Saturday, February 2, 2008

FairTax Illustration - basic example

If it suddenly cost 40% less to make a product, even if the corporation only passed on 20% of that 40% initially, prices would drop. If a product cost $2.00 to make after taxes and gets sold for $4.00, with $1.00 of overhead cost coming out, that's about $1.00 of profit that gets taxed $.40. If the product costs $1.60 because that tax is gone, it could be sold for $3.20 with the $1.00 overhead, and the corporation still makes the same $.60 profit, but the cost of that $3.20 product after the 23% tax is $3.94 - but they're paying that out of their whole paycheck plus their prebate. So the cost of bringing that product home is less, the corporation makes the same profit, and the taxes are still paid to cover the cost of running the government.

Corporations will reduce their costs as a function of competition. Some might temporarily withhold the savings, but as soon as the first "Tax sale! We're passing the savings on to you! Buy now and save!" commercial flashes across the TV, prices will drop dramatically. I will cover more on corporations in my next post.

-- Robert


Robert said...
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melissa said...

I agree that people will notice an increase in take-home pay, but people have really short memories for positive events.

And I am the most cynical liberal on the planet. It would be in companies best interest to lower prices, but most won't do it. They can keep charging the same for things because most people won't notice that prices didn't change. Especially if companies use a pricing strategy that factors in the sales tax in determining their final price and spin that into the media. I can hear the PR flacks on CNBC now....

It's not that I think people are stupid. I just think that people are too focused on the short term.

But there does need to be a better way. I think that this one is close, but still has flaws. I can support it, but we'd really have to watch the behavior of corporations in the aftermath. Most people don't pay that close of attention, and Ralph Nader is getting old.

Robert said...

The corporations would figure their price based off the tax, but that formula I showed is exactly how they would do it. So the price would drop to $3.20 and the after-tax price would be $3.94, a lower price and paid for with whole paychecks. My next post about corporations might disagree with your feelings on corporations, but hopefully you see why and how.

Yes, people might have short memories, but everyone would adjust quickly to the much better system. Imagine a world where April 15 is no longer an important date.

The reason companies will lower their price is a function of competition. Name the list of businesses that have succeeded by keeping their prices higher than their competitors. Now name the list that have wiped out competition by undercutting them on price. Which one is longer?

le35 said...

Although I think that the stores will lower prices more than they have been, even if they don't, prices won't rise as high. I think that even if this isn't the fix, it's definately A fix, which is better than what we've got. There is no possible perfect system because it's managed by people, and people aren't perfect, but I think that it's a close as we're going to get.