How Federal Taxes Inflate The Price of Everything You Buy
When you stand at a checkout counter, the taxes you see are the state and local sales tax added to the subtotal. But that "subtotal" is already carrying a heavy, invisible burden. Long before a product reaches the shelf, a complex web of federal income and payroll taxes has been woven into its price.
Economists call this the "hidden tax wedge." From the farm to the factory to the final retail clerk, every hand that touches a product adds a layer of federal tax cost that the consumer ultimately pays.
The Illusion of the "Pre-Tax" Price
In the U.S., we believe the "price" of a gallon of milk is what the farmer and grocer need to cover their costs and make a profit but don’t consider that federal income/payroll taxes are part of the “costs”.
Federal taxes—including corporate income taxes, pass-through taxes for small businesses, and the employer’s share of payroll taxes—are treated by businesses as operational costs, no different from electricity or rent. They are all costs.
To stay in business, firms must pass these costs forward. It is hard to see the difference made by increases in federal taxes but recent empirical research from the NBER suggests that for every 1 percentage point increase in the corporate tax rate, retail prices can rise by as much as 0.24%.
The Supply Chain
To understand how much the federal income/payroll tax system adds to your receipt, we look at the accumulation of these tax costs at every node of production.
1. The Raw Materials
The journey begins at the farm or the mine or producer of the raw material. Most American farms are "pass-through" entities, meaning the owners pay Self-Employment Tax, a 15.3% levy on nearly all net earnings. According to USDA data, the farm share of every dollar spent on food is about 14.9 cents. While small, the taxes paid by the farmer on labor and fuel (including federal excise taxes) are included in that 14.9 cents.
2. Manufacturing
Manufacturing is where the "value added" is highest, and thus where the income/payroll tax wedge is most substantial. Manufacturers and most businesses operate on obtaining a specific rate of return. If a factory needs a 10% profit to satisfy its investors, a 21% federal tax means they must aim for a 12.6% gross margin. Instead of increasing the price 10%, the price to the next person/entity in the supply chain is increased by 12.6%. This same math is used by each subsequent person/entity in the supply chain.
3. Logistics and Wholesale
Before it hits the store, your product moves by truck or rail. This sector is labor-intensive and have a low profit margin. These firms pay the 7.65% employer payroll tax on their drivers; they almost always pass 100% of it to the retailer or to the next person/entity in the production cycle.
4. The Retailer
The retailer is the final "tax collector." Retail is the largest private-sector employer in the U.S., meaning payroll taxes are a massive overhead. Research into supermarket scanner data shows that labor cost increases—including the taxes paid on those wages—are passed through to food prices almost dollar-for-dollar.
The $546 Billion Paperwork Tax
Beyond the taxes themselves is the cost of complying with them. Businesses spend billions of hours annually navigating the Internal Revenue Code.
According to the latest analysis from the Tax Foundation, the total economic cost of tax compliance in 2026 is estimated between $536 billion and $546 billion. This figure represents roughly 1.8% to 1.9% of the U.S. Gross Domestic Product (GDP).
The National Taxpayers Union Foundation (NTUF) divides this burden into two primary categories:
- Out-of-Pocket Expenses ($148 Billion): Direct payments for tax preparation software, professional CPAs, and legal services.
- Time and Productivity Loss ($388 Billion): The monetized value of the 7.1 billion hours Americans spend on recordkeeping, researching rules, and filing forms.
The Small Business Administration says that there are nearly 36 million small businesses, they contribute 43.5% of the total U.S. GDP and create 46% of the private sector jobs.
Unlike large businesses, these small businesses don’t have accounting and legal staff and must include the costs of compliance in the prices of the goods and services they provide.
The Bottom Line: A 15% to 25% Markup
When you aggregate the corporate income tax, the employer payroll tax, and the compliance burden, the cumulative "embedded" federal tax in retail prices is estimated to range between 15% and 25% of the final shelf price.
This means that for every $100 you spend, between $15 and $25 is effectively a federal tax payment that never appears on your receipt. While the U.S. is often perceived as a low-tax jurisdiction compared to Europe, Federal Reserve research suggests that our system of embedded taxes functions remarkably similarly to a European Value Added Tax (VAT)—it's just that in America, the tax is kept off the books and hidden in the price of bread, gas, and clothes.
By the time you pay that "visible" 7% sales tax at the register, the federal government has already taken its cut, one supply chain link at a time.
The total cost of federal tax compliance is currently 23 times larger than the annual operating budget of the Internal Revenue Service itself.
Conclusion
The $546 billion compliance burden represents a significant "deadweight loss" to the American economy. If the 7.1 billion hours spent on tax forms were redirected toward innovation or labor, the long-term growth of the U.S. economy would be substantially higher. Despite digital filing advancements, the "hidden tax" of complexity continues to grow faster than the technology designed to manage it.
While all alternatives to the income/payroll tax system need to be carefully examined, it is clear that the best alternative is the FAIRtax, a national retail sales tax on new retail goods and retail services which provides a family credit so that all purchases up to the poverty level for each family are not taxed. There is no withholding from your paycheck and YOU NEVER HAVE TO FILE A TAX RETURN TELLING THE GOVERNMENT HOW MUCH YOU EARNED AND HOW MUCH YOU SPENT, AND YOU’LL NEVER BE HARASSED BY THE IRS EVER AGAIN.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@fairtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.
THE SOLUTION—PASS THE FAIRTAX!
Why would D.C. pass the FAIRtax and give up this almost unlimited source of donations? The only way that they will is if the rest of us demand it!
Isn’t it time to end this ludicrous tax collection system and the IRS?
HELP BRING ABOUT REAL TAX REFORM AND STOP FUTURE IRS ABUSES
By contributing (investing) $10.40 per month, you help provide a financial base to AFFT. If you can make larger contributions (investments), these will be used not for salaries, as we are all volunteers, but for the needed updates to our economic studies which will be vital for all future years.
Please go to this link to invest in AFFT and help us pass the FAIRtax. It’s an investment in your and your family’s future.