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Income Tax, VAT, FairTax Comparison

The following table is used to illustrate the concept of VAT and FairTax versus Income Tax. Please note that for illustration purposes, we assume that one individual is doing all the work and has all the tax consequence. In real life, this would be divided among many individuals.

Company A sells product to Company B, Company B sells to Company C, Company C sells to Company D and Company D sells to Consumer.

Company Product Price/Labor Income Tax
15% Tax Rate
Payroll Tax
FICA 15.3%
VAT
23% Rate
FairTax
23% Rate
A Bearing $5.00/$3.00 $0.35 $0.46 $1.15 $0.00
B Wheels $250/$150 $17.10 $22.95 $56.35 $0.00
C Car Frame $6,000/$3,600 $410.40 $550.80 $1,322.50 $0.00
D Car $20,000/$12,000 $1,368.00 $1,836.00 $3,220.00 $4,600.00
____________ ____________ ____________ ____________
Total Tax $1,795.85 $2,410.21 $4,600.00 $4,600.00
Employee Pays: $1,795.85 $1,205.11 $0.00 $0.00
Business Pays: $0.00 $1,205.11 $4,600.00 $4,600.00

Above table is based on Employee making $50,000 married with two children. 2007 Tax Rate Schedules.
The total taxes the government receives under the Income Tax System is $4,206.06 (Includes FICA)
The above table assume a 3/5 ration of labor to sales price of item at all levels for illustration.
We do not discuss the corporate taxes in the above example, concentrating only on the effects of Income and Payroll Taxes.




Summary of ADVANTAGES and DISADVANTAGES of FairTax
(Does not includes all changes, just overview of major changes.)

Economic
Effects
  • Advantage: Applies to all retail purchases within United States without regard to nationality of purchaser.
  • Advantage: Applies to all goods imported to United States.
  • Advantage: Does not apply to goods exported from the United States.
  • Advantage: Growth in Businesses
  • Advantage: Growth in Savings


Congressional
Effects
  • Advantage: Congress will no longer have to deal with the Income Tax code. This would leave them with lots of time to do the people's work.
  • Advantage: Congress would not have to deal with tax lobbyists.
  • Disadvantage: Congress would lose all those contributions from the Tax lobbyists.


Employee Changes
Includes
American Workers
Foreign Workers
  • Advantage: No Federal Income Taxes
  • Advantage: No Capital Gains Taxes
  • Advantage: No alternate minimum taxes
  • Advantage: No Federal Payroll taxes (FICA)
  • Advantage: No self-employment taxes
  • Advantage: No estate taxes, so can pass property to children
  • Advantage: No gift taxes, so can give gifts to anyone you desire, including children.
  • Advantage: Employee keeps all of his income, $50,000 in our example.
  • Advantage: No taxes are deducted from employee's income.
  • Advantage: Employee ceases to file Federal Income Tax forms.
  • Neutral: Consumer prices rise, offsetting the income taxes saved.
  • Advantage: Consumer can decide how much in taxes he wants to pay by the amount of goods and service purchased.


Business Changes
  • Advantage: Businesses no longer pays matching FICA taxes, $1,205.11 in our example.
  • Advantage: Businesses no longer pays corporate taxes, $861.70. in our example.
  • Advantage: Businesses can reduce products or services price by the FICA and Corporate Tax amount thus being more competitive.


VAT
  • Advantage: Replaces Personal Income and FICA Taxes as well as Business Income Taxes.
  • Advantage: Government receives tax receipts at each vertical stage of production, thus if the product is never sold to consumer, at least the government received some income.


FairTax
  • Advantage: Replaces Personal Income and FICA Taxes as well as Business Income Taxes.
  • Advantage: Government receives tax receipts at final sale to consumer (retail)
  • Advantage: Purchases of New homes taxed but resale is not.
  • Advantage: Improvements to homes and realtor's fees are taxed.
  • Advantage: Current home owners not taxed on sale of home.
  • Advantage: Education Tuition and Job Training is not taxed.
  • Advantage: Unprepared food purchases not taxed.
  • Advantage: Financial Services fees are taxed.
  • Advantage: Non-Profit organizations' sale of goods and services are not taxed.
  • Advantage: Government consumption of goods and services is taxed.


Federal Changes
  • Neutral: Federal Revenue is neutral: Collects the same amount of tax receipts.
  • Advantage: IRS greatly reduced in size and costs to tax payers.
  • Advantage: IRS responsible for collecting the receipts collected by the States.


State Changes
  • Advantage: States can earn money for collecting Federal Taxes. States are already collecting State Sales Taxes.
  • Disadvantage: By making it a sales tax, the state would have to raise their state rate to offset the reduced price of products due to business not paying the FICA. If state rate was 6% it would rise to 6.385% to collect equivalent tax revenue.(In our example we do not talk about corporate tax reduction, thus states would have to increase rate to cover this reduced part of the sales price).


Welfare
Poverty
  • Neutral: Those under the poverty income rate will be expenditure (living expenses) neutral.
  • Advantage: Those at or below the poverty rate will be paid a rebate of 23% of poverty rate in cash at beginning of each month (actually a pre-bate). This would be 23% of $26,981 (2007 rates) of $6,205.
  • Advantage: These rebates will offset the rise in prices of products or services.



Instead of the car costing $20,000 it has to be reduce by the FICA amount as in the table below.

Company Product Price/Labor Income Tax
15% Tax Rate
Payroll Tax
FICA 15.3%
VAT
23% Rate
FairTax
23% Rate
D Car $18,794.89 $4,322.82 $4,322.82
____________ ____________ ____________ ____________
Total Tax $4,322.82 $4,322.82
Employee Saves $1,795.85 $1,205.11
Business Saves
FICA:
$1,205.11
States Collect
for Federal:
$4,322.82 $4,322.82

Under the current Income Tax System,
the total taxes the government receives from employee is $3,000.96 (Income Tax plus FICA) and
from the business (FICA) is $1,205.11 for a total of $4,206.06.

Taking this another step forward, the business can reduce the price further by the amount of corporate taxes it paid. Assuming an after tax profit of 8% of $1,600.00 the taxes at 35% tax rate would be $861.70 out of the total profits of $2,461.54. Instead of the car costing $18,794.89 it has to be reduce by the corporate tax amount as in the table below.

Company Product Price/Labor Income Tax
15% Tax Rate
Payroll Tax
FICA 15.3%
Corporate Tax
35% Rate
FairTax
23% Rate
D Car $17,933.19 $861.70 $4,124.63
____________ ____________ ____________ ____________
Total Tax $861.70 $4,124.63
Employee Saves: $1,795.85 $1,205.11
Business Saves
FICA:
$1,205.11
Business Saves
Corporate Tax:
$861.70
States Collect
for Federal:
$4,124.63

Under the current Income Tax System,
the total taxes the government receives from employee is $3,000.96 (Income Tax plus FICA) and
from the business (FICA plus Corporate Taxes) is $2,066.81
for a total of $5,067.77.




Summary

Category Income Tax FairTax
Car Cost + Profit $17,933.19 $17,933.19
Business FICA $1,205.11
Business Corporate Tax $861.70
_______________ _______________
Sale Price $20,000.00 $17,933.19
Federal Retail Tax $4,124.63
@23%
State Sales Tax $1,200.00
@6%
$1,200.00
@6.69%
_______________ _______________
Total Price $21,200.00 $23,257.82
Employee Saves: -$3,000.96
_______________ _______________
Income Adjusted Cost $21,200.00 $20,256.86
States Collects
for Federal:
$4,124.63
States Collects
for State:
$1,200.00 $1,200.00