| Eomund said:
Ahh yes, I nearly forgot your second point. This is a fair question you ask, but one that I have pointed out before. Prices already include the taxes of businesses and their employees. Now lets see if I can effectively setup a model here. Lets create a fictional business together.Final-Fan and Eomund, Inc. lets call it. We are in the market of say, making bookmarks and other printed items. We sell these items directly to the public. Now we have 100 employees, besides ourselves. These employees are paid $10.00 an hour. They all work 40 hours a week. The total price of wages comes to 100(e) x $20.00(w) x 40(t) or $40,000 weekly (e= employees, w= wages, t= time worked). So if we pay $80,000 in wages how much do our employees take home? Each employee would take home about $619.10 weekly (7.65% Social Security and Medicare taxes + ~15% Federal Withholding Tax [sources: http://www.ssa.gov/OACT/ProgData/taxRates.html and http://www.yourmoneypage.com/withhold/fedwh2.cgi ]). The total take home wages of our employees would be $61,910, just as a reference. We are stingy and don't provide any other benefits at the moment. Lets assume our supplies for creating the product cost us $10,000 weekly as well (we will leave out the embedded taxes from our supply, at least for now). We also had to buy the printing and cutting presses for our product, to do that we took out a loan of $150,000 at 8% over 20 years or 120 months. Now we have to pay the loan every month @ $1254.66. We also have to have a building to do business and rent costs us another $2500 monthly. Our costs have quickly added up. Monthly expenses are ($80,000+$10,000+$1254.66+$2500) = $93,754.66 without taxes. So we need to sell at least $93,754.66 just to cover expenses pre-tax. Now lets assume that we sell $100,000 on average. That means that we are making a profit of $6245.34! Wahoo! O wait, just a minute. The government just taxed that income @ 39%. (soruce: http://www.smbiz.com/sbrl001.html ) So we actually only made $3809.66... But wait there are more taxes to be paid. The payroll taxes need to filed and paid. That is an additional 7.65% of wages (matching payments) + State and Federal Unemployment Taxes of 6.2% (since we are a startup business we don't get any credit source: http://www.alllaw.com/articles/tax/article5.asp ). That means 7.65+6.2=13.85% of $80,000 is another $11080 from our coffers. So profit of $3809.66- payroll taxes of $11080 = Net loss of $7270.34. We are actually operating at a loss!!! So we have to raise prices to cover the costs of business. We will have to make another $10,000 to cover costs. As you can see from this lengthy example that taxes are figured into prices. We can't pay our employees less, they have make enough money to survive, so the price of our product actually gets hit for the full amount of taxes @ 36.5% (adding up all taxes for employee income). Now that is a hefty amount and is assumig no deductions. Now also think about the income tax on our revenue as a business. This is not even including the money it would cost us to hire accountants and tax lawyers to ensure our own compliance with current tax laws. This is a huge burden for our little business to pay. And since we want to make a profit, we have to raise our prices to include our tax burden. Therefore our prices include our taxes paid, aka embedded taxes. When we strip out the taxes our business pays, we have much less overhead. The FairTax would replace the current taxes already embedded in the price (in our business model, the FairTax is much less than the taxes we already pay). This is why I can say that prices would not be any higher than they currently are, not to mention market forces driving the prices down to the lowest point possible while still maintaining a profit. PS. sorry for the length of this post, but I was trying to make complete models and answers to your questions. NOTE: I edited all the links to make them work. |
This is a bad example. Assuming the competitors/consumers set price, a different tax is not going to save a failing business. As there competitors are most likely making money at current prices, will lower their prices due to the savings of all the various payroll taxes and this business will continue to be in a loss condition with the different tax system.
Also, am I missing something shouldn't it be $6,245.34-11,080 is a net loss carryforward of $4835. I.E., we can use this loss to offset future earnings and pay less taxes on those. I don't know why they calculated the tax and it shouldn't be 39%, since 39% was the largest incremental corporate tax rate.
