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An explanation of the assumptions made by Dr. Jorgenson and misrepresented by Boortz

Economist assume that there will be one of two outcome with the transition to a sales tax. They are:

In his study, Dr. Jorgenson made Assumption 2 - that take-home pay and consumer prices stay the same. This is not wrong, it is just one of the possible outcomes. What was wrong was how this was presented by Boortz and the FairTax supporters. They took the assumption that take-home pay would increase (from Assumption 1) and paired it with the assumption that consumer prices will stay the same (from Assumption 2). They mixed the best of both worlds and came up with a windfall, that take-home pay would increase while consumer prices stayed the same, that could not possibly happen. Much of the proported benefits of the FairTax come from this erroneous assumption made by Boortz and the FairTax supporters.

While Dr. Jorgenson's use of Assumption 2 was not wrong, most economists believe that, because wages are difficult to lower (economists call this "sticky wages"), Assumption 1 is the most likely outcome from a transition to a sales tax.

Below is a complilation of quotes from various economists (including, ironically, the authors of the FairTax bill) that explain these assumptions in greater detail:


Consumption Taxes: Macroeconomic Effects and Policy Issues

by C. Alan Garner
Federal Reserve Bank of Kansas City
in Economic Review - Second Quarter 2005

Wages and prices. Replacing the income tax with a flat tax poses smaller challenges for wage and price adjustment than either a national sales tax or a VAT. Because the structure of the flat tax is similar to the current income tax, large adjustments in consumer prices or wages would probably not be necessary After-tax and before-tax wages would be similar before and after the tax reform, and nominal prices would be roughly unchanged (Zodrow 2002).

A national sales tax or a VAT, in contrast, would require the average price of consumer goods and services to rise relative to production costs and wages.15 A national retail sales tax is the simplest case to understand because the tax is imposed entirely at the retail level. Consumers would pay a substantially higher price for goods and services after adding in sales taxes at a rate that could easily be 30 percent or higher. Because wages are a large fraction of production costs, the price paid by consumers would increase relative to the wage rate received by workers. However, in the case of a revenue-neutral tax reform, the decline in the income-related taxes paid by households would offset the rise in consumption taxes, leaving households with the means to purchase the higher-priced goods and services. Under a VAT, consumer prices would increase relative to wages because of taxes imposed at various stages in the production process rather than just the final retail sale.

An important question from the standpoint of short-run macroeconomic adjustment is how the increase in consumer prices relative to wages occurs. One possibility is that the after-tax consumer price level would rise by the full amount of the consumption tax while wages remain constant. Another possibility is the after-tax consumer price level would be constant while wages decrease. Most discussions of transitional tax-reform issues assume the first case.16 When a VAT has been introduced abroad, authorities typically permitted an upward adjustment in the after-tax consumer price level, although efforts were generally undertaken to ensure that this one-time adjustment did nor become a sustained inflationary process (Tait).

Alternatively, the necessary increase in consumer prices relative to wages could be accomplished by holding the price level constant and reducing the wage level. Many economist, however, believe that wages are "sticky" in the downward direction. Workers are reluctant to take a wage cut, and efforts to reduce the wage rate might cause many workers to leave their jobs. The result could be a large temporary increase in the unemployment rate and lower levels of spending and output. Gravelle cites simulations with large-scale econometric models that do not assume the economy always operates at full employment. In three of the four simulations cited, real output decreased initially in response to fundamental tax reform. Although other economists have criticized such models and might not accept their conclusions, the simulations emphasize the need for further research on the short-run employment and output effects of fundamental tax reform.

Moreover, replacing all federal income taxes with a national sales tax or VAT would require much larger price and wage adjustments than other countries experienced when adopting VATs. Foreign VAT rates have typically been no more than 10 percent because the countries kept other revenue sources, such as an income tax. In most cases, the country also eliminated other consumption-type taxes, which offset some of the upward price-level pressures. Thus, the price adjustments required by fundamental U.S. tax reform would be outside the range of historical experience.

 

  1. This discussion focuses on fundamental tax reform in which a national sales tax or VAT replaces all federal income and payroll taxes. The adjustment issues would be smaller if a low consumption-tax rate were enacted to replace a small part of the current tax system or to supplement existing revenue sources.
  2. The increase in consumer prices could account for part of the decline in the real value of existing assets during the transition to a consumption tax. Nominal assets such as bonds and bank accounts would lose real value as the price level rose. With no increase in consumer prices, the decline in the real value of existing assets would occur through other channels. For example, the decrease in wealth would fall on equity owners as corporations lost expected depreciation allowances and the prices of tax-free investment goods declined relative to taxable consumer goods and services (Zodrow 2002). In practice, the increase in the price of consumer goods and services relative to wages could occur through a combination of consumer price increases and nominal wage decreases.

