist society earns (supposedly) the big bux. He's supposed to be "... the little engine that could ..." and can revamp his business to meet changing conditions and take advantage of new business opportunities, etc.
If you'll look back a few threads this was one of the things I pointed out since ALL businesses pay income tax and not just Subchapter C corporations as some seemed to pretend. When these cascading embedded taxes get removed, the business owner certainly has no free lunch ... nor does he right now for that matter. The government guarantees him nothing (nor the union, etc.). He's got to hustle and scamper. If he can't/won't do that then perhaps he should go to work for (gasp) wages.
I have agreed that there is likely 8-10% cost savings to be realized through: 1)elimination of employer FICA match both as it applies to the labor portion of the business costs, (about 7.5% of labor) 2) elimination of employer FICA match embedded in purchased goods (maybe 5% of purchased parts), (emphasis added) 3) C corporate taxes (about 1-2%), 4) compliance costs (0.5-1% max)
Why and how is the employer contribution to FICA an additional cost to the employer. The total "cost" of any employee = Employee Wage(part of which is returned to the government and is not a cost to Employer) + Employer Contribution to FICA. If it costs X to have an employee now, in a competitive free market economy, taxed on income, why would the employer pay the employee a lesser amount if the only difference is the way that employee is taxed. Self-employed people pay the entire cost of FICA now. They would get the entire savings under a NST. Would self-employed people see a pay cut also?
One would presume that ALL prices of American companies would be reduced by the (debated) amount: domestic products personally consumed AND domestic products sent abroad (our exports are more attractive because the cost less, right?)
Also missing are the purchases made by businessess to equip their businesses (cost reductions on these items is how much of business cost reduction is passes along.) These are tallied under "Gross domestic investment" in National Income and Product Account tables.
Also missing are home and other real estate purchases, also listed in "Gross Domestic Investment" (we'll remove, of course, broker commissions and net purchase of used structures from the totals, as well as private inventory change.)
Also missing are Government purchases (listed under "Government Consumption Expenditures and Gross Investment".)
Reworking the numbers to include these missing items, a more accurate base upon which to apply any tax savings is:
All values in Billions
Personal consumption expenditures: $8,214.3 Less Imports: $1,797.8 Plus Exports: $1,173.8 Plus Gross private domestic investment: $1,928.1 Less Broker Commissions: $98.0 Less Net purchases of used structures: ($4.6) Less Changes in private inventories: $55.4 Plus Government consumption expenditures and gross investment: $2,215.9
========= Equals
Total Cost Reduction Base: $11,585.5
"Obviously owners will correct this imbalance."
Yes, and no. They will have that pressure to limit their after-FairTax prices to close to the prices under the old system.
If they can manage that, while their customers have more money to spend, they will make additional profit through volume.
"The 11% price decrease, combined with a 30% tax on top of it is a 15.7% drop in purchasing power for every dollar already saved."
Well, let's see. My folks are retired. From $40K SS, pension and IRA income, they paid $4K Federal income tax in 2004. They spent $36K, all on stuff that would be FairTax-able.
Using 11% for both the amount prices would fall and the amount of embedded taxes in current prices, what do we find ?
Currently, they receive 89% buying power of their $36K spent. So they received $32K of "stuff".
Under the FairTax, to go out and buy $32K of stuff, they would need 130% of $32K which is $41.6K. So they have $40K from their own income plus $4K from the prebate. Looks to me like they are $2,400 ahead -- $1,850 more buying power.
So they have $40K from their own income plus $4K from the prebate.LOL!...Where did the extra $4K for the "prebate" come from? Would everyone have more money to spend than they earn?
Of course. Do you not understand the prebate ?
Of course. Do you not understand the prebate ?No I guess I don't. Aside from not being a real word, "prebate" is an oxymoron.
If you go buy a new computer for $2,000 and they're offering a $500 in store rebate do you spend $2,000 total or $2500 total?
