The Chairman’s Report October 9, 2020

EMPLOYEE OR CONTRACTOR?  A PROBLEM CREATED BY THE INCOME TAX

For hundreds of years, people have provided services to companies as contractors rather than as employees.  Companies generally like this arrangement, as it is often a less expensive option for them. According to Joseph Hadzima a senior lecturer at the MIT School of Management, once you consider basic salary, taxes and benefits, an employee’s real cost is typically between 1.25 and 1.4 times the employee’s base salary. In other words, an employee earning a $30,000 salary will cost a company somewhere between $37,500 and $42,000.

And it’s not just the companies that find contracting an attractive option.  Many people prefer to be contractors rather than employees—something that baffles many government bureaucrats.

A Contractor:
 

GIG ECONOMY

An article by Investopedia, describes the rapidly growing “gig economy.”  The article states:

In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees. 
America is well on its way to establishing a gig economy, and estimates show as much as a third of the working population is already in some gig capacity. Experts expect this number to rise, as these types of positions lend themselves to independent contracting work.  Many of those jobs don't require the contractor to come into the office to work.
The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform.
The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and the demand for flexible lifestyles.
Many state and federal government bureaucrats are wary of contractors.  They say that they are “concerned that the workers are not getting the benefits to which they are entitled”.  From their point of view, this is understandable because they cannot really comprehend how someone would not want a “stable” job that provides the benefits and security available to employees.

But what they’re really concerned about is the rapidly growing evasion of state and federal income taxes and the resulting revenue loss.  With one exception, Vermont, every state has a balanced budget requirement.  They can’t just go deeper and deeper into debt the way the Federal government can.  States must actually raise the revenue they need to fund their budgets.

Government bureaucrats love tax withholding.  They see it as a way to make evasion harder.  Also, when people’s withholding exceeds their tax liability, the government gets an interest free loan courtesy of the taxpayers.  Contractors receive payments for their services.  They are generally not subject to withholding.  After deducting their business expenses, contractors pay income tax on their net profits.

Contractors, like all rational people, try to minimize their tax liability.  They want to keep as much of what they earn as possible.  Some contractors are more aggressive than others in taking deductions.  That’s not necessarily illegal, although IRS auditors might not agree with all of them.  Still, there are some contractors who illegally evade taxes by not reporting income or exaggerating deductions.

The bureaucratic answer is to not focus on the guilty parties, but to declare open season on all contractors.  This response is what led to the turmoil in California involving Uber, Lyft and countless other companies that hire contractors.  Apparently, some of these contractors were not paying the income taxes the bureaucrats thought they should be.

Consequently, California passed a new law making it extremely difficult for any company to hire people as contractors.  The law provides for heavy fines and penalties on any company that mistakenly classifies an employee as a contractor.

The government bureaucrats just assumed that everyone would immediately change their business models to comply with their orders.  Few, if any, had actually worked in the business world since they babysat or mowed lawns as teenagers.  Therefore, they were totally baffled by the response they got.  With the incredible arrogance of people who think that they know best but who don’t, they were outraged that employers and contractors didn’t just obediently fall in line.

Private companies live in the real world, not the hypothetical world of the government bureaucrats.  The bureaucrats never saw the unintended consequences of their new law coming.  Many companies that were forced to hire their previous contractors as employees ended up cutting benefits for all employees.  They simply couldn’t pay all the extra costs and survive—something the bureaucrats never considered.  Others are just contracting their business operations because they cannot afford to hire more employees.

The reaction from the government bureaucrats?   They label these actions as “corporate greed” and look for ways to punish these companies.

CONCLUSION

With the FAIRtax, the distinction between employee and contractor is irrelevant, at least for tax collection purposes.  Neither would be subject to withholding.  Neither would be subject to payroll taxes.  Both would bring home their full gross amount, and both would get the monthly prebate.  Remember, with the FAIRtax, everyone pays their Federal taxes at the cash register when they make retail purchases of new goods and services.

Isn’t it better if people and not bureaucrats decide what is best for them?

Many government bureaucrats won’t like the FAIRtax.  They’ve found that the income/payroll tax system is a powerful tool they can use to manipulate people.  The FAIRtax would take that away from them.

British writer C.S. Lewis said something that all of us should consider.   

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

Will passing the FAIRtax suddenly allow people to make their own decisions in matters that don’t adversely affect others?  No, but it will remove a tool that government busybodies use to control and manipulate each and every one of us.  And, it will give each of us the freedom to decide when we pay our taxes, and how much in taxes we pay.

If you have friends who don’t know about the FAIRtax send them to FAIRtax.org.  Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.

Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.

Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:

“If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Is it hopeless?  When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?”  But I dream things that never were; and I say “Why not?”

Isn’t it time for us to ask, “Why not?”