When you purchase an item such as a loaf of bread, a shirt, an automobile or a service, you see the sales tax on your receipt. Most people think that that is the total tax your are paying but, unfortunately, that is far from the truth. What you don’t see on the receipt is the embedded taxes.
Hidden inside the price of everything you buy are the tax costs of every entity that had a hand in the production and distribution of that item. To stay in business, a business must recover their costs – including labor costs, cost of materials and taxes – through the prices they charge. It is estimated that 15%-30% of the retail price you pay for an item is due to these tax costs being passed on to you.
Goods and services involve a lot of labor with federal payroll taxes alone demonstrate the magnitude of taxes associated with labor. Social Security and Medicare taxes are 7.65% for the employee and 7.65% for the employer for a total of 15.3%. In addition to payroll taxes, corporate income tax affects consumer prices. Research by the National Bureau of Economic Research examining actual retail prices, found significant pass throughs and estimated half of the corporate tax incidence examined ultimately fell on the consumer.
Let’s look at a loaf of bread. The farmer grows the grain and sells it to the miller for $3.00. The miller adds his tax costs and sells it to the baker for $3.30. The baker adds his tax costs and sells it to the distributor for $3.63. The distributor adds his tax costs and sells to the retailer for $3.99. The retailer adds his tax costs and the final price to the consumer is $4.39. This example illustrates the cumulative effect of embedded costs. Each participant can introduce additional federal income and payroll tax costs into the chain and these costs become part of the company’s selling price and are then marked up by every subsequent business.
The FAIRtax repeals federal individual and corporate income taxes and federal payroll taxes and replaces them with a transparent national retail consumption tax. Isn’t it time that we have a federal tax system that rewards things that benefit society? Let’s get rid of the these embedded costs and enact the FAIRtax.
For more information, go to FAIRtax.org