If your answer is true to Fairtax "prebate" lies you'll say $2500...so where did the extra $500 come from?
First, are you sure your parents are paying a 10% effective income tax rate. That seems really high for a retired couple making $40,000. The CBO shows elderly couples making ~$40,000 pay a effective income tax rate of 1.8%. I think 10% is extremely high. (Remember, we are talking about total income, not taxable income.)
Second, an 11% price drop is still impossible. The FairTax base for 2004 would have been ~$9,716 billion. Add $1,173 billion in exports to that (the claim is taxes are embedded in them too) and you get $10,889 billion. This is the amount that is suppose to be reduced by the "embedded taxes". In 2004, corporate income taxes were $189.4 billion, add half of the employment and general retirement receipts ($344.6 billion) and you get a grand total of $534 billion in tax revenue from corporations. That is 4.9% of the FairTax base plus exports or 5.5% of the domestic FairTax base alone. Let's be extremely generous and say, for discussion, that with compliance costs the "embedded taxes" are 7%.
So, under the current system, your parents make $40,000 and pay $720 in federal income tax. That leaves them $39,280 to spend on items with 7% "embedded taxes." That would allow them to buy $36,530 worth of stuff. This is their effective purchasing power under the current system.
Under the FairTax, they would keep the $40,000 and get a $4,283 Family Consumption Allowance. This gives them $44,283 to spend, but they pay $10,185 in FairTax. This leaves them with $34,098 worth of stuff. Their purchasing power has been reduced by almost $2,500.
And this doesn't even take into account that the 23% FairTax rate is not revenue neutral. In July, Treasury ran the numbers for the Tax Reform Panel and determined it would tax a 24.5% inclusive rate just to replace the income tax! That doesn't even include the payroll tax. The 23% rate is another FairTax fantasy that will be exposed soon.
$4K is what they told me. I haven't looked at their return. But they have no deductions outside the standard deduction, $15K is SS and $25K is pension and mandatory IRA disbursement. Looking at the rate tables, $4k seems about right.
11% is easy. 14% more likely.
You are omitting all of the non-corporate businesses. See earlier posts. The total cost reduction is AT LEAST $950B without including any of the inefficieny costs of the current system.
So Treasury (meaning the IRS -- who has quite a lot to lose) tells you the rate would need to be 24.5% just to replace the $1T of income taxes, and you believe them ? After you've just come up with a tax base of $9,716B ?
Care to explain how that can be ? 24.5% of $9,716B seems to be $2,380B -- over twice what the income tax brings in, and over $500B more than the Income and Payroll taxes together bring in. Using your $9,716B FairTax base, it only takes 18.5% to bring in the $1,800B the income and payroll taxes bring in -- the other 4%+ is to cover the cost of the prebate.
If you are going to use statistics, then at least be consistent.
.
"The FairTax base includes federal spending. Unless you drop the real value of federal consumption (an across the board "real" budget cut of 25%) ..."
Not true. The Fed will be charged Sales Tax on what it purchases, but that will be compensated for by the drop in prices. The Fed will not pay sales tax on its entitlement disbursements. That includes Social Security benefits, Medicare benefits, Medicaid benefits, welfare, food stamps, farm subsidies, education, loan guarantees, etc. You conveniently forgot to remove those from the Federal expenditures, didn't you ?
So there is really only $750B of Federal spending that is FairTaxable. The Fed will save from the price drop like anyone else on education ($415B from Table 255, SAOUS 2003), interest expense ($350B), etc. So if we stick with the 11% price drop figure, the Fed price drop savings would be 11% of $1,515B = $166B. Which comes close to offsetting the 23% tax on the $750B of taxable consumption. Very little net change in Federal spending.
This is not a dirty little secret. It is a complicated topic to explain and the net effect is a wash, so it just isn't mentioned much. But it is not "secret", and it is not some hidden "gotcha" that FairTax proponents want people to be unaware of.
