Posted on 09/14/2005 1:22:09 PM PDT by ancient_geezer
Today's Nuze
http://boortz.com/nuze/index.html
September 14, 2005
FAIR TAX UPDATE
My friends, you have no idea of the impact that The FairTax Book is having on our elected officials in Washington. Officials at the highest levels are expressing their surprise to Congressman Linder of the success of the book, and you can believe that they are ready to take some action. While on vacation I'm writing some items to clarify portions of the book --- and I hope to have them posted in the Nuze by Thursday. In the meantime, if you haven't yet bought or ordered The FairTax Book, please do so. The link above will take you to amazon.com or see if your local book store has any left. Hey ..I'm not trying to pad my own pockets here. I've already told you that my royalties age going 100% to charity, including a rather large check to the Red Cross for Katrina relief. My interest here is in promoting a tax reform plan that I sincerely believe will bring about a positive change in the life of virtually every American, except, perhaps, for the K Street lobbyists who have been making hundreds of thousands a year gaming the present tax system for their clients. The longer we keep The FairTax Book up near the top of The New York Times Bestsellers List, the more attention we get in Washington DC, and the greater the chance that HR 25 is going to get serious consideration in Washington.
Last weekend I was sitting in a restaurant near the west coast. At the next table was a man I knew to be well connected in Washington and Hollywood. (Not mentioning names here.) I actually overheard him telling his luncheon guests about the FairTax! The word is getting around, my friends, and politicians are finding this movement harder and harder to ignore.
As soon as I'm back off vacation I'll be heading out for more book signings. One week from Saturday I'll be at the Republican Leadership Conference at the Grand Hotel on Mackinac Island. I'm told that almost every Republican with presidential aspirations will be there. When I get up before that group to make my presentation on The FairTax I want to be able to tell them that the book is still right up there at the top of the list. The books that are sold between now and Monday afternoon will make the difference ... so you know what to do.
Notice the anomaly that in post #42 & 42, the poster said that "corporate taxes". etc. The embedded taxes cover far more than just "corporate" taxes since, of course, there are other sorts of businesses taxes other than "corporate". Even if the tax is paid by individuals the cascaded, embedded tax effects still apply.In #42, I said "This can't be done with with just corporate income tax and the employer portion of payroll taxes."
1. In the 33% profit example (34.4% tax rate,) what is the highest level that the embedded taxes, measured as a % of sale price, can ever be?
2. In the 10% profit example (25% tax rate,) what is the highest level that the embedded taxes, measured as a % of sale price, can ever be?
3. In the FairTax, (23% tax rate,) what is the level of tax, measured as a % of sale price?
4. Do you see a pattern here?
If any one else wants to give it a try (it's not very difficult,) please jump in. pigdog usually avoids direct answers to direct questions.
Your questions fail to recognize the systemic costs associated with those taxes that are reduced and in some instances costly tax avoidence schemes are completely removed as the tax system in which they are dependant to provide an advantage in their use disappears.
The key to understanding total price decline is in understanding that not only are income/payroll taxes removed from business, the costs associated with minimizing those taxes and IRS reporting go away as well.
Additionally, as price is effected with removal of tax per-se and overhead costs associated with them, trade effects a net gain in production level as equilibrium price shifts toward opptimal efficiency levels.
Overall the gains can be substantial and definitely more than just the "revenue neutral" amount that taxes collected by government per-se would account for.
Hey, this sounds very good. Thanks for the post.
I am the author of the example use by pigdog. He is, as he usually does, misrepresenting the mechanism (my "discussions" with pigdog, and I use the term loosely here) have led me to believe the pigdog does not understant the math.
Taxes are indeed embedded in prices. However, taxes are only proportional to profit.
This notion of "cascading" is used to infer that income (profit) taxes are taxing previously paid taxes. While this can be problem with sales and excise taxes, it is not a problem with income taxes. Income taxes levy tax only on incremental profit not on costs (which may include previously paid taxes.) While the incremental profit (including that portion of it remitted as an income tax) are indeed carried on to the next level of production as a part of price (cost the next level,) it is never taxed again ... just passed on.
