FairTax Overview
What the FairTax does not do – raise the price of the automobile to the consumer
Even if the automakers are not making a profit and therefore do not pay taxes at their entity level, the
subcontractors, labor, and the many component parts industries do pay taxes. And they do bear
considerable compliance costs. Indeed, the current system alone imposes compliance costs of an
estimated $265 billion, which is a dead-weight inefficiency buried in the price of each good and service
Americans buy.
And to the extent the prices of goods and services reflect these tax costs, sellers push these costs
forward in the product and service prices. In other words, the prices we pay today at the retail level –
for instance, the price at a car dealership – reflect the hidden content of taxes and compliance costs
imposed upstream. With the FairTax, these costs disappear, and with it, the prices will decline.
Those who support the income tax – and in fact want to continue to impose unnecessary costs on
the economy by complicating it further – make the claim that the FairTax would increase the costs of
consumer purchases, such as automobiles. This logic, however, assumes that the price of automobiles
would not decline by the repeal of corporate taxes, payroll taxes, and capital gains taxes and
administrative costs that automobile manufacturers bear today. They believe the forgiveness of tax at
the business level would simply be turned into additional profit when those taxes are repealed, rather
than passed along in the lower price of vehicles. However, U.S. automakers know firsthand how
competitive is the marketplace. Competition will drive prices downward simply because of the taxes the
automobile manufacturers no longer face.
What the FairTax does – make automobiles more affordable
Interest carrying costs decline.
While economists can dicker over how much producer prices – and therefore the costs of the vehicle –
will fall, one factor is indisputable: The purchasing costs to U.S. consumers will decline about 10
percent because of the effect on interest. The key question to ask is this: How much would an
American wage earner have to earn to buy an automobile under the FairTax versus the income tax? The
answer is: A whole lot less than today.
Consider the following math (shown in the table below). Using a down payment of 10 percent
(which is a conservative assumption), and assuming that the owner paid 7.65 percent payroll taxes and
was in the 28 percent marginal tax rate bracket, let us see how purchasing a new car becomes more
affordable under the FairTax.
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