Statement of Laurence J. Kotlikoff,

Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research

Testimony Before the House Committee on Ways and Means - Hearing on Fundamental Tax Reform
April 11, 2000

This sentence and the one preceding it assume the price level will rise with the adoption of the Fair Tax. If the Federal Reserve used its monetary policy to maintain the consumer price level, the adoption of the Fair Tax would entail a decline in the level of producer prices and, thus, the nominal wages and capital income received by productive factors.

Response to William Gale

by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998

Federal income and payroll taxes either are or are not incorporated into the prices of goods and services. If they are embedded in prices, their removal will reduce prices. If they are not, then their removal will not reduce prices but instead returns to labor and capital will go up. If returns to labor go up, people will see their after-tax wages increase and asset values will increase since the present discounted value of the new, higher returns will be higher.

The replacement sales tax could be incident on the factors of production or it could be incident on consumers through higher prices. It cannot be both. If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation

by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779

Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.

The Price Level

Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.

A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.

Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.

Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.

Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.
Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.16 Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.
  1. Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.

Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.

Transition Costs and Macroeconomic Adjustments

One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.5 While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.

Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT

Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.

These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).6 Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.

  1. See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
  2. The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
  3. 7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.

Prices.

Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.

Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.

The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.

Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.

Transitional Issues in Tax Reform

Price Level Effects

Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.

In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.

Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.

The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.

Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level ;and no change in payments to workers in nominal terms."

Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.

Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.

Monetary Implications of Tax Reforms

Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.

And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.

But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.

Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.

The Price Level

When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.

One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.

Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.

64 posted on 09/07/2005 7:30:49 PM PDT by Your Nightmare
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To: Your Nightmare
Below is a complilation of quotes from various economists (including, ironically, the authors of the FairTax bill) that explain these assumptions in greater detail:

But pigdog and ancient_geezer says that is all bs....

67 posted on 09/07/2005 7:36:24 PM PDT by Always Right
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To: Your Nightmare

There are clearly more than the two alternatives you offer as the be-all and end-all options you proffer (your "economists assume ..." nonsense). And any claims about prices declining are hardly based upon a single economist as you state. None of you SQLers have ever been willing to admit that the costs of cascading taxation embedded into prices will be removed when the FairTax becomes law. This will certainly work to reduce prices and I have no doubt that studies are ongoing on these effects.

There is certainly no reason why there is not AT LEAST a third assumption having wages increase and prices decrease - but this doesn't fit the SQL playbill of disinformation so you never mention it as a possibility. It is, however, clearly another option to the two you present and probably the most likely of all. And your "economists assume" only two outcomes statement is nonsense. That's YOUR statement.

And there is nothing that I have seen in "The FairTax Book" that states that both benefits occur simultaneously in any event - that again is merely your statement to try to persuade others that any FairTax supporter is lying. They certainly could both occur and whether at the same time or reasonably close to each other is difficult to say. Are you trying to persuade us that only one will occur exclusively of the other? On what do you base that assumption???

Well, Nightie your #64 on this thread (of which you seem so proud) is just the same old rehash you're done previously. Perhaps you have re-arranged the order of some of the snippets, but that can easily be sorted out in my response to your original opost of this nonsense which was ---












"The 11 cut-and-pastes you stitched together in your post (and aren’t YOU the guy continually criticizing ancient_geezer for HIS cut-and-pastes??) Fall into 2 categories - FUD (Fear, Uncertainty, and Doubt) and OOC (Out of Context quotation). The FUD Factor items are marked with a “*” and the OOC items with a “+”.

The 11 items are:
1 - Garner (Zodrow, Gravelle, Gale)*
2 - Koltikoff+
3 - Response to Gale by Mastromarco/Burton+
4 - Mastromarco/Burton real estate +
5 - CBO Price Level*
6 - Slemrod/Bakija; Taxing Ourselves*
7 - Gravelle & Esenwein; CRS Overview*
8 - Wilkins; National Retail Federation*
9 - Zodrow; Transitional Issues*
10 - Bull & Lindsey; Monetary Implications*
11 - Hall; Price Level*

Let’s take the OOC items first -
Item 2 (Koltikoff) - in a two paragraph discussion of whether or not the FairTax is regressive in theory, the author made certain assumptions to illustrate a point. You merely took these assumptions and presented them as though they were a fact - his belief - he was presenting. They were assumptions to illustrate a point, not fact he was presenting.

Item 3 (Response to Gale) - You conveniently left out the portion where the responders point out that prices would drop with the assumption of the FairTax, and that Gale, in fact, was contradicting himself. Here’s a link to the entire response midway on page 14 (through midway on page 15) where it says:
” J. Gail Perspective: Consumer Pricing: Up, Down and Sideways Simultaneously”. Gale completely overlooks the fact that prices would drop with the onset of the FairTax as the responders point out. After this price drop, prices would then be raised up again to some degree by the sales tax which is the meaning of their statement “... prices will increase by the amount of the sales tax but returns to labor and capital will be higher.”

