Buying Power With a National Sales Tax

Take a look at this quote from a research paper on automobile purchases from FairTax.org:


"First, look at the current system. Today, a worker must earn $43,537 to be able to pay for the average new vehicle sold in 2003 (according to NADA) because in order to do so, he first had to give the federal government $11,442 in payroll taxes and income taxes. This leaves $4,545 to pay the interest on the loan and $25,550 for the price of the car. Under the FairTax, our buyer only has to earn $100 to spend $100. The total cost of purchasing the car is $27,550 plus the FairTax of $8,265, or $39,160. This is 10 percent less than today, even after the sales tax is added on! The cost savings increase to 14.9 percent if the car buyer is self-employed and pays 15.3 percent payroll taxes instead of 7.65 percent.

"A major cost component of an automobile for a consumer is interest. The FairTax results in interest cost savings on the purchase of a new car in two ways. First, under the FairTax interest rates will decline from their level under an income tax. Interest rates will fall 25 to 35 percent under a consumption tax like the FairTax.1 Rates will drop immediately and quickly toward the current tax-exempt rate. Investors will no longer need to receive a tax premium to achieve a particular after-tax rate of return. The impact of eliminating this "tax wedge" or tax premium on interest can be seen every day in The Wall Street Journal. Tax-exempt municipal bonds tend to yield about 30 percent less than taxable corporate bonds of similar term and risk.

"Second, the taxpayer can use his or her complete earnings to pay for the interest. Using pre-tax earnings to pay for the interest on a new vehicle is analogous to the home mortgage deduction where home purchasers can deduct interest paid. Deducting interest paid on home purchases is the tax code’s attempt to allow interest to be paid with pre-income tax dollars. Since interest payments are not taxed first under the FairTax, the FairTax extends what is essentially the treatment of home mortgage interest to car buying. But it takes it one step further, granting what would be the equivalent today of a sort of supercharged interest deduction. That is because the mortgage interest deduction does not allow a deduction of such interest against payroll taxes (which three-quarters of Americans pay more of than income taxes). The FairTax allows interest for a new car to be paid before any tax, payroll or income tax, further reducing the costs of buying a car. "

In layman's terms, this means under the Fair Tax we as buyers will have more buying power with our money. This means American car makers will be more competitive.

Just think, in order for American car makers to compete with the subsidized foreign auto producers, American vehicles have to be equipped with parts that just meet industry standards. This is not because auto makers want to produce cheap products. They want to be able to compete with foreign producers who do not have to pay the same rate of tax that an American company has to pay.

Why did Chrysler move its headquarters to Germany? Because they get a better tax rate as a foreign company than they do as an American company. Our tax code is driving American businesses outside the United States. The Fair Tax will be a dream come true for American businesses.

Auto workers will also benefit. Unions fight hard to help the auto worker earn a high income just so the worker can afford the taxes they pay. This places a heavier burden on the auto maker because they have to pay out higher income, Social Security, and Medicare expenses. This means the consumer (you and me) has to pay more in the end because of the amount of money that it takes to generate one vehicle. Remember, corporations do not pay taxes - we do. Corporations just embed the taxes in the final price.

Auto Workers will benefit in a number of ways. First, they will get to keep all of their paycheck (no more withholding, except for maybe insurance and Union dues). They will have the right to determine how their money is spent. Second, auto makers will be able to produce above standard cars at great prices which in turn is passed on to consumers who buy more cars. More cars means the industry grows which means auto workers keep their jobs and do not have to worry about layoffs.

The consumer benefits because they can afford American products and get their money's worth. They will no longer pay embedded taxes. There will just be a flat rate. Read the auto research paper to find out more.