If your interested on doing a little math, you'll discover that the maximum level that embedded taxes, measured as % of final sale price, can ever be is precisely the tax rate.
The "cascade" mongers want you to believe that taxes are taxed multiple times through the production chain and, therefore, grow to higher levels than would be the case if all the tax was applied at the end (like a retail sales tax would.) It's simply not true. The highest BOTH systems get is the tax rate.
Interestingly enough, since most goods and services are NOT 100% profit, the embedded tax paid under the income tax system is much less than the tax rate. Of all the roughly $11,000 Billion of goods and services produced in the USofA, only about $260 Billion is embedded profit tax, and $411 Billion is embedded employer part of SS tax. That represents an effective tax rate of 6%.
So much for "cascading."
Since they are your examples I'm sure you know the answer especially as we've discussed this before on other threads. Due to the way your sample is constructed, the tax rate (34.4% or 25% depending) must be the limiting factor.
That, however, is not the important figure, but the "tax cost as % of revenue" is the pertinent one since that is what buyers will be paying in the way of increased prices and generally well before the limiting tax rate factor is reached. Whether there is a limit or not is certainly not the point since the example could have been constructed differently - but it was your claim that this way the One True Way to show cascading, embedded taxes.
It is the "tax cost as % of revenue" that will be removed under the FairTax. The fact that the FairTax rate itself is fixed at a maximum of 23% (but may decrease due to the Bush tax cuts) is totally unrelated to embedded income tax as you surely know. The effective rate of the FairTax for a given situation will typically be a good bit less than the maximum FairTax rate where the rate being embedded as nothing but non-productive cost into prices with the income tax can actually be at quite a bit higher rate than 23% (or 19% with the Bush tax cuts).
Are you, perhaps, attempting to say that once these embedded taxes are removed under the FairTax that prices will somehow remain the same or even increase? Perhaps you're trying to make the case that price levels as under the income tax will drop when the FairTax becomes law but then will be increased back in the upward direction due to the FairTax?
Perhaps, though (as you tried previously) you're merely trying to find something to start a quarrel with. If that's the case you've got a loser on your hands as I've told you before. And I STILL don't care for your patronizing posts.
I guess if we were talking about that, I'd have mentioned it ... but we're not.
There is a seperate, important, debate to be had about the level of real cost embedded in the system that is directly available for price reduction. You and I differ on what is defined as a cost, and what is defined as a growth opportunity. And we differ on the magnitude of the numbers.
So be it.
My questions relate precisely to representations made by pigdog and nothing more.
So, what exactly are the components of "tax cost" as you use the term in "tax cost as a % of revene" anyway?
If he has some unforeseen expenses one month he can cut back on his purchase as he does now. The income tax, however, doesn't care that his carburetor went out. He has to pay the taxes anyway. Under the fair tax, if his carburetor goes out, he can fore go steaks this month and eat hamburger but still sock some money away for retirement. He can buy a used Big Bertha instead of a new Bubble Burner. He can put off unnecessary purchases for a while.
In other words, he is financially no better off but he has a big advantage that he didn't have before, he can decline to pay his federal taxes for a month or more.
I'm with you- I'm not an economist or an accountant. It seems that this dispute over the size of embedded tax burden cannot be proven in any solid way by either side. It all goes back to expert opinions, computer models, charts and such.
For my part, I do know this. The tax burden is a fixed size, set forth by the tax code. The adoption of the fairtax changes the method of collection, that's all. It's meant to be revenue neutral. If it's not, it can be changed- either by raising the rate to make up for shortfall, or by reducing the rate to correct surplus. (Either one of these is going to mean a fight, of course.)
The results of a consumption tax on the psyche of America is worth far more than revenue, however. Taxing income in any form is Marxist. (see my homepage.) Removing the manipulative threat of the IRS and encouraging savings and investment is going to do more for the cause of freedom worldwide than any war.
