Would You Really Get to Keep Your Paycheck?
From reader Ken Veit:
Finding some way to post is not easy!
I read the Fair Tax Book and got all excited until I spotted a flaw that no one seems willing to address. Rep. Linder sent me to several gov’t websites that are pregnant with data but don’t answer what is a simple question.
Here it is.
A basic assumption of Fair Tax is that companies will keep prices unchanged because the so-called “embedded tax” savings of 20%-25% will offset the 23% Fair Tax, and corporate profits will not go down.
The problem is that the embedded tax does not go away entirely. Why? Because it includes the amounts that companies must pay to employees so that they can pay their Soc Security/Medicare taxes. Companies WILL save the 7.65% in MATCHING contributions, but they will NOT save the 7.65% embedded in employee compensation because one of the features of the Fair Tax Plan is that GROSS employee pay will not change. (”You get to keep 100%.”)
Without saving the ENTIRE SocSec/Med tax, companies will have to raise prices somewhat in order to preserve profit margins.
Until someone addresses this point, I am afraid that the promises of the Fair Tax Plan are just so much arm-waving.
Ken Veit
Phoenix AZ
This topic has come up before — many times, actually. You can read our coverage here.
Hrm, I have thus far been a proponent of the fair tax, but the linked article raises a big concern in my mind. Under the senario where I keep 100% of my current gross pay, I see the fair tax as neutral to me. My net wages go up, but everything costs more.
gross pay is adjusted so that my net pay stays the same, yet a 20+% tax is added to all goods, I have in fact lost real buying power.
To some degree, this would be a delayed effect, since my company is contractually obligated to pay me (and may others) at a given rate, but the tax withholding requirements would go away immediately. Over time things could adjust to somewhere between, but I would expect a revolt.
Jason,
Actually, if you were to keep 100% of your gross pay, it wouldn’t be “neutral” to you — it would be a huge, automatic (and unearned) pay raise.
AND at the same time, prices would be dropping due to reduced compliance costs across the board. ...If that sounds too good to be true, it’s because it is. It’s too much.
In reality, however, the reduction in your wages would be more than offset by the drops in prices. So you’re still going to be better off. You’re just not going to get that automatic 20% pay raise.
If you read the full text of Boortz’s explanation, I think he goes into this in some detail.
So I recommend doing some more research. The FairTax still deserves your support, you’ve just got to do a little research to understand the full picture.
Joshua
Ken,
The current situation is that the company has to pay out your gross pay and the SSN match of 7.65%. With the Fair Tax, they could actually start paying you your gross pay plus the extra 7.65% and be breaking even. Actually they would save by avoiding the cost of keeping track of and sending a huge chunk of your net pay and the 7.65% match to the IRS.
That was easy.
Joshua, I prefer to think of the increase not as an “unearned pay-raise” but rather as an end to many years of undeserved pay-cuts that have been endured by those of us who work hard every day in the real world of the private sector.
All this said, I am NOT in favor of the Fair Tax. Our current tax regime and monetary system originated in the 2nd and 5th planks of the Communist Manifesto. I am opposed to both on moral grounds. They both need to go. The powers that be know that the current tax code is a grand sham and that people are beginning to wise up en masse. I see the Fair Tax as a shell game to change the game before everybody wakes up and storms Washington DC with pitchforks.
My 2 cents worth.
Robert Ingle
I miss typed the last sentence of the first paragraph of my previous post. It should read:
.....huge chunk of your GROSS pay......
They now pay out ALL of your gross pay AND the extra 7.65%. Your net pay is paid to you, the rest is paid to the IRS. With the fair tax it could ALL be paid to you and the company would break even.
Before you guys go any further, take a look at what I wrote on the subject about ten months ago.
Short answer, it will all work out in the long run, but there might be some rocky transitions in the short run.