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On Friday, Nate and I were discussing over the phone some questions I had regarding the FairTax.

One point of contention was that I felt that the book implied that the 22% reduction in cost from "embedded taxes" included the federal taxes that were currently being paid to the government that would ostensibly now be paid directly to the employee. Nate thought I was wrong.

I went back and reread the chapter about embedded taxes and it still seemed to reference payroll taxes and income taxes. A little more researched turned up this.
We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does.

See, in the FairTax book, the authors repeatedly belittle people who bring up the fact that the actual tax rate - when calculated like all existing sales taxes - would be 30%, not 23%. Personally, I don't consider the 30% crowd to be any more intellectually dishonest than the authors who try to put their own shine on the FairTax concept.

For instance, the book continually tries to show the pros and cons of the FairTax as follows:
23% retail sales tax X
You'll keep the taxes you're currently paying on your income!X
Prices will fall by 22% due to the embedded taxes - you won't pay much more than you do today!X
You'll get a "pre-bate" to cover the taxes on necessary expenses.X

Of course, painted like this, the FairTax plan comes out as a major winner. It looks like even with taxes added in, prices will remain about the same, but you'll have way more money because you'll have the money that is currently taken out of your taxes. However, the reality of the situation is that EITHER prices will remain about the same OR you'll have more of that money to spend. EITHER employers will be able to cut costs (and thus prices) by pocketing the amount that would otherwise be withheld and sent directly to Uncle Sam, OR they will continue to pay their employees their stated salary without withholding money.

Sure, prices are bound to drop some - the embedded tax is not 100% income and SS/Medicare withholding, but that appears to be a large portion of it.

A revised table might look like this:

23% retail sales tax X
You'll keep the taxes you're currently paying on your income! OR Prices will fall by 22%!--
You'll get a "pre-bate" to cover the taxes on necessary expenses.X
Domestic economy will grow!X
Costs of imports and fuel will increase X

Something else to consider: when FairTax supporters say that it is revenue neutral, they mean for everyone. You'll likely end up paying the same amount of taxes under the FairTax as you do now. To quote Neal Boortz:
We explained in the book that the FairTax plan was revenue neutral. By this we meant revenue neutral for everyone ... the government, businesses and individuals.

Of course, any money you save won't be taxed until you spend it, so there are ways to avoid paying taxes on money for a time, but at the end of the day, you will pay the taxes.

Let's be clear, I don't think the FairTax is a horrible idea. I think it has some merit, chiefly in that it forces people to recognize how much of their money goes to the government. However, I'm still not convinced that it is the magic bullet that Boortz and Linder try to make it out to be in the book. I think Boortz is much more honest and straightforward in his Nealz Nuze entry.

You won't pay any less in taxes, they'll simply be assessed in a different manner.

I hate the IRS and our current tax system. I despise withholding. I do not benefit in any way from the status quo. I'm still researching the FairTax, and I like some of what I see, but other parts I'm having a hard time swallowing. One thing I don't like is the lack of clear explanations available on for any of the harder questions. Some things are addressed well, but other misrepresentations appear to be repeated. This is not ideal for the source of the FairTax concept.
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