Fair Tax Revisited

Quite some time ago I wrote a post concerning the Fair Tax and how I thought it would aid in not only in rescuing the economy, but how I thought it would help to curb corruption in the halls of government. In that post I reviewed my understanding of the Fair Tax and just how it would rescue our economy. Imagine my surprise when I actually received a comment from someone named Dutchman 3 (Fair Tax Skeptic). He argued the following:

Using the 2007 data in the Kotlikoff/BHI study about what Fairtax rate would work, with retail sales of $9.5 trillion, businesses paid $291 billion in income taxes or 3% of sales; businesses paid $435 billion in FICA or 4.5% of sales; and businesses paid $265 billion in compliance costs or 2.5% of sales. Add them up and, if you agree that businesses can't save more than they paid in tax related costs, then businesses might reduce costs by 10%. Add the 30% sales tax to their costs and retail prices will rise by 17%. (1.00 x .9 x 1.30 = 1.17). Simple math. And, please note that retail merchants have to add 30%, not 23%, to their costs in order to arrive at a 23% inclusive price.

In a nutshell, Dutchman 3 argues against the Fair Tax folks, who claim that on average 23% of the retail selling price of goods and services is made up of direct and indirect tax costs. Dutchman 3 asserts that at most, 10% of any particular retail could be saved through implementing the Fair Tax and that the Fair Tax is actually 30%, not 23%. Obviously Dutchman 3 is very articulate in his criticism and utilizes Fair Tax research in his critique. I've given Dutchman 3's rebuke of the Fair Tax quite a bit of thought and after some time came back to consider his argument.

In this response, I won't argue with Dutchman 3's numbers, rather I will use them to demonstrate that even when one considers that 10% of the average retail today is due to tax burdens rather than the 23% the Fair Tax uses, that the Fair Tax is still the way to go.

So, let's consider a product today that retails today for $100.00 and the gross margin associated with that item is 30% or $30.00, and therefore the cost of that product is $70.00. Per Dutchman 3, the tax burden of that $100.00 retail is $10.00, not $23.00 as the Fair Tax would suggest.

Well then, let's implement the Dutchman 3's Fair Tax savings of $10.00 and see what happens. Rather than a cost of 70.00, the new cost to the retailer is $60.00 ($70.00 - $10.00 tax savings = $60.00 post Fair Tax Cost). Now let's mark that $60.00 item up to generate a 30% gross profit as before. ($60.00/.70 = $85.71 retail), add the 23% Fair Tax ($85.71 + 23% Fair Tax = $85.71 + $19.71= a total Fair Tax retail of $105.43). The new retail is only 5.43% higher than the original retail of $100.00 and that is using Dutchman 3's tax savings of 10%.

Now I don't know about you, but if I could tell someone making Sixty Grand today that they would take home approximately $300.00 more per week ($1,200 more per month) with the Fair Tax; a 39% increase in take home pay given a 28% tax bracket, but that they may have to pay $105.00 for something that costs $100.00 today; do you think they would think that a good deal? Oh and that is only if that item is new, if it is used, there is no tax.

No matter how you slice it, I think the Fair Tax is the way to go.