Friday, April 21, 2006

debunking FairTax, II

I should have pointed out that according to the FairTax authors, the workers get to keep all their pay. This means that the cost of workers to the employer doesn't decrease - he can pay the government the withholding, or he can pay the worker.

This is important because of the rebuttal I sense coming. Basically, if you chain the full 23% reduction in costs, everyone comes out ahead - or so the argument goes. And they're right.

If our example wholesaler can cut ALL the costs by 23% and cuts his gross income by 23%, his profits increase by about $200 per month (from about $7500 to $7700). Which means our retailer can sell his goods at the original price and get $7700.

As I just demonstrated, however, what FairTax giveth it taketh away. Either the employee gets to keep what he's paying in income taxes OR the employer can reduce the total cost by 23%. Let's return to our wholesaler. Of the $90,000, 1/3 or $30,000 is employee pay and - according to FairTax - irreducible. So for him to reduce his gross by 23% - to $77000 - and make even the $7500 after-tax profit he had before he has to reduce the remaining $60,000 of costs to $39,500. That's a deduction of over 34%. 23% allegedly comes from the cut costs further up the chain, and another percent or two comes from no longer having to pay FICA matching - let's be generous and call it 2 percent. That's 25% savings from FAIRTAX, which leaves our employer having to find someplace to cut another 9%. Or he can just leave the sales price high enough to earn the same profit - which means the next link up the chain doesn't get a full 23% reduction in that cost as well as not getting 23% from employee expenses.

There's one more place where costs won't reduce - I want to get this here so I can move to other subjects. That's real estate - EXISTING real estate sales - and more specifically ongoing charges for current mortgages and rents.

If a landlord is running on a (allegedly typical) 5% margin, he simply cannot cut his rent by 23%. But with FairTax, rent's an end-user good. Which means the landlord has to pay 23% of what he brings in to the government. He's got to either get the mortgage payments he is making to the banks reduced, or he's got to increase rent. I think we can picture the fun of increasing rent by 30% (to get the embedded 23% taken care of). And the banks aren't going to reduce the mortgages. Oh, let's be fair - in most cases the bank can indeed reduce the mortgage payment by 23% and still get back more than they loaned. But the monthly dollars in runs into our wholesale/retail problem above -- reduce the money we bring in but not a big chunk of our costs means we start losing money.

And what about the fun of the bank determining if the building to which the mortgage is applying is a retail (taxed) or wholesale (untaxed) property? I'll get into this scamworthy opportunity in a bit, but at this point the bank is tasked with determining the government's authority to take. And to continue review in case part of all of the building changes status (home-based businesses being the basic example here). That means the bank needs MORE people to do the investigation and paperwork - more costs against less income.

It's an irreducible flaw. Businesses lose profits. If your income is from owning a business, you don't get the money you used to get, and in fact go broke. OR -and more likely - you maintain your profit margin which causes everything to jump in price. Most people get to take home more money, but at the same time the price of everything jumps. I believe that's called inflation, though I admit it's driven a bit differently than classic economics patterns it.

I think the next debunk will be the underground economy and other scams. Bear with me, though, as I'm beginning to get some anger and frustration on other topics I want to discuss.


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