This Grassroots Corner continues a series on dealing with hostile questions and comments that people may raise about the FAIRtax. Many of these suggested responses will be good comebacks for you to have in your pocket when you need them. Some of these suggested responses can be too long to insert into an actual conversation. You may want to boil them down to where they'll be more useful when you're talking face-to-face with someone attacking the FAIRtax.
This week, we respond to a question that FAIRtax Guy Bob Paxton sent me from Darryl. Darryl’s question is similar to a question we answered in our June 14, 2021 Grassroots Corner about “double taxation,” but with a subtle difference.
Darryl writes, “Hello. … I have a question about the FairTax to which I haven’t found an answer yet. To be clear, I am a huge fan, but I wonder if I’ve found a down side that may give others an argument against the FairTax.
“At the moment that the FairTax takes effect, all of the money that I have on hand will have already been subject to the income tax. Then when I spend it, I’ll pay taxes on it again. Isn’t this double taxation? Does the FairTax plan have any provision to exempt money that has already been taxed? Even if I have to pay taxes twice, I think that the benefits of the FairTax are far and away worth it, but I’d like to know how you would respond to the objection.”
Darryl, you raise a great point, for which the Inventory Credit was designed. What is the Inventory Credit?
Let’s imagine it’s January 1, and it’s the first day of the FAIRtax. A car dealer has a million dollars’ worth of new unsold cars sitting on his lot. He bought those cars before the dawn of the FAIRtax. The wholesale prices of all those cars contained the embedded costs of the income tax system—the tax liability itself, compliance costs and payroll taxes for every employee who had a hand in the production and distribution of those cars.
Those costs were passed on to the dealer when he purchased his inventory. So, those cars have already borne the incidents of today’s income and payroll taxes and should not again be subject to the FAIRtax.
The Founding Fathers of the FAIRtax recognized that problem. In order to soften the impact of the FAIRtax on Day One, before the FAIRtax has a chance to fully kick in, the founders decided to give our car dealer a credit for inventory on hand at the dawn of the FAIRtax. Our car dealer can take a credit of $230,000 on his one-million dollar inventory and charge tax on only $770,000 of that stock.
What does that credit look like per car? According to The Freeman Online, most retail auto dealers make a gross profit margin of between 8% to 10% per car. Thus, if a car sells, before tax, at $30,000, and if $3,000 of that sales price is the dealer’s gross profit margin, $27,000 of that price is the cost to the dealer of each car sitting in the lot.
Without the inventory credit, the dealer would have to sell the $30,000 car for $38,961 in order to be able to pay the FAIRtax-inclusive rate of 23% on the sale. (If pre-tax prices go down by 10% due to elimination of embedded tax costs and competition, the sales price drops to $35,064.) But with the inventory credit taken against the FAIRtax, the dealer can sell the car at $30,896 – only slightly more than he would charge today.
As the dealer sells off inventory, he would have to charge tax on the replacement inventory which is no longer entitled to the Inventory Credit. But by then, most people will be bringing home their paychecks free of federal withholding. And seniors who no longer receive a paycheck will get a boost to their Social Security benefits to compensate for any rise in the cost of living due to the FAIRtax.
What goes for cars goes for anything else that is tangible. Indeed, the FAIRtax is a win-win for all, even in the early days.
Are there any more Darryls out there with great questions like his?
I would love to hear from you about how to squeeze this explanation into a soundbite.
AFFT Grassroots Coordinator & Secretary
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