In terms of objectives for a better tax solution we covered why FairTax simplicity and FairTax revenue neutrality are important. It’s time to tackle the issue of removing barriers to economic growth.

First off, what are the barriers to economic growth?

The most basic answer is anything that impedes the overall prosperity of our people – almost exclusively associated with reducing our ability to compete in free markets. This wasn’t such a big deal 96 years ago (i.e. when we allowed the 16^th Amendment to be ratified) when our markets were more isolated and when gross manipulation of the tax code hadn’t occurred.

But where do we stand today?

1. 1.       We are in a competitive global market.
2. 2.       We have 66,000 pages of tax code that shift the burden away from those who can afford to lobby our politicians and onto the little guy.

Most U.S. companies compete with one arm tied behind their back. The exceptions are those with significant tax breaks – usually very large organizations. 

Entrepreneurs with great ideas must not only be experts in their fields they must be experts in complex tax compliance. Sure, they can hire tax attorneys and CPAs but financial resources must be committed which take away from developing ideas and getting products and services to market. 

Also, once started, companies must divert 7.65% of gross pay (employer-side of payroll tax on salaries and wages of its workforce) to our federal government. In a society that is increasingly service-oriented and when you consider marketing, distribution, sales, administration (as well as all marketing, sales, admin of suppliers) these payroll taxes make up a significant cost of doing business which must be priced into the end products and services that you and I buy as consumers. Of course we need to factor in the ongoing cost of tax compliance as well (payroll services and/or internal software systems plus tax attorneys and CPAs). If business is a pipeline and profits come out of the end of the pipe, inefficiency constitutes the leaks in the pipe where profits seep out. Unnecessary tax compliance is a major leak to all U.S. companies.

Finally, any profit that our entrepreneur is able to manage gets taxed via the corporate tax as well.

Speaking about profits, it is worth mentioning that our government wants companies to record profits sooner rather than later. Any significant investment that our entrepreneur makes in plant and equipment must be depreciated using complex tax schedules many years into the future rather than in the year of acquisition in order to maximize (in the government’s eyes) net profit before taxes. This enables the government to take “their share” sooner rather than wait until the capital expenditure pays for itself. Our entrepreneur must carefully consider the tax consequences and additional financing prior to committing to any large acquisitions which often-times prevents companies from moving forward.

The payroll taxes, corporate taxes, and capital investment considerations can be entirely removed from the production side of goods and services by replacing our 66,000 page 96-year-old tax system that is on life support with the FairTax (see FairTax in a NutShell). In addition, costly efforts to comply with tax complexity can be replaced with one simple calculation – 23% of net sales of new goods and services period.

Our entrepreneur can now take his/her great idea and really run with it unshackled! He/she can invest in facilities and equipment, research and development, production and operations, distribution, marketing and sales… all with little to no required consideration to and ongoing cost of tax compliance. 

To bring this point home, if our entrepreneur wants to tackle, for example, our energy challenges which might require $100 million investment in plant & equipment, scientific r&d, operations, marketing, sales, etc. ahead of sale #1 under our current tax system, he/she will likely need only $75 million after the FairTax has been around for a few years.   The government will get theirs… but on the consumption side not the production side.