In the FairTax it is exactly equal to the tax rate.You continue to imply that the Income Tax system taxes previously paid profit taxes or payroll taxes over and over again as a product passes through the production chain. That simply does not happen.In the Income Tax, it is limited to the tax rate, but is effectively significantly less than the tax rate because the entity that is taxed (profit) is only a small part of final price.
"... taxes are only proportional to profit ..."
Why are you still carrying coals to Newcastle??? The last time you used that phrase I gave it a well-earned "DUH!!!". Your apparent pontificating of the same thing does nothing since, by definition, that is how business tax is derived - from profit. Neither I nor anyone else I know has stated otherwise.
This elucidation, however, gets different treatment -
"This notion of "cascading" is used to infer that income (profit) taxes are taxing previously paid taxes."
In a word - NO. The discussion is not about taxes "previously paid" at all but accrued and (at some unspecified point) presumably paid. And it is not an inferrence but a clear illustration that taxes at a later level in the chain indeed do tax the tax COSTS accrued earlier in the chain whether paid or merely accrued. Not the taxes themselves which are taxed later in the chain (those taxes remain in the level where accrued/paid), but the COSTS of those taxes which have, indeed, been passed forward.
To see how this works, let's look at the first example in post #23 (with the 34.4% tax rate) to see what happens to taxes as they progress through the chain of levels. In Level 1 there is $0.35 in tax paid (or accrued - either way). THis $0.35 is (and must be) part of the Profit Before Tax and this entire PBT of $1.01 (which includes the $0.35 in tax) is passed on to Level 2 after it has had the L1 input of $1.00 added to it, making L2 input $2.01 (of which $0.35 is tax from L1 remember - which tax has been paid/accrued by the L1 business from the $2.01 in sales to L2). The $0.35 portion in L2 that represented tax in L1 is now boosted by the markup in L2 (a multiplying effect which multiplies the entire cost including the $0.35 from L1) and adds to the input cost of L2 to give a new tax of $0.70 which is passed along - still with what was originally a $0.35 tax from L1. The upshot of the mechanism is that the cascading taxes both multiply and add and when sold to an end consumer, say at L6, the tax cost as a % of revenue will be (in this case) 33.88% which would represent the savings from removing the business income tax.
So, you see, the discussion is not and never was about merely the taxes themselves, but the costs of taxes that are passed forward, with the multiplicative effect at the next level of what WERE taxes in the earlier level but are now COSTS. This multiplicative process goes on at each level and raises what were taxes in a previous level and multiplies and embeds these costs into new costs at the current level which have the effect of taxing the earlier tax costs once more.
Once again, I note that to attempt to "minimize the numbers" you once again revert to quoting tax as a percentage of revenue. That is not the way taxes are paid as you know full well. They are paid as the tax rate multiplied by the income subject to tax. Revenue has nothing to do with the tax calculation.
And, please, in #72, spare us the truisms about taxes being limited by the maximum tax rates. I'm sure you'll find that most readers of this thread already know that. And your statement about the tax in "final price":
"... but is effectively significantly less than the tax rate because the entity that is taxed (profit) is only a small part of final price ..."
is well off the mark since it is not the tax in that final price that we are discussing but the TAX COSTS that have cascaded (multiplied) through the different levels to that point - which are greatly more than just the tax in that final level ... they are the "tax costs as % of revenue" which will be removed by the FairTax.
I'd also thank you to NOT put words in my mouth since I have never in any of the cascading examples said that payroll taxes were included, but always that merely business income taxes were included - and not even compliance costs. And the effect of the cascading is, indeed, to tax the tax costs caused by taxes in earlier levels to be multiplied and passed forward, artificially raising prices ... QED.
Here are a couple of links you might find helpful in researching tax reform:
http://www.cato.org/pubs/pas/pa-272.html
This was the original piece by the authors of the FairTax bill and shows the derivation behine the revenue neutral rate. It's out of date a bit in a couple of spots but not in any important ones. It covers a good bit of the philosophy involved. Note the background of the two authors.
and this one:
http://www.freerepublic.com/forum/a388d0748789d.htm
entitled "What's so Fair About a tax on Income?" is makes some very good points about tax reform and taxation in genreal.
and this one:
http://www.fairtaxvolunteer.org/smart/tax_system.html
which contains (toward the bottom of it) some more recent data re revenue neutral values.
