What Does the Fair Tax Really Do for You?

The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:

Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).

Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.

Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.

Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.

Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.

The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.

(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.

There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.

While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc. which currently help eligible people, substantially. I have seen no comparison as to which program (current IRS or prebates) offers the most dollars to assist low income individuals and families.

(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.

The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.

(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.

(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.

Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.

(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.

Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.

Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.

If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.

CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.

In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.

Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.

In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.

I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.

Don,

While you are collecting examples of the unfairness of the Fairtax, here are some more to think about;

(1) As a senior retiree who paid into the SS Trust Funds for 45 years, and am now collecting the benefits as promised, under the Fairtax I would effectively have to resume paying into the Trust Funds with my sales tax dollars. Fair? No way! I think it would be a major breach of faith by the government.

(2) Fairtaxers are proud to say that spending up to the poverty level will be untaxed through the prebate. But, an estimated 30 million low income workers may never pay one dime in net federal taxes, yet all will qualify for full Social Securty retirement and health care benefits. Compare that number to the estimated 1 million workers under current law that can reduce their income tax liability to near zero through the use of deductions, exemptions and tax credits, and then totally offset their payroll tax amount by qualifying for the EITC and Additional Child Care refundable credits. Is this fair? Is this good for the country?

(3) Fairtaxers often say that investments won't be taxed, but they either haven't read Sec. 801-806 in HR25, or they don't understand the proposed implicit tax provisions. Both investment and debt instruments will be taxed depending on the rate differential with the monthly Treasury rates. Is that fair?

(4) Fairtaxers claim that the revenue neutral rate is 23% inclusive. But that is only true if you realize that 12% of the cost to fund the federal government would be hidden in higher state and local taxes. Is this fair, simple and transparent? I don't think so!

(5) There has never been a price impact study done as far as I know, but the most likely outcome will be a 10% reduction in producer costs by removing the federal tax related costs, and a 17% rise in retail prices. (1.00 x .9 x 1.3 = 1.17) This assumes that workers current gross pay will become the workers net take home pay. Fortunately, the increased take home pay will mean that income will be basically a wash with the higher retail prices. Your standard of living would be unchanged. But all this talk of increased savings under the Fairtax is nothing but a myth. If you can't save now, you won't be able to save under the Fairtax.

(6) Fairtax claims that you can "control taxes by controlling spending" are misleading. Half of the average family budget is for services, and there are no "used" services. All services will be taxed. There are no used groceries, no used gasolene, no used restaurant meals, no used apartment rentals, nothing used at Wal-Mart, etc. etc. Check last years budget and try to find some used stuff you may have purchased.

Don, any new tax scheme is in trouble if it has to redefine things like: Sales taxes are progressive; sales taxes are inclusive; "used" means tax previously paid; and the prebate is a tax refund. As for that last one, the prebate is really a cash grant entitlement which will be spent and taxed.

What Does the Fair Tax Really Do for You?

The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:

Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).

Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.

Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.

Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.

Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.

The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.

(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS - It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.

There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST AMERICANS - The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.

While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc. which currently help eligible people, substantially. I have seen no comparison as to which program (current IRS or prebates) offers the most dollars to assist low income individuals and families.

(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.

The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.

(4) WHAT IF PRICES DO NOT DROP BY 23%? - If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.

(5) WILL INDIVIDUALS PAY MORE TAXES? - The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.

Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.

(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.

Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.

Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.

If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.

CONCLUSIONS - Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.

In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.

Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.

In closing, I have reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.

I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.

Fair tax won't work out in my opinion either.

For info about the stimulus visit: http://www.efile.com/news/articles/stimulus-package.asp

Terry

Hi,
As I came to know from this article, while calculating fair tax, so many factors are taken into consideration. I also agree with him that calling something fair, doesn’t necessarily make it fair. So many examples on fair tax are given here for clear understanding.

Mr Goldman was exactly correct. But he was much too lenient. He didn't bother to show the absurdity that befalls the fairtax. I guess he is a nice fellow.

Just one absurdity --Fairtax is a tax on the federal government, by the federal government.

This just isn't some novel book keeping technique - Fairtax actually depends on collecting about 300 billion in tax, from the federal government, to pay for the federal government.

This is so outlandish, so comical, I can only imagine people don't notice the audacity of its logic -- or lack of it.

Boortz writes "the federal government itself becomes a major taxpayer" Page 148.

The federal government a major taxpayer? To itself?

That's like the guy who decides he needs to make some big money. So he pays himself 10,000 dollars a day to cut his own grass.

Yes, he could write himself a check every day for 10,000 dollars. He can even deposit the check in his own account. But at the end of the month, he won't have 300,000 dollars.

He will, however, have very short grass.

Incredibly, Fairtax thinks they will have 300,000. Well — they pretend they have 300 billion. But they won't.