A fine explanation of the actual effects. TYVM, Kellis91789.
Not true. The Fed will be charged Sales Tax on what it purchases, but that will be compensated for by the drop in prices.You said price would drop 11%. When you add the FairTax, prices go up.
Nightmare,
I've looked for all the Federal Spending in one convenient
place, and this is the best I've found -- for 2003 -- at
http://harvester.census.gov/cffr/ . You'll notice that
of all these areas, only the last two items in "Direct
Payments" would be FairTaxable. Those are:
PROCUREMENT CONTRACTS (PC) 327,413,076,294
SALARIES AND WAGES (SW) 210,677,312,249
Which means out of a $2T budget in 2003, only $538B would
be subject to FairTax. For 2004/2005 $750B is more than
generous as an estimate.
CONSOLIDATED FEDERAL FUNDS REPORT: Fiscal Year 2003
Detailed Federal Expenditure Data - United States
SUMMARY TOTALS FY 2003 AMOUNT
DIRECT EXPENDITURES OR OBLIGATIONS
RETIREMENT / DISABILITY PAYMENTS FOR INDIVIDUALS (DR) 636,238,733,450
OTHER DIRECT PAYMENTS FOR INDIVIDUALS (DO) 399,013,819,124
DIRECT PAYMENTS OTHER THAN FOR INDIVIDUALS (DX) 47,105,398,141
GRANTS (BLOCK, FORMULA, PROJECT, AND COOPERATIVE AGREEMENTS) (GG) 441,037,632,532
PROCUREMENT CONTRACTS (PC) 327,413,076,294
SALARIES AND WAGES (SW) 210,677,312,249
TOTAL DIRECT EXPENDITURES OR OBLIGATIONS 2,061,485,971,790
The Fed will not pay sales tax on its entitlement disbursements.We were talking about discretionary spending, but now that you mention it, the bill requires Social Security payments to increase by the amount of the FairTax.
So there is really only $750B of Federal spending that is FairTaxable. The Fed will save from the price drop like anyone else on education ($415B from Table 255, SAOUS 2003),The $415B includes federal, state, and local education expenditures! The Federal amount was only $30.4B, not $415B. (Didn't the federal government spending $415B on education seem a little too high for you? Oh, right. FairTaxers will believe anything.)
"Also, the government would be paying the FairTax on the wages of its employees! Are their wages and salaries going down?"
No, wages are not going down. But looking at the 2003 Census figures -- which I hope you will agree are as impartial as it gets -- Federal salaries and wages were only $210B. And let's not forget that the Fed is going to save 7.65% (the employer side) of those wages and salaries. Subtracting $16B means this is now $194B. With no other price drop, adding FairTax would be $58B. Net increase is $42B.
Adding FairTax onto the Procurement (89% of $327B = $291), it costs us $87B. Net increase is $51B.
Applying the price drop to the block grants, where we do not have to add back any FairTax, we save $49B.
So we have a net increase in Federal spending of $44B. Roughly 2% budget increase. But ... buried in these numbers somewhere is the interest on the Federal debt. I couldn't figure out where. But it is $350B. When T-Bills are no longer taxable income, they can offer a lower rate -- equal to the tax-free bond rate. That will save the Fed $70B in annual interest payments.
So we end up as close to a net wash on the Federal expenditures budget as makes no difference. Even if we didn't reduce the block grants at all, the net effect would be $24B increase in Federal expenditures.
Now do you see why it is not considered a big deal ?
Thanks for the CFFR link - that's really a good one and worth bookmarking.
No, wages are not going down. But looking at the 2003 Census figuresWhy are you looking at the Census data? The AFT used the NIPA tables to determine the FairTax base. If you use the same lines for 2004 that they did, you get $827B in federal government consumption. This is the amount they are using to calculate the revenue generated by the FairTax. If this number is too high, then the FairTax isn't revenue neutral for sure.
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