The Fair Tax Act of 2005, Part VII
The final set of definitions:
`(15) UNITED STATES- The term `United States’, when used in the geographical sense, means each of the 50 states, the District of Columbia, and any commonwealth, territory, or possession of the United States.
`(16) USED PROPERTY- The term `used property’ means–
`(A) property on which the tax imposed by section 101 has been collected and for which no credit has been allowed under section 203, or
`(B) property that was held other than for a business purpose (as defined in section 102(b)) on December 31, 2006.
`(17) WAGES AND SALARY- The terms `wage’ and `salary’ mean all compensation paid for employment service including cash compensation, employee benefits, disability insurance, or wage replacement insurance payments, unemployment compensation insurance, workers’ compensation insurance, and the fair market value of any other consideration paid by an employer to an employee in consideration for employment services rendered.
OK, so we have defined the USA to include territories, not simply states and the DC area. Folks in Puerto Rico and the US Virgin Islands will be included in the FairTax legislation.
We also define ‘used property’ as asked for by Hank in a previous comment on part VI. If the tax has been paid on an item, it is now considered used. If tax was paid on an item and a credit was used to refund that tax, it is NOT used. (More on how businesses can use credits later). Property that is not business-use property as of the date of transition is also considered used. this provides a date at which to begin measuring conversion for business use or personal use.
We also define wages and salary as including total compensation for an employee (note this definition is specifically for government employees and domestic servants as noted in earlier parts of this series). This includes all benefits and such, meaning that pretty much ALL government consumption is taxed and no portion of payrolls or purchases of goods is ignored.
Following this is a series of cross references, which I won’t detail since they don’t contain anything beyond section numbers.
Next we’ll cover the section detailing the Imposition of Sales Tax.
Maybe this will be covered in the fullness of time, but here’s a thought: If you hire, say, a cleaning lady, and as part of her payment, you buy her something, when does the tax get paid? At your initial retail purchase, upon giving it to the cleaning lady as payment, or both?
Now that we have covered “wages and salaries” definitions, (and I think we all agree that all government wages and salaries except those directly providing education services will be taxed), can anyone tell me how the government can calculate (monthly) the burdened cost of the taxable salaries and wages. Are there any business owners on board that might be able to explain how they would calculate an employees burdened wage/salary costs, or at least estimate a percentage that would make sense?
Barry – If you are hiring a cleaning lady from a service, she is supposed to charge sales tax as part of her charge to you. She remits 23% of the sale as tax.
If on the other hand, you employ the cleaning lady, meaning she works pretty much for you, full-time or part-time, then you are supposed to remit the tax to the government yourself.
Essentially, this means that no service gets left out.
Gifts are generally not taxed, if that’s what they are.
However, since nothing is to be taxed twice, if you buy her something it should NOT cost you tax.
In practical effect, I think very few people will be in this position. Most people do NOT simply give things to domestic servants in lieu of payment (perhaps the fair market value of rent for live-in servants) and services generally do not deal in barter.
Hank, the Census seems to track a lot of that type of data, but I can currently only find straight payroll info.
I would suggest for the sake of your particular interest, determining the impact on state governments, it is easier than you think. Instead of measuring impact only to payrolls, you should examine what is not taxed for a government.
The worst-case scenario should be a flat 30% increase in each government’s budget. Period. This is your starting point.
Then take off the employer’s share of SSA, etc for ALL gov’t payrolls. Then remove all taxes (burdened estimate if you wish) from the education sector for the state in question (the Census folks break down payrolls by department, typically). Also remove the small administration credit.
I think then you’d have a decent estimate.
James, thanks! That is basically what I did to arrive at the $300 billion increased cost. However, I can’t figure out how to calculate burdened payroll costs, so just assumed it would amount to 150% of the basic payroll. All other assumptions I used are in line with the BHI/Kotlikoff study report. I was simply hoping that someone in business could lend some support (or opposition) to using the added 50% for benefits, etc.
Frankly, I wish the BHI folks had taken a stab at the economic impact, but as you can tell, they took a pass by stating that, whatever the cost may be, state/local governments can simply increase other taxes to make up the revenue shortfall. Without quantifying the cost, just how useful is that statement??? Scary!
There are some other elements to consider as well.
Payrolls is only one portion of government consumption.
The other major portion is simple purchases of stuff. Things like equipment, computers, and the like. While they might still get government price discounts, they would still have to pay tax on whatever they bought, and that price would likely be an increase of 5-15% after taxes for many things.
This is mitigated somewhat by the fact that most governments can gain price advantages through bulk purchases, but a conservative estimate of 15% increase in purchasing costs, along with a 20-30% increase in costs for personnel, is probably a fair, but rough guess.
So overall government consumption would increase by a number between 15 and 25% more than likely. How high or low would depend on how each individual government spends its money, the ratio of payrolls to goods and services purchased, etc.
You are absolutely correct. Perhaps I should have explained that my $300 billion final estimate includes both “stuff” and payroll’s. I used the BHI/Kotlikoff data which estimated that the split was 59% stuff and 41% payroll, and these percentages were applied to the $1.1 trillion in the Fairtax state/local consumption base. Education payrolls and administrative credits were already removed from the base. I used a 15% after tax price increase for stuff, and credited the burdened payroll amount with savings from FICA.
We are probably wearing this subject out, but anyone who wants to take a look at the numbers can email me and I’ll send a copy of the three page analysis.
In any event, the economic impact is large and increases in state/local taxes of all kinds are sure to result. There is no free lunch!!