With an understanding of withholding and corporate taxes, the time is ripe to learn about embedded costs in products and services. To demonstrate how embedded costs affect the individual let’s look at a fictional paper company operating out of Scranton, Pennsylvania.
The process begins with a tree farm in upstate New York where loggers cut down trees and then ship them to a paper mill. The tree farm pays the income tax and passes the cost on to the paper mill when they purchase the lumber. The tree farm and the paper mill both buy their equipment from taxpaying businesspeople that also pass their tax costs on to them. The paper mill processes the logs into pulp and eventually paper and sells the paper to the company in Scranton. The paper company in Scranton buys office supplies from taxpaying businesses, hires accountants to make sure they comply with the income tax, and then sells paper, with their tax liability included in the cost, to other businesses in their region. The dental clinics and department stores that purchase the paper from Scranton then pass all of the embedded taxes they were forced to pay in purchasing the paper onto the consumers who buy their products or services.
Dale Jorgenson, former Chairman of the Harvard Economics Department estimates that the embedded taxes on paper are around 22.81 percent. Should those embedded taxes be removed, the price to the consumer would decrease by roughly that amount.
 Dale Jorgenson, “The Economic Impact of the National Retail Sales Tax” Final Report to Americans for Fair Taxation (May, 1997) P. 41
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