The Fair Tax Act of 2023 is a lot like previous Fair Tax Acts that have been introduced in every Congress since 1999. It’s not expected to become law this time, either, but it has gotten further than previous bills of its kind. Suppose it does make it through the House and the Senate, and suppose it survives President Biden’s threatened veto — how will it affect manufacturing?
What is the Fair Tax Act?
The Fair Tax Act is a proposed federal tax reform plan that would abolish the current income tax system with a national retail sales tax that would be collected by businesses at the point of sale. The goal of the FairTax is to simplify the tax code and make it more equitable. Under he new systems, people would not be taxed according to their incomes, but instead according to their expenditures.
Goods and services bought for individual consumer use would all be taxed at a 30% rate: $100 in goods and services would end up costing $130, whether those goods and services were yachts, groceries, cigarettes, or rent.
There would be no more income tax, no payroll taxes, no corporate or capital gains taxes, and no gift or estate taxes. Just sales tax, and that would be identical for everyone in all circumstances, except items bought for use in a business. These items would not be taxable.
Under the current income tax system, businesses in the manufacturing industry are subject to a variety of taxes, including income, payroll, and other taxes. These taxes are often complex and can be difficult to manage and comply with. The FairTax would eliminate these taxes, reducing the burden on businesses in the manufacturing industry.
How would the Fair Tax affect manufacturing?
Under the current system, businesses must pay income tax on the profits they make from the sale of their products. This can lead to higher production costs, as businesses must factor in the cost of taxes when calculating their prices. Under the FairTax, businesses would not have to pay income tax on the profits from their products, resulting in lower production costs. Since businesses would not have to pay income tax on profits earned from investments, there might be an incentive to invest in new technology and equipment.
Prices for consumer goods could be lower, manufacturers could increase the wages they pay, or companies could simply keep higher profits. Equally, manufacturers could reduce the production costs they pass on to brands, or they could increase their profits. Lower prices for consumers could help balance the significant increase in consumer taxes, or the taxes could be added onto the current price of consumer goods and services and the current state and local taxes.
Seeing the cost of an item go from $100 to $130 could reduce demand. Since only the top 10% of earners would see an increase in their incomes (an estimated $75,000 per year for the top 1%), the rise in costs would not be offset by a rise in income, so it is quite likely that there would be an effect on demand for goods and services. However, it is not possible to predict how this would play out. A reduction in demand for goods and services could hinder manufacturing, but increased profits could create a boom for manufacturers.
On the other hand, the new system would reward investment just as it punishes consumer spending. With more investors and more available money to invest among high earning individuals, businesses — including manufacturing — might benefit from increased capital investment.
Supporters of the FairTax claim that it would provide a level playing field for the manufacturing industry to do business in other countries. More competitive pricing would help American companies to increase sales around the world. Supporters also suggest that restoring would speed up under the Fat Tax Act, as companies benefited from the lack of taxation.
The bottom line
At this point, it is well-nigh impossible to guess what the full impact of the Fair Tax act would be. It appears to have both potential benefits and potential drawbacks for manufacturers.
Either way, when you need service and support for your Rexroth industrial electric motion control, we can help. We get your facility back up and running fast.