Friday, November 06, 2009

Embedded income tax costs eliminated with FairTax

Roger Buchholtz, MI FairTax Director, recently wrote to us asking that we focus on another huge problem created by the income tax system - embedded and hidden income tax costs. He’s right; it’s the part of the income tax iceberg that lives dangerously hidden beneath the surface of our economy and our tax structure. Every consumer pays them hidden inside retail prices, wages and benefits are often depressed because of them and American companies are at a severe price disadvantage with foreign competitors because of them. The FairTax eliminates these hidden tax costs and - among other advantages - allows retail prices to drop in their absence.

American consumers typically don’t understand that federal tax costs are added into the price of domestically produced goods and services because these costs are hidden from plain view by “embedding” the costs into retail prices. But as any American business owner knows, income taxes, FICA payroll taxes, and the cost of obeying tax laws is a big part of business operating and production costs. Every employer pays half of each employee’s Social Security and Medicare taxes (FICA), the second highest corporate tax rate in the world and the significant cost of filing tax paperwork and maintaining records. These costs are added all along the production, distribution and retail sales line right up to the consumer.

To some, this just represents business “paying its fair share” and political figures often direct voter scorn toward the business sector claiming that businesses are not carrying enough of the tax burden. But only people pay taxes, not businesses, and such rhetoric disguises the truth of this hidden tax cost. Business taxes are, in reality, always passed along to consumers and/or workers. Business tax costs are commonly paid for by charging consumers more for the product or service, or by depressing employee wages and benefits. Typically, it is a combination of the two strategies that is used to pay required business tax costs.

Harvard economist Dale Jorgenson added up the entire FICA payroll tax cost (the employee and employer share), as well as business income taxes paid and compliance costs, and found that the production costs of domestic goods and services could decrease by approximately 22 percent on average after embedded tax costs are removed. Arduin, Laffer, and Moore, another respected group of economists, estimated production costs could decrease by a minimum of 11.55% if businesses provided employees with gross pay (including income tax withholding and only the employee share of payroll taxes) after enactment of the FairTax.

The other self-defeating consequence of these embedded tax costs is the effect on the “Made in America” label and job creation here in the United States. Foreign producers don’t suffer these costs when selling products or services here. Foreign governments typically forgive such taxes on overseas sales. It leaves American producers with a huge cost disadvantage on both domestic sales the sale of products and services overseas. By eliminating these costs, retail prices will fall under competitive pressures, taxpayers will see the tax cost of our federal government, and American companies will be freed of as much as a 22% producer cost disadvantage that typically translates into higher prices and lower wages and benefits for American workers. By eliminating these costs, more American jobs will be created with more favorable tax treatment for USA-based companies.

The FairTax eliminates embedded tax costs by shifting all such taxes into the open. It means a more honest relationship between the citizen and government and it means that American businesses will no longer have the American tax system working against job creation and competitiveness with foreign producers. Many believe that elimination of these costs will also lead to a resurgence of the American manufacturing base, which has been steadily declining over the most recent decades. It is one more income-tax-produced problem solved by the FairTax, and one more way to make the economy boom once again.

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