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Closing the Tax Gap–A new Era of Oppression? 7 March, 2007

Posted by stoptaxing in Fair Tax, federal, Taxpayer rights.

The late Senator Bill Roth fought to reign in IRS abuses.  The agency was so flagrant that it became a threat to our liberty.  Taxpayer rights legislation was passed and now we have the highest collection rate in the western world.  That is not enough for some.  They imagine $300 billion being missed in collections, so they want to unleash a new era of tyranny.

What is the solution?  The Fair Tax would not  require honesty or reporting nor would it require sacrificing our rights.  Think about it.  Story is below.




1. Alan Lidstone - 27 December, 2007

Retirement and the Fair Tax
As the rhetoric around our upcoming Presidential primaries heats up, it is important to pay close attention when candidates start talking about the Fair Tax proposal. While the simplification of the tax laws is very beguiling, there are major shortcomings in the Fair Tax proposal that can affect anyone nearing retirement, or currently retired.

Those nearing or enjoying retirement will find that the Fair Tax proposal implements a Federal sales tax of approximately 30% sales tax on the purchase of any new home, utilities, insurance, rent, medical expenses and more.

What is the Fair Tax? – The implementation of the Fair Tax requires the Congress to pass HR 25, currently supported by approximately 100 Members of Congress. The Fair Tax proposal assumes that the new approach is revenue-neutral and will raise the same amount of funds for the US Treasury. The proposal is based on the following premises:

1) The cost of new products and services in the US has an average set of embedded costs totaling 23% of the sales price – A product selling for $100 has $23 of embedded costs (see Note below).
2) Replace the Federal personal income tax, Federal corporate tax, and the Payroll Tax (Medicare and Social Security) with a Federal sales tax to on the sale of all services and new goods to provide the funding to run the US Government.
3) Providers of goods and services will reduce prices by the amount of their embedded taxes (up to 23%); substantially offsetting the 30% Federal sales tax applied to new purchases and all services, and may provide salary increases to their employees.

Note: Embedded Costs included in the 23% include administering and paying the Federal corporate income taxes and the employee payroll taxes, as well as the cost of administering Federal personal income taxes (employees pay for the employee Federal income tax and employee share of the payroll tax). The 23% embedded costs do not include any taxes levied by states, counties, or cities, or other Federal taxes and fees (tariffs, excise taxes, use taxes, etc.).

The Fair Tax requires a Federal Sales Tax of 30% to replace the business embedded tax or cost of 23%. The Fair Tax proposal overlooks the massive tax evasion that will occur as consumers either order goods from abroad, or go to Mexico or Canada to purchase goods, and those who will make “under the table” cash purchases.

Fair Tax proponents assume that the free market and competition will result in providers of goods and services reducing their prices by the amount of the embedded tax, estimated at 23%, that is now replaced by the Fair Tax.

Unfortunately, the providers of goods and services will have no legal requirement to reduce prices, and will only considering doing so if their direct competitors do so. If their competitors only drop the prices by 5%, then they will only drop by 5%.

Note: Did you ever notice that with all the development, innovation, “uniqueness”, and productivity improvements provided by mobile wireless communications products, most service provider plans are within $2 of any comparable competitor product or service offering, and they all have the same contract periods and penalties for early cancellation?

It is very difficult to arrive at the embedded costs for many products. Many imported items do not have a US product price based on the US tax code. One of the largest sewing machine distributors in the country allows you to order machines through their US location, sends the order overseas, and has it packaged and drop-shipped to directly to you. The manufacturer requires no inventory or distribution system for machines that can cost thousands of dollars. The only embedded US cost is the labor cost to bill, process and transmit an incoming order placed by computer or phone call (less than 15 minutes).

Approximately 70% of the petroleum products used in the US are extracted overseas, refined overseas, and only arrives in the US as a product ready for distribution. The preponderance of cost of petroleum products is allocated to non-US business entities and is largely unaffected by the embedded cost factor for any US federal corporate or income taxes or payroll taxes.

Will the Fair Tax Result in Reduced Prices for Products and Services – The track record for reduced prices brought about by substantive changes in tax policy, free trade policies, technology, manufacturing, productivity improvements, and the global economy is a mixed record.

