Generally speaking, I am leaning towards support for the 'FairTax'. What I don't agree with is some of the claims being made by FairTax supporters.
From FairTax.org is this statement: 'They may not know it, but they are paying corporate income taxes, employer payroll taxes, plus the associated compliance costs that are hidden in the price of every retail purchase they make.' This statement is in regards to the concern that retirees that currently have no taxable income will now be taxed on money they have saved and are now spending, essentially being 'double taxed'.
The issue I have with the statement is that it treats retail prices as if they are determined based on a recovery of costs. This is not true. Consumer behavior (demand) is a major force in pricing.
Consider two identical products from different manufacturers that sell for $100. Both companies incur the same cost and have identical profit margins on the products. Company A has net income of $1M and pays $400K in federal, state and local income taxes (40% rate assumed). Company B however does not have any net profit either because of other product lines, losses that have carried forward, or higher indirect overhead costs.
Does this mean that Company B is overcharging and should lower its price? Is Company A undercharging. Should A increas its selling price?
Simply put, if consumers see two identical products with the same quality, function and features, they will not care what each company's costs were. The notion that costs (and taxes) or savings (tax reductions) are passed on to the consumer is not generally true.
Consider two identical products from different manufacturers that sell for $100. Both companies incur the same cost and have identical profit margins on the products. Company A has net income of $1M and pays $400K in federal, state and local income taxes (40% rate assumed). Company B however does not have any net profit either because of other product lines, losses that have carried forward, or higher indirect overhead costs.
Does this mean that Company B is overcharging and should lower its price? Is Company A undercharging. Should A increas its selling price?
Simply put, if consumers see two identical products with the same quality, function and features, they will not care what each company's costs were. The notion that costs (and taxes) or savings (tax reductions) are passed on to the consumer is not generally true.
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