Posted by
Countryman on Saturday, March 08, 2008 10:34:09 AM
After reading comments all over concerning the Fair Tax, it appears that the main objection to it is that retail items will cost an additional 30% due the the Fair Tax.
It is true that the 23% inclusive tax translate to 30% of the sales price, I won't naysay that to make it seem less.
What people have difficulty with is understanding that the base price after the Fair Tax is enacted will fall by approximately 23% (different items will be more or less, but on average 23%), therefore the final price will be virtually the same as it was before the Fair Tax.
That 23% is in the form of embedded taxes, and as such, it is hard to see just how much of the final price of an item contains that 23%. Most products reaching the market go through numerous steps of production, transportation, handling, packaging, and at each step they are taxed in one way or another. People don't see the many corporate, capital gains, and payroll taxes involved in products. The Fair Tax eliminates all taxes in these steps along the way to market.
To make it as simple as possible, I shall give an instance where a product is taxed just once, but that can be extrapolated to more complex production and marketing scenarios.
Consider a truck farmer, raising vegetables on his small acreage. No employees, just him and his wife. He starts the seeds, cultivates, and picks the produce, then sells it at his roadside stand. Let's say his gross sales is $22,000. Only once does he pay Federal tax, on Forms 1014, SE, and Schedule C. After he subtracts the cost of seed, fertilizer, tractor expense, property tax, local tax, etc. ($8,000), his net profit is $14,000, and he pays about 14% in taxes; thus his after-tax income is $12,040.
Let's say that the Fair Tax is enacted at the end of that year. In the next year, he and his wife raise the same amount of produce. To calculate how much he should sell that produce for, he looks at what his end of the year income will be under the Fair Tax. If he keeps his prices too high relative to other produce stands in the area, he won't sell. His expenses are going to be lower than the previous year, as the seed and fertilzer companies will no longer be paying corporate and payroll taxes, and to compete with other similar companies, will drop their prices. As he is buying wholesale from them, he won't be paying the Fair Tax on those items.
Let's say his expenses will be $1,000 less, or $7,000. He adds that figure to the $12,040 in income he had the previous year ($19,040), then subtracts the amount of prebate he'll receive - $3,841 ($15,199). That $15,199 is the price he can sell all his produce for and still have the same income as previously. This represents a drop in price for his customers to 69% from the previous year, but as he is a retailer, they will pay 30% on top of that in Fair Tax. They end up paying 90 cents on the dollar of last year.
In other words, he has the same net income selling a head of cauliflower for 69 cents and tacking on 21 cents in Fair Tax, as he did the previous year, selling that head of cauliflower for $1.00.
Even if you think that his costs of production won't fall in price, the necessary gross sales for him is then$16,199, which is 73.6% of the previous year, and with the Fair Tax added to that, his customers will be paying 96 cents for the same item they paid a dollar for the previous year.