Pharmaceuticals -The US pharmaceutical industry has manufacturing facilities around the world, including Europe, Ireland, India, and China. Many of the prescription medications distributed and sold in the US are manufactured outside the US and exported for distribution in the US in the spirit of free trade and the global economy

In addition, US pharmaceutical corporations have more than 30,000 employees in manufacturing plants located in Puerto Rico that still produce 13 0f the 20 best selling drugs in the US, and receive substantial Federal tax benefits.

Federal law prohibits Americans from purchasing those same prescription medications made by US corporations in foreign country from the foreign country that ships them back to the US pharmaceutical companies, providing substantial protection from foreign pharmaceutical distributors.

The result of the above factors in what’s commonly described as a “free trade and global economy has given Americans the highest prescription drug costs in the world with substantially lower prices available outside the US.

Technology Products and Jobs – The savings and increased profits gained from moving millions of manufacturing, service, and technical jobs that began in the early 1990s to low-cost sweat shops in Asia, China, India, and Mexico, cutting millions of US jobs, and dropping Federal Corporate taxes to 5% to bring back money from overseas entities went directly to the executives and investors and no one else.

Note: If you think that US employees receive pay increases when work is moved offshore, then you should review the situation in the Technology industry and Information Technology (IT) industry. These industries have moved hundreds of thousands of high-paying jobs for engineers, programmers, data base analysts, systems analysts, etc. offshore and laid off hundreds of thousands of US professional employees since the mid-1990s.

When US technology corporations need more technology personnel, including engineering and IT professionals, in US locations, they tell the US Government that they can’t find the skills in the US labor force and petition and receive H-1B visas to bring in computer technology and engineering specialists from foreign countries (primarily India and China). The offshore employees are given temporary work visas, paid substantially less than comparable US employees, and reminded that they can be replaced (and returned to their home country) if they should ask a salary deemed inappropriate by the employer.

Health Care – When the Medicare Advantage HMOs talked the Government into giving them a $7 – $9 Billion dollars (amounting to approximately 12% more per beneficiary) than Medicare spends per beneficiary to provide Medicare Part A and Part B to beneficiaries who declined the Medicare Advantage HMOs. Most of the excess funding goes to marketing costs, administrative overhead, executive perks, bonuses, and retirement for the HMO executives (such as the $519 Million Dollars in stock options and $99-Million Dollar retirement bonus taken by the CEO of UnitedHealth).

It appears to be intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors, not the customers or employees.

Impact on Retirees – The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the system used to report earnings to calculate Social Security benefit. The Fair Tax proponents have not mentioned how Social Security benefit could be calculated or what they propose to do about the Social Security Trust Fund.

The Fair Tax proposal will put retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”? In its place, they will most likely propose a means-tested charity program.

The next step may be to propose the elimination of the Social Security Trust Fund, turn the proceeds over to the US Treasury and not return of the Trillions borrowed from the working Americans who provided them via the payroll taxes they paid.

Observations -The Fair Tax program is in essence a reverse “Robin Hood scheme” that shifts raising funds to finance the US Government by shifting the raising of substantial amounts of tax revenues from businesses and higher income Americans to the Middle Class and retirees via the proposed the 30% National Sales Tax. All Americans (children, working, and retired) will be paying for Social Security and Medicare from the purchase of their first baby rattle until they die.

Do you really want to pay a 30% sales tax on your next new car, house or RV, or your insurance expenses? Do you think the cost of utilities, heating oil, or fuel (or anything) will go down by 23% of your current costs for these items? If you think your medical care is expensive now, how do you handle the application of a 30% sales tax your medical care and health insurance? How will you feel about selling an RV or car you purchased new and were advised that the resale value did not include the 30% Federal sales tax you paid?

Do you really think the large US and International corporations will be willing to drop the savings they incur from reducing their embedded costs? These are the same corporations that threaten to move the corporate headquarters and tax home to Bermuda, Dubai, or the Cayman Islands when too many questions are asked.

