Economics Made Economical

Even More Benefits of the Fair Tax

The National Fair Tax has many benefits over the American government’s current tax system. I have previously discussed just some of the most basic of these.

I have also tried to dispel some common misconceptions about what the Fair Tax is not. Some questions, however, remain:

1. How can the Fair Tax include raise the sales tax so much and still not cause the price of goods to increase?

Answer: The first rule of running a business is that you are doing it to make a profit, not to charge the highest prices, make the greatest amount of your product, or even, necessarily, to make a high quality product. You are in business to maximize your personal profits. This is why Supply And Demand and the Equilibrium Point determine how much of a good is to be produced and the price at which it can be sold. This is also why a company can’t get away with, say, making 8 trillion boxes of paper clips in a week and charging the customer $5.00 per paperclip. It’s not just because the corporations are too nice to overcharge. It would simply be a really, really dumb move financially.

Another really stupid move would be for a corporation to undercharge and lose money for every good sold. What would be the point? So corporations, when reviewing production costs and determining market prices, take their entire operating cost–including both Fixed Costs and Variable Costs–into consideration. One of their variable costs is the corporate tax that they must pay. For many of the largest corporations this can be as high as 30% of their income. Therefore, when determining their goods’ market costs, the corporations must add an extra 30% to the price just to break even. The Fair Tax eliminates all tax on businesses, including income tax, payroll tax, corporate tax, federal property tax, matching employees’ Social Security/Medicare payments, and any other monies a corporation must currently pay the government just to function. As a result, the prices we see on the shelves will be 25-30% lower, at the very least, than what they currently are, and even with an additional 30% added back on for the sales tax, we will still be making out much better than we are today.

2. Would the 30% get added to everything I’d buy?

Answer: No. Essential items like food and clothes will be tax-free. However, as indicated in the answer to the first question, corporate prices will be around 30% lower, so all of our food and clothing prices will decrease by about 30% and still have zero sales tax. Additionally, only brand new items are taxed, so anything bought second-hand on eBay, at a garage sale, or at a pawn shop will be tax-exempt. Even pre-owned cars and houses that have already been lived in will not have any tax added to their prices. Again, we’ll be making out much better than we are today because used goods currently do have tax added onto their register prices.

3. What if I want a new house or new car or luxury clothing or want to eat at a fancy restaurant? Is it fair that I’d have to pay an extra 30% on an already high-cost item?

Answer: Yes! Think of it as a luxury tax or a kind of sin tax that helps to ensure the wealthier are paying their fair share, which, in general, the richest of the rich are not currently doing because they can exploit all the loopholes in the current system, for example the black market, under-the-table pay, illegal labor, “donations” to wealthy friends and family members, and tax-free offshore bank accounts. For those who can’t afford the luxury items as often as they want them, they probably are not the type of people who should be purchasing them in the first place, and the Fair Tax will encourage them to be more frugal and save more money, only splurging when it’s really worth it.

Also, as stated in the answer to the first question, most goods will not see massive price increases, and goods that exist in perfectly competitive or near-perfectly competitive markets will actually see decreases from current prices. Ferrari, Coach, Louis Vuitton, Prada, Hummer, Lexus, and the like may not be brands that exist in perfectly competitive markets because people who buy them are paying for the brand name itself. So the lion’s share of the 30% tax may still be included in their final prices. But the people who purchase those brands are likely people (or should be, anyway) who won’t even notice an extra 30%. This is an example of how the upper classes will be held accountable for making frivolous purchases and those who choose to save and live humbly could end up paying negative tax (being rewarded by the government’s rebate) in any given year.



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  2. Gordon Cassaday

    Where does it say that food and clothing would not be taxed? Is that in HR 25 or some other version of fairtax?

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