Some FairTax Questions and Answers

Recently I posted some questions and concerns I had about some facts quoted in The FairTax Book regarding corporate incomes taxes on a couple of the FairTax Yahoo Groups listservs. The responses were very enlightening and well written so I thought I would share the transcript.

My Post

One of the big arguments made regarding the concern of a 23% increase in the price of goods and services is that those goods and services will likely go down by about 22% as that is the rough average of corporate income taxes paid by corporations. Then when they no longer have to pay those taxes competition will drive the prices down to the same margin they were enjoying prior to the income tax abolition.

I totally see and buy that point. It makes perfect since and aligns with a classical and universal understanding of basic economics.

Then as I was cruising along in the The FairTax Book, Boortz quotes some facts/figures on offshoring. On page 99, he says “Between 1989 and 1995, more than half of all corporations doing business in the United States, both foreign and domestic controlled, paid no U.S. income tax.” A few pages later on page 102, he says “Fifty years ago, corporate America contributed approximately one-third of all the income taxes collected by the federal government. Today, that number is about 10 percent.”

If those statements are true and accurate, then I don’t see how mathematically the claims of embedded taxes artificially inflating the cost of our goods and services could be true – and visa versa. I just don’t see how both lines of reasoning can both be true and accurate at the same time. Am I missing something?

By the way, I love the idea and want to champion it to others in the public square. However, I do want to be prepared when I, as a fan of the plan, see things that seem like discrepancies to me, as the critics will surely find and point them out.

Marlene responds:

The quote also doesn't consider HOW the corporations avoided taxes. There are NO American Corporations that don't file tax returns. There bottom line might be $0 depending on deductions and loopholes, but it still cost them an arm and a leg to pay accountants and lawyers to set up their business to avoid taxes, claim all their expenses, take all their loopholes, lobby in DC, donate to reelection campaigns, and file their long form corporate tax return. Between that and FICA their IRS tax compliance costs are still high. Paying their fair share of the $250 Billion in tax compliance costs cost all corporations something.

Simon responds:

I'm certainly no expert on this but I will take a stab. I am a small business owner (corporation). The cost to comply is incredible for us.

As an example, when our company grew and crossed the threshold of only having to file once a month to having to file twice a month, we were unaware of the status change. It's a somewhat complicated calculation to determine how often you must file. We were heavily fined for this mistake. Keep in mind, we paid the same amount of total tax, but we only paid it once a month instead of half of it twice a month. The fines totaled $11,000. That's quite a hit to cash flow.

As the IRS agent said, "send us $11,000 by Friday and that should hold the hounds off for now." Yea, he actually said that to me. He threatened to seize our bank account. We decided to lay off an employee to help us pay the bill.

Since then the IRS has refunded approximately 75% of the fine. They keep sending us checks out of the blue saying that they "miscalculated" our fines. In the mean time, we have spent great effort and time to comply. Most regrettably, we lost an employee. I won't even go into what it costs to find the type of employee we had to let go (don't forget how that affects our unemployment insurance rates and that some estimates have the cost to replace a high tech employee to be over $25,000).

Hope I'm not too far off track, but I just wanted to provide an illustration of how corporate compliance is a real cost and not necessarily represented by what is paid on our annual corporate tax form.

We are just a small start-up healthcare firm; lowering the cost of healthcare while increasing patient outcomes. I just wish we could focus on doing our job, and not learning the tax code. The Fair Tax accomplishes that for us.

JPDMSmith responds:

Costs are bound to go up with tax included, but disposable income should rise even more. US-produced goods should rise less than foreign-made goods due to the tax savings at the corporations. The real benefit is that the playing field for domestic versus foreign manufacturing should be leveled a bit through the tax law change. The onerous trade deficit may be controlled, a benefit that FairTax needs to emphasize.

Kirk responds:

As others have said, "embedded taxes" is more involved than the taxes that are actually remitted to the federal government by corporations.

There is the overhead involved in managing the payroll taxes and minimizing the income taxes. There are opportunity costs of bad business decisions made based on tax reasons. And finally, there are the "raw materials" and "components" costs to the corporation -- all of which were inflated because small businesses incur all of these same "tax related" costs plus hefty individual income and payroll taxes. All passed along to the corporation and added to the costs of goods.

So a major corporation may pay '0' income tax, but 25% of his raw materials costs and overhead is really pass-thru tax costs from his suppliers. And 5% of his payroll and legal costs might be tax related employees/services. And 7% of his payroll costs might be directly remitted as employer-side FICA.

I prefer the phrase "tax related costs" over "embedded taxes".