Members of Congress, the White House, and global corporations headquartered in the United States have watched and encouraged the transfer of millions of US jobs to Mexico, India, and Asia, participated in the decimation of defined benefit pension plans and retiree health plans, and run the Federal deficit from approximately 5 Trillion Dollars to well over 9 Trillion Dollars in the name of Fair Trade and the Global Economy. They are now looking to the Fair Tax proposal as a way to extricate themselves (but not us) from this mess and tax people from cradle to grave.

Many of the members of the business community are very excited about the implementation of the Fair Tax because of the savings they see coming and passed on to executives, investors, and the bottom line. They support the Fair Tax because they expect to any business Federal Sales Tax expenses to be substantially lower than the combined corporate income taxes and employer share of the payroll tax that they currently pay.

Pay particular attention when a candidate talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the requirement to continue paying for them.

When any candidate talks about means-testing or entitlement reform, ask them to define the difference between a politician’s entitlement to the massively under-funded Government pension plan and retiree health care, and the Social Security recipient’s entitlement to Social Security and Medicare benefits that they paid into for their (age 18 – 67) entire working career.

We recommend all working Americans, those approaching retirement, and those retired listen carefully to all the Presidential candidates. Question all statements and proposals made by a candidate regarding the protection and security of all retirement income sources, including Social Security, private and public pension plans, 401-k, and IRAs to determine just who the candidate will actually representing and if they represent your needs.

2. David Anderson - 27 December, 2007

Point one, you are paying the tax anyway. Point two, the tax is not 30%. That is a misnomer put forth by the opponents. It is not hard to figure. The numbers are in the bill enrolled in Congress by Rep. Linder. They intentionally misfigured based upon current after income tax figures instead of pretax figures which are the only valid ones since there would be no income tax.

Next all savings accounts would have the benefit of pretax plans. It would not take away from the current plans. They would not all of a sudden become taxed. If you think about it, they would be better off because you would not be hit with a tax just for withdrawing money. Those with lower incomes at retirement would especially like the rebates. It would be like boosting their incomes thousands of dollars a year.

Don’t fear change. Understand it.

3. Alan Lidstone - 2 January, 2008

Point One – “I may not be paying the tax. The actual amount of embedded costs for new products and services depends on the type of product or service.”

A tire company with 7 employees in New Jersey imported 450,000 tires from China. The tires were manufactured in China, drop shipped directly to the purchasers based on information from the tire company ordering system. The tire company had zero inventory, zero storage facilities, and rental officesand never saw the products they were buying and distributing.

The company went bankrupt when told that a tire recall was needed, meaning they had no assets and most likely zero profits. Assuming a delivered cost of $25/tire, the 7 employees were responsible for generating more than $11,000,000 in sales.

Do you think the this company had 23% of embedded costs? Unfortunately the actual embedded costs vary very widely. They can depend on the types of products or services being sold, whether the products were manufactured or services provided from within the US, and where the company maintained its headquarters and tax home.

Finally, there is no legal requirement for businesses providing services or new products to document their embedded costs and share the savings with either customers and clients or their employees.

Point Two – The Fair Tax proponents say the proposal is revenue neutral in that it will raise the same amount of taxes as the current embedded costs of 23%.

If a new product or service selling for $100 has $23 of embedded costs and that the item would only cost $77 with the embeded cost removed, it will require $23 of Federal sales tax to be revenue neutral.

An embedded cost of $23 applied to a service or new product costing $77 amounts to 30%.

4. David Anderson - 2 January, 2008

You are arguing about the same amout of money. You are spending 100 dollars and sending 23 dollars to the federal government.

5. Alan Lidstone - 3 January, 2008

Mr. Anderson, I agree. Just don’t call it a 23% tax. It is a 30% Federal sales tax on the manufacturer or service provider’s price.

a 30% increase on a product or service reduced by 23% is the same amount, Unfortunately, there is neither a guarantee or legal requirement that sellers will reduce their current price by 23% and also no way to confirm that prices are actually reduced by 23%.

We can guarantee that the purhaser of the new goods or services will pay a 30% tax on whatever the manufacturer or service price charges, whether or not there is any reduction for elimination of embedded costs.

I think the Fair Tax proponents should clearly state that they expect prices to decline 23% and consumers will pay a 30% sales tax on the price (reduced by embedded cost or not). Hopefully it’s a wash, but the odds are well against the consumer.

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