For example, when the Fairtax makes the US Navy pay 4 billion in "sales tax" on a 12 billion dollar aircraft carrier — the Navy can write the check, The Treasury can even deposit the check.

But the Treasury isnt 4 billion dollars ahead. The treasury had to issue the money to cover the check it cashed.

Fairtax proceeds as if they are getting that 4 billion -- plus 296 other billions - from making "the federal goverment a major taxpayer."

Because the Fairtax would collect zero from that futility - there will be 300 billion less in tax revenue. And the fairtax rate would have to be much more that 23%. It would have to be about 35-38%.

If that was the ONLY fallacy of the Fairtax -- it would be enough to ruin the idea. But there are more fallacies -- of even greater impact.

Another major fallacy — Fairtax pretends it will be able to tax health care. Fairtax looks to tax the 2 trillion dollar health care industry — to the tune of getting people to cough up 460 Billion in "fairtaxes" on their health care.

(This is what makes the name "fairtax" so comical to me. I think cancer patients and others would find a different name for it, if it were ever to pass.)

Will health care patients just pay this 460 billion?

Can they pay 460 billion?

If Fair tax CAN NOT collect this tax, — the treasury will be shy 460 Billion more in revenue, and the tax rate has to go up to 50-50% percent.

You decide if people will pay the US government 460 billion dollars in taxes, on their health care.

What will a cancer patient do, when just ONE patient gets a tax bill of 40,000 dollars on their surgery, chemo, and hospital bill?

What about when 15 million cancer patients open up all their medical bills, and see a 35-40% sales tax on there? Forget the percentages -- when they see 10,000 - 50,000 tax bills, on TOP of their 30,000- 150,000 medical bills?

What do you think nursing-home patient will say, or the famlies they see a 25,000 tax, per year, on their nursing home care?

What would the parents of an 8 year old leukemia victim say, when they see a "sales tax" bill of 70,000 dollars, on their effort to keep their child alive?. Suppose further that the parents only make 35,000 a year.

Its not like the hospital can waive the sales tax. Its not like insurance is going to pay it.

What will people say when they see their bills — second opinions are taxed — lab tests — taxed — ER visits — taxed. Dental care -taxed. Doctor visits — taxed. Knee replacement — taxed. Child birth — taxed.

The outcry from these folks will be like nothing US history has ever seen before.

Congress would quickly exempt health care expenses from a high sales tax.

If any Congressman dared to suggest the parents of a cancer victim should pay a sales tax — they wont be a congressmen very long.

My point is — you wont be ABLE to tax health care. If you tried to, Congerss would exempt it.


I could go on — car makers, new home builders, there would be major problems in all markets that are hit by this absurd tax.

Fairtax would come up over a trillion dollars SHORT on collecting 2.3 Trillion.

And we aren't done YET with the inevitable exemptions. But I must close.. briefly, thouugh, what would RENTERS say when they have to pay this 40-60% sales tax, on THEIR RENT??

Of the 40 million renters in the USA - I bet not 12 individual renters know their taxes would skyrocket. The moment this bill is passed they will they have a few words.

So now the sales tax would have to be 65-70%. Then car manufacturers would demand - and get -- exemptions, or their businesses would collapse. Ditto new home sales.

Fairtax won't work. It's not just unfair -- its a house of cards. Im sorry.

What Does the Fair Tax Really Do for You?

The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:

Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).

Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.

Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.

Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.

Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.

The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.

(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS - It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.

There is no legal requirement for any business to reduce prices by the amount of any embedded cost elimination savings and there is no way to measure if or by how much any business do actually reduce prices.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST AMERICANS - The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.

While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Child Tax Credit and Additional Child Tax Credit, Foreign tax credit, elderly or disabled, etc. which currently provide substantial help to eligible people. The Fair Tax proponents provide no comparison as to which program (current IRS or Fair Tax prebates) offers the most dollars to assist low income individuals and families currently receiving these tax benefits.

(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.

The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.

(4) WHAT IF PRICES DO NOT DROP BY 23%? - If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits keep any embedded costs at less than 3-5% of the retail price, not 23%.

(5) WILL INDIVIDUALS PAY MORE TAXES? - The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. Since individuals are the only ones paying taxes, by default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.

The Fair Tax will result in everyone (children, everyone in the work force, and retirees) paying the 30% Federal sales tax on every service and new product they buy from “cradle to grave” with a small offset for any prebate. Since everyone except those in the top 5% of income brackets spends just about all their available lifetime income on goods and services subject to the Fair Tax, the effective tax rate for most Americans will be close to 30%.

(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax is expected to remain the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.

Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.

Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find a large increase in the cost of tax compliance activity as a result of having to report to up to at 46 agencies on a monthly basis based on the number of states where they conduct business.

If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.

CONCLUSIONS - Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

Note: Although many smaller businesses will appreciate not paying Federal business taxes and FICA, they may quickly conclude making monthly payments to a combination of State and Federal bureaucracies is substantially more onerous than the current reporting requirements.