Item 4 (Real Estate Foundation) - The footnote you posted from this response also suffers from the same flaw in reasoning as Item 3 just above. Price will first decrease with the advent of the FairTax causing the after tax increase in wages mentioned as well as the increase of prices back in an upward direction from their decrease to the lowered level mentioned above

So much for your out of context quotations. Next we take up the FUD Factor Items:

Item 1 (Garner) with points from (Zodrow, Gravelle, Gale) - As with almost all of the liberal FairTax opponents, the discussion presents what amounts to a description of a VAT structure (calling it a “consumption” tax) and comparing that to a flawed description of the FairTax (which includes a discussion of exemptions/exceptions “required”). In addition the discussion goes on to the SQL “leap of Faith” (as do you) that prices MUST increase with the advent of the FairTax ... while showing no such convincing (or even fairly convincing beyond just stating it) evidence of why this would happen. Garner is obviously not too familiar with the FairTax as he describes a decline in bond values and the idea of corporations “losing” their depreciation - which of course is nonsense under the FairTax. He also uses heavily from well-known SQL sources such as Zodrow, Gravelle, and Gale which in and of itself should merit serious concern.

Item 5 (CBO) - Hardly a benefactor of the Status Quo (yeah, right) but also makes the “Leap of Faith” as in Item 1 that prices must increase with the advent of the FairTax. They do, of course, but only after first declining by the removal of the income tax component leaving them more or less the same overall. Despite that lapse, the opinion is offered that the Fed will step in to raise prices (without any clear or convincing indication of why this might be so; merely the claim that it is so).

Item 6 (Slemrod/Bakija) - Here, from a long time SQL advocate (Slemrod) we see the similar liberal “Leap of Faith” that the sky would fall in the opinion (offered again without any backup) that corporate earnings would fall by 20%. A slightly different twist is given in that the Fed rather than raising prices would now, God-like, merely “monitor” prices to decide if any action need be taken to PREVENT A PRICE RISE (rather than causing it as in Item 5. Perhaps rather than calling these sorts of SQL ploys a “Leap of Faith” (which of course they are), they should be called the Chicken Little Syndrome.

Item 7 (Gravelle & Esenwein - CRS) - Once again we see the Chicken Little Syndrome in full operation where any price reduction due to the FairTax is completely ignored and sweeping statements reflecting a great lack of understanding of the FairTax are made by claiming that the tax “must be paid” in an example industry having a 1-2% profit margin which “now owing a tax equal to 20% of receipts” - all the while ignoring the fact that the business does not pay the sales tax (at all, let alone out of its “profit margin”), but that the customer of the business pays the tax. In addition, the CRS folk seem to not understand that the FairTax is border-adjustable as well as the old unwarranted assumption about lower wages being required (for some reason). There are a good number of other flaws in the paper itself other than the selected snippet posted. We also see the use of the old chestnut of anonymous “... economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects. You’d think that at least these “unnamed economists” would appreciate the credit (?) of being named.

Item 8 (Wilkins - National Retail Federation) - This is a study originally commissioned by the NRF from Coopers & Lybrand (who had, as I recall, Wilkins as the leader of the group doing the “investigation”). It is of the Chicken Little/Leap of Faith persuasion and is impossible to tell much about - aside from the lack of veracity - since, despite requests, it was never published so others could investigate its pronouncements. This link:
http://www.fairtaxvolunteer.org/smart/PwCRebuttal.pdf
has a refutation of the Wilkins/PwC/NRF “study”. A HIGHLY RECOMMENDED READ!!

Item 9 (Zodrow - Transitional Issues) - this is merely George once again “doing his thing”. He pretty much makes the usual Chicken Little observations, but is at least honest enough to mention that the “... opinion on this issue is certainly not unanimous.“ And goes on to cite the Jorgenson 25% or so price decline. Kudos, George, for inserting a bit of much needed honesty into the discussion. Makes the Leap of Faith about the Fed being magical and omniscient.

Item 10 (Bull & Lindsey - Monetary Influences) - Makes the Leap of Faith about the wage decline without even considering the removal of the cascaded income tax in prices. This may be one of the reasons that Lindsey is no longer a Presidential Advisor on the economy.

Item 11 (Hall - Price Level) - Why is it not surprising that someone largely thought of as an author of the Flat Tax be strongly in favor of that over the FairTax (which he nowhere demonstrates an understand of aside from the requisite Leap of Faith that wages will be lowered and prices raised (the Chicken Little Syndrome again) while ignoring any price reductions offered by the advent of the FairTax.

So, let me see now if I have this straight ... the FairTax supporters may not use the economic data which is presented in good detail on the Americans For Fair Taxation website (because you say so) while you are quite free to use all of the snippets you can gather up from the known SQL defenders (who seldom, if ever, admit to being so - just like you) even if they are only op/ed pieces with little or no economic detail? By George, I think I’ve got it!!! "








To be correct we should note that the study in #8 is now "available", but only if you wish to buy it - which I certainly do not since it's been heavily rebutted.

That "stuff" is no better now than then - but nice try to try to trick the unwary!


138 posted on 09/12/2005 6:02:08 PM PDT by pigdog
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