Thursday, January 6, 2011

The Fair Tax and Benefits and Compensation

Representative Rob Woodall (R-GA) yesterday re-introduced (it was HR 25 in the 111th Congress as well) the so-called Fair Tax. Thus far, the bill has 47 co-sponsors, most Republican, but some Democrat. There have been whole books written on the topic, so its far too complex to explain here, but I'll give you the simple version.

  • All existing federal taxes would be repealed
  • The IRS would be abolished
  • The federal government would get its revenues primarily from a 23% sales tax on finished products, but not on intermediate steps (so not a VAT tax)
  • Basic necessities would be paid for with a prebate
Let's think about an employee's rewards package, currently. Typically, it includes all of these:
  1. base compensation which may be a salary or may be based on hours worked
  2. additional cash compensation (for some) in the form of sales commissions, a bonus, or overtime
  3. health benefits
  4. a 401(k) plan that may have an employer matching contribution
  5. (perhaps) an additional retirement plan
  6. (for the lucky few) equity compensation
  7. some other benefits
Numbers 1 through 6 and parts of 7 are generally tax-deductible for an employer. That's a big reason that they are willing to offer these rewards. In fact, where the costs of certain parts of a rewards package may not be tax-deductible for an employer, they pay tax departments, tax advisers and sometimes lobbyists millions of dollars to make them tax-deductible.

So, what if there were no corporate income tax? Then, there would be no tax deductions. Would employees still get a similar rewards package? Probably not. But, what of the group purchasing power of various benefits? Perhaps employee groups would be formed that would be group purchasers. Perhaps, new methods of getting better deals would arise. But, in any event, the landscape would change.

So, if you are in favor of the Fair Tax, be ready to deal with the consequences as well, whether you consider them good or bad.

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