The following example should illustrate why the Fair Tax is superior to the current federal tax system.

Let’s assume that a certain product type will be sold under 2 different tax system: under the current system and under the Fair Tax system.

1) Under the current system:

Assumptions:

The federal CIT has been rounded to 40% for simplicity.

All the 4 businesses analyzed are based in Texas, which does not levy a state CIT.

Federal payroll taxes are ignored. (With federal payroll taxes calculated into these equations, the price of the product would’ve been higher than it is.)

The raw material provider dugs the raw material out of the ground at a cost of $10. He sells it to the first level manufacturer at a price of $20, because he must make a profit margin big enough to pay the CIT and earn a profit of $6.

The cost of the product when the RMP sells it: $10+$6+$4=$20.

The first-level manufacturer buys the raw material for $20, processes it at a cost of $5, and sells it to the second level manufacturer at a price of $50 (because he must cover the cost of the purchase of the raw material, cover the cost of processing, and make a profit large enough to pay the 40% federal CIT and make a net profit of $5).

$20+$5+$20+$5=$50.

The second level manufacturer buys this thing at a price of $50, processes it at a price of $5, and sells it to the retail store at a price of $100, because he must pay a 40% CIT (i.e. $40) and make a net profit of $5.

$50+$5+$40+$5=$100.

The retail store buys the final product at a price of $100 and sells it at a price of $180, because it must pay a 40% CIT (i.e. $72) and make a net profit of $8. This is, of course, a minimalist assumption. Almost every retail store requires a higher net profit, which means that the real price of the final product is much higher than $180.

$100+$72+$8=$180.

The price paid by an American consumer (with all the taxes embedded): $180.

2) Under the Fair Tax:

The raw material provider produces the raw material at a price of $10 and must make a profit margin of $6, so he sells the RM to the first level manufacturer at a price of $16.

No federal taxes, no federal tax audit.

$10+$6=$16.

The first level manufacturer buys it, processes it at a cost of $5, and makes a $5 profit margin. So he sells this thing to the second-level manufacturer at a price of $26.

No federal taxes, no federal tax audit.

$16+$5+$5=$26.

The second level manufacturer buys this thing, processes it at a cost of $5, and sells it to the retail store at a $36 price (he must make a profit of $5).

No federal taxes, no federal tax audit.

$26+$5+$6=$36.

The retail store buys the final product for $36, and sells it to the consumer at a price of $54.12 (without the FT the price is $44, because the retail store must make a $8 profit on this product, plus a 23% FT.

Only a retail store pays a federal tax (namely, the Fair Tax), and only retail stores are subjected to federal tax audits – conducted by state tax auditors.

The price of the product under the current system: $180.

The price of the product under the FT: $54.12.

Under either tax system, you would pay federal taxes embedded in the prices of the products you buy. The difference?

Under the current system, you will pay massive, oppressive, hidden, untransparent taxes (passed on to you by corporations), e.g. the federal corporate income tax and the federal employer payroll tax (a payroll tax paid by employers; it’s an additional tax to the payroll tax paid by employees).

Under the Fair Tax system, you would pay only one, mild, transparent, uniform, simple tax: a 23% sales tax called the Fair Tax.

Zbig,

Sorry, but your analysis makes no sense. Income taxes apply only to profits, and your initial 60% profit margin seems much too high. Perhaps you might redo your analysis using a 10% profit margin and apply the income tax to profits only. Also, for the Fairtax calculations, you must add 30% to cost plus profit, not 23%, in order to get a 23% inclusive retail price.

Using 2007 actual revenue data, with retail sales of $9.5 trillion, (durables, non durables, and services), businesses paid $291 billion in income taxes or 3% of sales; $435 billion in payroll contributions or 4.5% of sales, and $147 billion in compliance costs or 1.5% of sales. Add them up and total tax related costs for all businesses in 2007 averaged 9% of sales. Should the Fairtax be put in place, businesses could reduce their costs by 9%, and after adding the 30% sales tax, retail prices will rise by an average of 18%. (1.00 x .91 x 1.30 = 1.18)

I would hope that you would agree that businesses can’t reduce their costs by any more than they actually paid. Using a different year data, the result might change a little, but I only had 2007 data to use.