Corporation to Corporation Taxing
From reader Jay Hinton:
Good afternoon, Joshua. I have enjoyed learning about the fairtax on your blog.
I am a member of a local group devoted to promoting the fair tax. I am presenting an internal informative presentation so that the group can better understand how the fair tax plan works.
I am having trouble conceptualizing how a real estate office would function under the fair tax. When the real estate sales person forms a corporation so that he will not pay federal taxes on advertising his listing, what process would be in place so that double taxation would be avoided? (i.e. the real estate company pays 23% on the full commission and then the real estate salesperson pays 23% on his split). This question is based on the assumption that the real estate salesperson’s company is selling its services to the real estate broker with the objective of obtaining sales.
Could you point me in the right direction so that I could find the answer to this question by Saturday (Aug. 12)? Or is the answer so simple that I am just missing it.
Anybody know the answers to his questions?
I can field this.
The principle is always to fall back and ask: who did the retail consumer pay for the service?
First, let me make sure I have a clear notion of your senario. In your senario a home owner hires a real estate company to facilitate the sale of their home, and pays the real estate company a commision. The real estate company engages a real estate salesperson’s company to provide some services in support of that service. Please correct me if I have this wrong.
So who here is the retail consumer? The home owner is the retail consumer. What is the FairTaxable retail payment? The FairTaxable retail payment is the commision paid by the homeowner to the real estate company.
So what, you may ask, about the money the real estate company pays to the real estate sales persons company? That’s a business to business expense, so the FairTax does not apply to it. You might further ask, what about the advertising expenses of the real estate salespersons company incured in support of this sale? Those are also business to business expenses, and are thus not subject to the FairTax.
The basic principle is that only retail sales of new services or goods are taxed. Anything in the business chain that leads to that retail sale is not subject to the FairTax. The reasons *why* this is so are simple:
1) If taxed business to business transactions you would artificially encourage verticle integration. If, for example, the real estate company had to pay tax on it’s payment to the real estate salesperson’s company, and the real estate salesperson’s company had to pay tax on it’s advertising expenses, then it encourages the real estate company to simply handle all of those services inhouse, even if it’s less efficient and would be more expensive in the absense of the tax.
2) Any taxes collected by taxing business to business transactions would simply be passed on to consumers anyway. It is simpler, cleaner, less distorting, and more honest to lay that tax directly at the point of consumption.
Thank you for such a great response. The answer was so simple that I was overlooking it. The simplicity of this plan is truly amazing, which is one of the reasons why I like it so much.
You understood my question perfectly and I thank you again for the answer.
Have a great day!