In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.

Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.

In closing, I have reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.

I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.

What Does the Fair Tax Really Do for You?

The implementation of the Fair Tax is predicated upon several assumptions:

Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).

Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.

Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.

Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.

Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.

The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.

(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.

There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.

While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc. which currently help eligible people, substantially. I have seen no comparison as to which program (current IRS or prebates) offers the most dollars to assist low income individuals and families.

(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.

The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.

(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.

(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.

Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.

(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.

Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.

Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.

If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.

CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.

In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.

Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.

In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.

I also have serious concerns about rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.

The fair tax as a "concept" is a step in the right direction. Taxation by force is not practical, just note our current tax structure. (IRS costs taxpayers about $10.6 Billion annually)

Then there are collection expenses, costs for prosecuting tax evaders and costs for "housing" convicted tax criminals. Just eliminating those potentialities could do nothing but help the country.

While the post above and it's very intelligent comments are correct about the currently proposed Fair Tax, I think the bigger issue and the issue that must be set forth and upon which the "revenue" issue must be based,is that people whatever their income level, will thrive in an environment where they are allowed to earn as much as they can with out the fear that it will be "taken" away from them before they have the choice to spend or not to spend.

If a broad sales tax on goods and services has to be designed so that health care, food and housing are taxed at lower rates or not at all and it doesn't raise the same amount of money that is being collected currently ... well maybe the government will just have to SPEND LESS!

I will support that idea!

The tax structure needs to be reformed but after reading this post and the comments, the fair tax does not seem like the solution. I really appreciate this information, it makes me see the fair tax from a different perspective.

I don’t think it’s fair neither! It’s just another manipulating trick! Seems that for many people this looks like a revolution, like a great saving idea… I think it’s crap! A study made by Nouveau Rich University proved that, if a tax has in its name a trustful word, like faith, people trust it more. But it’s silly.

Fair or not, switching to the 'Fair' tax would cause economic havoc just as this country seems to be sliding into a recession. The point of this tax is to charge us for spending with the natural end result being that we'll cut back. But cutting back now could move us from stagnation to recession to possibly recession.

It is true that the consumer debt levels in this country is out of control and saving and investing should be promoted. But we need to move carefully.

Does anyone understand how our current tax system really works? Businesses don't pay taxes now. Consumers pay taxes. If I have something that cost me $1.00 and I want to make a 10% profit margin on each item I sell, then logically I would have to charge $1.10. Well our current tax system does not allow this to be true. I would have to factor in my tax rate that I pay for the sale of the item as well as my payroll tax, social security tax, and all other taxes I pay for this product and my operating costs. So I would have to charge lets say $1.40 now to make that %10 margin. Like the one comment before, the corporation wrote the check but you paid the tax. The fair tax eliminates this and thus to make the 10% profit margin, I as a business owner would only charge $1.10. That unless this massive collusion happens and they keep the price at $1.40 and just pockets the profits. However, this won't happen in our capitialistic society. Trust me I know. Someone will want to gain a higher stake in the market and offer a lower price. How can you explain why corporations get together now and have 50% profit margins. Food companys, Car dealers, Gas companys could charge what they want because we need these goods but yet each of these industries hold a less than 10% profit margin. For those of you who don't know what a profit margin is, it is the profit made on each dollar. I.E. Gas coorporations make 8% or $.08 on every dollar spent. By the way the government makes 15% right now, which is one of many reasons we pay what we pay at the pump.
Please, do your research and think logically. The fair tax is fair, not prefect. I don't understand the house example above, if you buy a house under the fair tax scheme then you pay taxes on that purchase regardless of the reason you buy it. That is a false statement.
Unfortunately the people who have already paid income tax on savings would be in essense double taxed but since the price of goods should go down due to capitalism then that rate would not be too high. Like I said this is not prefect and we can come up with something to contridict that difference. We can't be afraid of change because of this. We will never move from status quo if we don't. Please do your research on both sides. Use your common sense and think about how our system works now. Do we want to move to more capitialistic society or to a bigger government society. Also not mentioned in this is how our economy would thrive under the fair tax. More business would setup here in the States because it would be easier to make a profit. That means, more jobs, higher wages, stronger dollar, lower deficit, more money for the Federal government. Our country would grow and thrive under the fair tax and more people could make better wages and thus continue the cycle of growth. Unlike our current tax system of make it more expensive to do business in the States and watch our jobs go overseas and money go over seas and see more of us depend on the government to live and see our dollar become weaker thus killing our savings. The deficit is out of control and the obivious solution to that will be make taxes higher for imports...well who the hell do you think is going to pay for that. We need lower or have no taxes for business and the only way to do that fairly is the fair tax. Please don't buy into the hype that the consumer is going to have to burden the corporate taxes if we goto the fair tax. WE ALREADY BURDEN THE TAXES....