Costs? What exactly are these costs? They are markups which are proftis to businesses. Your ficticious examples have zero to do with how real businesses operate. Business look at bottom line profit. You assume business are locked into charging some fixed percentage of costs. You also assume that businesses and business owners will be happy making less money while at the same time their employees are pocketing more money. These cascading costs have nothing to do with embedded taxes and everything to do with reducing bottom line profits to businesses. It just does not happen that way.
But strangely you don't seem to comprehend the point he was making.
With the FairTax, the employee gets a take home raise of 7.65% FICA + whatever the FIT withholding is. That should be in the neighborhood of at least 15% for most taxpayers.
The employer get a reduction in employee cost of 7.65% of wages (FICA) + withholding administration costs.
The employer gets a further reduction in overhead of their FIT expenses + associated administration costs. The employer also gets the opportunity to organize and manage their business in a more efficient manner without worrying about tax implications.
The estimated 20-30% price reduction at retail includes cascading of embedded taxes from various levels of production. There is NOT an estimate that prices at every stage of production will drop by 20-30%, or that every retail price will drop by 20-30% - only the average total by the time it reaches the retail sale.
This reduction in accumulated overhead expenses will not necessarily be passed entirely along in reduced sale prices. The overhead reduction could be retained as profits (increased value of the business [stock prices increase]), distributed as dividends, paid as increased salaries, invested in business expansion [employment increases, other businesses gain volume], etc.
Each business owner will seek to maximize return on investment by adjusting these variables. The great news is that the incomprehensible and ever changing income tax code will no longer be a variable they are trying to predict and optimize.
Additionally, the FairTax transition plan provides a great incentive for prices of inventory goods to immediately drop by 23%. This is because the seller gets a direct credit for these goods. A $100,000 home that was built with after tax dollars and exists in inventory on the transition day will get a $23,000 exemption of FairTax to prevent double taxation of inventories. Comsumers will scream if the sellers do not immediately reduce their product prices by the amount of their exemption. Adding the new FairTax to the discounted price brings it exactly to the original after tax price of $100,000.
Certainly there will be fluctuations following the transition, but the transition plan is designed specifically to produce a smooth transition with little uncertainty. This also serves to keep the capital markets calm.
So how do consumers get a 15+% take home pay bonus, a FairTax prebate every month, and after tax prices that remain about the same, while businesses get enough of an overhead reduction to keep after tax prices about the same, and the government still gets the same amount of tax revenue as before?
The answer lies in a broader tax base and improved economic efficiency.
Regarding Jorgensen's estimate of price reductions, some have stated that he included the employee FICA and FIT in his calculations of reduced business overhead expenses. If that were the case, employee gross wages would drop by the amount of FICA and FIT withholding. (We will ignore my suspicion that any employer who attempted this would face a mutiny.) Business overhead would drop by 15.3% of wages (FICA) + employee FIT withholding + business FIT expense + withholding and FIT compliance costs + business efficiencies. I suspect that this would reduce corporate costs by 20+% at EVERY stage of production, creating an even larger embedded cost reduction at the retail level, and a greater incentive to reduce prices, increase dividends, invest earnings, raise salaries, etc.
I suspect that after the transition, with employees just getting a 15+% increase in take home pay + FairTax prebate, wage increases would probably be postponed for a couple of quarters to see how things stabilize.
Good! The fairtax has absolutely nothing to fear and everything to gain from folks taking such an approach.
You may want to include a reading of James L. Payne's COSTLY RETURNS The Burdens of the U.S. Tax System as a part of your research.
I'd also thank you to NOT put words in my mouth since I have never in any of the cascading examplesWhat Dimples is trying to explain to you but you fail to grasp is that your examples do not illustrate cascading. The taxes in your examples merely accumulate as the profit accumulates.
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