Boortz Clarifies "Keep 100% of Your Paycheck"

September 15, 2005  ·  Filed under: AFFT Updates, Education

In recent weeks, a number of people (including Brad Warbiany, Pat Regnier, and many others) have raised the question, “How much of their gross income will employees actually keep under the FairTax plan?”

In today’s Nuze, Boortz tackles this issue directly, by addressing the meaning of The FairTax Book‘s claim that you and every other employee would “keep 100% of your paycheck” under the FairTax plan.

The full explanation is worth reading, but here’s the meat of it:

Now here’s what we didn’t explain well in the book. Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer’s product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.

The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%. In some industries, such as leather goods, the embedded tax is smaller. In other industries, such as homebuilding and construction, the embedded tax is higher, but it averages out to somewhere between 22 and 23%. With the passage of The FairTax Bill, those embedded taxes disappear. These embedded taxes include the combined tax burdens of all entities involved in bringing those goods or services to market, and that includes you, the employee, and the taxes you incur as a result of your employment.

We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So … what does this mean to your paycheck after the FairTax becomes law?

When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call “take home pay” before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay – the amount you can put into your bank account – will not decrease, and may actually increase.

On a larger scale real wages will rise to the extent to which the nation’s employers decide to return the embedded costs of their employee’s income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax. Once again, a zero-sum, revenue neutral game.

Now, let’s elaborate on the “keep 100% of your paycheck” line that appears in The FairTax Book. It is certainly true that after the FairTax becomes law there will be no more withholding from your paycheck for any federal taxes. What you earn is what you get. This is not to say that your gross pay will equal what it was before the FairTax. This will depend on what your employer does when the embedded costs represented by the tax burden you have passed on to your employer disappear. One thing is certain: You will suffer no decrease in real or net earnings — the amount of each paycheck you deposit into your bank account every other week. The “keep 100% of your paycheck” concept can more easily be applied to those who either change jobs or come into the labor force after the implementation of the FairTax. A new worker will negotiate a wage with an employer knowing that the amount negotiated will be the amount that worker receives every two weeks … no deductions. Likewise, when you change employers you, too, will negotiate a wage that will not be subject to withholding, and you will get 100% of your wages in each paycheck.

Keep reading for additional information.

Posted by Joshua Zader  ·  Trackback URL  ·  Link
No Responses to “Boortz Clarifies "Keep 100% of Your Paycheck"”
  1. I’m glad to see he covered that. I’m even more glad to see that I was right :-)

    Brad Warbiany  ·  Sep 15, 2005 at 3:04 pm  ·  Permalink
  2. So the 22 percent imbedded tax does include employee’s tax bill. I must say that I don’t like seeing an “I wasn’t clear on that” statement when he was very clear on that subject in his book, just not having the same answer.

    “Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.”
    The Fair Tax Book by Neal Boortz, pg. 83

    I don’t see Medicaid and medicare being responsible for a 25 to 30 percent increase in take home pay. I think I‘ll leave the rest of this to the combat debaters LOL. Ok enough of the negative stuff (well maybe a little more depressing stuff, but it does get better!). Even though this bugs me I still favor this tax (crazy huh). Replacing our current Regressive tax system with the Fair Tax will improve everyone’s life. That’s right! U heard me! Our existing system is regressive. Want another news flash, even with the “prefund” system in the Fair Tax it is regressive too. Why? Because ALL TAXES ARE REGRESSIVE! Any tax no matter how viable the use of it is has the immediate effect of DEPRESSING the economy. A regressive tax is when the tax burden falls more heavily on the poor than the rich. The tax “burden” is not only paid in dollars, but lost economic opportunities . Who is the most hurt by a depressed economy? That’s right, the poor!
    Whoever has the least amount of economic RESCOURCES has the least ability to adjust their lifestyle to maintain health and happiness. An elite rich person might have to skip buying his monthly car now, or sell one of his homes, or payoff a different politician to create a loophole. What does that family do that is living pay check to pay check do when their dollars are worth less? Eat cheaper food? Eat less food? Buy cheaper clothing? Buy used clothing? Maybe they have more dollars because the social program sent them money out of the taxes they charged the rich. Great! Now they can buy more or better goods and services right? That sounds great, but where do the rich get their money? From businesses that produce goods and services! Maybe they raise prices to make up for the tax, who pays it? Maybe they’ll just cut back on a few employees to make up the money to pay the tax. Maybe that business that they had working is no longer able to produce a profit because the increase in the cost of doing business priced them out of the targeted customer base’s ability to pay. The dollar is only as valuable as what it can buy! Now that product or service cannot be paid for because it isn‘t there. The money never comes out of the pockets of the rich, if it did, they wouldn’t be rich any more so u just lost your tax source! In short we are always going to have poor people, and we are always going to have rich people. This isn’t some trickle down economic theory, that’s just the way it works. The rich people have the money and resources to work around any wealth redistribution program u can come up with, they’ll still be rich, the poor will be poor. All of the fancy wealth redistribution programs only force the rich to be a class of people who are good at finding legal loopholes and manipulating society for their own profit.

