After reading both the Fair Tax books, I’ve never quite understood how the “embedded taxes” in the purchase price of an item would be replaced by the Fair Tax.
Now, I don’t dispute that there are embedded taxes in every purchase I make. Anyone with even a modest amount of common sense understands that all taxes - corporate income taxes, capital gains taxes, employer social security taxes, and so on - are eventually paid by the consumer.
But to suggest that these embedded taxes will magically go away with the Fair Tax is disingenuous at best. They will be reduced, to be sure, but go away? Nonsense.
A small example is in order. Consider a consultant, an occupation for which I have some small ambition post-retirement. As a consultant, I charge my customer a fee, say $100/hour, which includes the 23% Fair Tax. Thus I take home for my labor and expertise $77, right?
Not so. For I have to reduce my income by my overhead expenses, the cost of electricity, the cost of the computer, pencils, paper, internet access, etc., ad nauseum, all of which I’ve had to pay the Fair Tax on. Those costs are embedded in the fee I charge my customers.
Large businesses and other commercial entities that buy in bulk might not pay the Fair Tax on these business-related purchases, knowing that the tax will be collected on the final product offered for sale, but for a small business/independent contractor who buys in small quantities from the local office supply store, I doubt that such a distinction is possible.
So some level of embedded tax is inevitable.
[UPDATE 9/6/08] The Nightfly (comment below) notes that “since the fair tax only applies to retail commerce, you won't owe tax on the contract work you do for other businesses.” I agree: intermittent work such as I contemplated in the post would probably be considered temporary employment not subject to the Fair Tax.
He continues: “Whether or not you choose to pay sales taxes on your business supplies, if the difference has no bearing on your fee, then it will be an expense to your customers regardless of whether that part of your fee technically falls into the category of embedded tax or not.” And that was my essential point – that the sales tax I paid is ultimately passed to the consumer, irrespective of whether it’s technically considered an expense or an embedded tax.
This is a minor bump in the road to a Fair Tax. Most embedded taxes will in fact disappear, but it’s foolish to believe that all will.
Currently you can avoid paying state sales taxes on your purchases from retailers by presenting a seller's permit and/or business license. The same would apply under the fair tax. This would be impossible with a VAT.
ReplyDeleteAlso, since the fair tax only applies to retail commerce, you won't owe tax on the contract work you do for other businesses.
Whether or not you choose to pay sales taxes on your business supplies, if the difference has no bearing on your fee, then it will be an expense to your customers regardless of whether that part of your fee technically falls into the catagory of embedded tax or not.