"Make a Hole, Make it Wide"
Big Poppa looked at his calender the other day and realized the misery was a few weeks away. That's right April 15Th TAX DAY! Time for misery of the day and headache of Media talkers spewing their thoughts on "Fair Tax" theories, which sounds good but essentially make no sense and can be confusing. So Big Poppa decided to give the two bar stools a much needed rest and waddled on over to see "Rajheid" the accountant.
*Public Service Announcement- Always be nice to those who do your taxes, especially a caffeine induced accountant. With the wrong click of the mouse, you could end up in audit hell!*
"Rajheid" is basically family to Big Poppa and I trust his opinion on many topics, even if I disagree. I mentioned I was researching "Fair Tax" and wanted his thoughts. "Rajheid" said "well the best would be a national sales tax." And through my research that would be the "Fair Tax" theory,
Now a "Fair Tax" is supported by many people, both ordinary and media, and is basically National Sales Tax on consumer goods, but only new goods, all used goods would not be taxed, since they were already taxed once already. And no one can agree upon what the tax should be set at. Friendly accountant "Rajheid" says well a tax around 7%-10% is a decent amount for anyone to understand, but I threw the grenade at him and told him that I have found that they want between 17% - 23% and one report at 30%! His jaw bounced off his glass top desk and the ill audible words of "are you serious?"
As I explained the reasoning for such a high percentage, is that the Fair Tax/National Sales Tax would essentially remove all taxes from ones paycheck, taxes such as Social Security, Medicare, Employee, Corporate taxes would be removed as well as Capital Gain, Estate and Gift taxes would be cast aside. He agreed that a high percentage in a Fair Tax/National Sales Tax system would be needed to cover the entitlements of Social Security and Medicare and not to mention other government functions that we pay for in the current tax system, but 23& and even 30% was outrageous.
Well my taxes were done and I left pleased with my Federal return, but left with more questions concerning the Fair Tax/National Sales Tax.
Is this a set tax or adjustable tax? If used goods are not taxed, couldn't these business owners charge outlandish prices for goods? Wouldn't lower income households consume less? Who monitors the retailers?
Now, everyone would see a larger paycheck, because nothing would be taken out, YIPPEE! But lower income households could adjust their spending habits, they would have to without a doubt. Sure the higher income families spend more, they eat out more, buy higher priced goods such as cars and electronics than the lower income families. And at year's end, that Fair Tax/National Sales Tax will add up and hurt the pocketbook.
If a household brings in $50,000 and spends on average $300 at the grocery, about 75% of that grocery bill is taxable. So the bill drops to $225 then add in the higher 23% Sales Tax, the bill comes to $276.75, saving $23.25 a trip. So people would consume more because they see a savings. And there's no factor that companies wouldn't charge more for goods or if the government decided to raise the Fair Tax/National Sales Tax if desired.
Competition drives prices, however, if people desire more hybrids than regular vehicles, the auto industry can drive up prices on the hybrids and gas companies can raise their prices as well because not everyone could afford a hybrid, and people would be stuck buying expensive gas. Win for business, lose for consumer.
Under the Fair Tax/National Sales Tax, retailers will send their share of revenue tax to the state which they reside and then the state takes their share and then sends the rest to the U.S. Treasury. Companies would then have to answer "how much was actually sold?" when the Federal government asks. Also, under the Fair Tax/National Sales Tax, states could lower property taxes, but also choose not to conform to the Fair Tax/National Sales Tax and keep their current Sales tax system. And if that happens, how many people would move from state to state and how would it affect mortgage rates?
Well, the Fair Tax/National Sales Tax could lower interest rates on mortgages, but then, as we saw over the last decade, people would buy more of a home then they need, not realizing the cost to maintain that larger home, because you'll pay that 23% tax on services. You think electricity is free?
Fair Tax/National Sales Tax theory believes that business would grow due to higher consumption and profits, but also that business would have less operational cost, meaning less employees, which could lean towards high unemployment. Sure some companies are reporting profits nowadays, but are also hiring less because they would rather pay overtime to the current employees than deal with the cost of new hirers not to mention health care, life insurance, operation cost, etc.. (please do not mention the health care reform if making comment)
It wasn't long ago, President George W Bush signed a tax cut to large business to reinvest in America, but about 90% of those companies reinvested out of the country. Companies like Coca-Cola reinvested in the European market while Pepsi reinvested in Asia. Why? Cheaper operational costs and a larger market share.
And then there's the Federal government, the evil empire amongst the galaxy. Under Fair Tax/National Sales Tax, the Federal government wouldn't see a change in revenue under the first year under the tax, however, they may see a downturn in the second year and so on. So technically, business would profit hoping people will consume more (just like today), business could run on less overhead, but the Federal government could adjust the Fair Tax/National Sales Tax higher on service and goods. Services like unemployment, because companies would need less overhead, a large amount of accountants would be looking for work as well, and the IRS could possibly higher more employees to regulate the Fair Tax/National Sales Tax properly, because "all" business is truthful nowadays.
We are trained in this nation to consume, the more we consume the less in savings people have and after the near collapse of our wonderful banking system, people are already near zero in savings.
The Fair Tax/National Sales Tax is a win in theory for many, but in the end run, it "hope for change" theory is that people will consume more for a "feeling" of saving more. The Federal government could adjust the Fair Tax and states would not have to join in if they don't feel like it. Companies could/would operate with less employees and gain larger profits. Consumers could/would buy larger homes and newer vehicles due to smaller interest rates and property taxes, but pay more for services for the larger home and newer vehicle.
But then again, this is all a theory or is it all fairy tale?
Peanut bowl is empty and the 2 bar stools are cold... Pay your tab