    We are going to have a class of rich people no matter what we do. I would rather have that group of people who are most skilled at making the best goods and services available to the most people in society as possible! Why? Because they are getting rich by making EVERONE ELSE’S LIVES BETTER- not by manipulating laws and politicians. People can speak loudest with their wallets. The free market forces the improvement of goods and services and the rich should be so because they make consumers happy not because they are good at finding the right tax loophole. The Fair Tax is designed with this in mind.

    That brings us to the main reason why I like this tax. One word. FREEDOM! This is a VOLUNTARY TAX. Countries far less concerned with individual freedom than we are have abolished taxes because it was far to invasive for a taxman to have to enter into a citizens house long enough to count chimney hearths! Compare that to sending an annual budget to the IRS, or maybe a tax audit?? Indirect taxation was widely recognized by the founders of this country as the only way Americans should have to pay for the regular maintenance costs of the government. Even though it did provide for a method of direct taxation it wasn’t exactly fair (apportionment), but at least it was linked to representation (no surprise there). The founders did agree that direct taxation was a DANGEROUS power but must be available in case of a war. Our current Direct Labor Tax isn’t even apportioned. This was a power granted by the passage of the 16th Amendment (unless u pay attention to supreme court cases) which also is formally recommended for abolishment by the Fair Tax . An indirect consumption tax is not invasive and, as a matter of fact, is offered up voluntarily by those paying the tax. Our current tax system takes money out of our pockets because we have it and only succeeds in robbing us of many of the opportunities we are being taxed for. The Fair Tax doesn’t tax us until we are realizing an advantage from our opportunities. For a Tax, it doesn’t get much fairer than that.

    Eric Nance  ·  Oct 20, 2005 at 11:59 pm  ·  Permalink
  3. […] This topic has been covered in some detail here. Posted by Joshua Zader  ·  Trackback URL  ·  Link   […]

  4. First of all, I am in favor of the fair tax, as long as the 16th amendment is repealed FIRST!! One thing about the fair tax that no one has brought up though is that it is somewhat self-regulating. Consumption taxes have what is known as deadweight loss, this represents the amount of sales revenue that is lost from consumer and supplier surplus as a direct result of taxation. Taxes increase the price of goods and services but reduce the price the supplier of the goods receives. Part of this loss is passed to the consumer which in turn reduces revenue to the supplier, both from loss of tax and increased price to consumer. Thus as the tax increases revenue will fall until a new equalibrium is reached. The higher the tax the greater the revenue shortfall. This will damage an economy long before equalibrium is reached but after this point is reached increasing taxes will result in an ever decreasing source of revenue. 23% seems to mke to be past the point where economic damage could occur. From 23% the government must seek ways to reduce government spending so that the tax can be reduced which over time will increase revenue through greater economic progress. Government should immediately work toward reducing such a tax rate to a maximum of 18% as quickly as possible to prevent the reduction of sales that could damage the economy and give the fair tax a bad rap.

    John Robison  ·  Dec 31, 2007 at 2:57 pm  ·  Permalink