[RobFromGa]

EXCLUSIVE FREE REPUBLIC REPORTING

I contacted Dr. Dale Jorgenson, the Harvard economist who did the FairTax models, earlier today. He said that he assumed workers would keep their current after-tax income, NOT their current gross pay.

There is no pay raise with the FairTax plan, as many of us have stated, and been ridiculed for stating.

RobFromGa

[Sprite518]

Ok I finally read what you wrote. LOL! Let me break it down for you since it’s obvious you went to a government school.. You Said: So, Dr. Jorgenson, whose report you are relying on to support your calculation of embedded taxes, is stating that in making those embedded tax calculations he was not assuming that the worker would keep his current after-tax amount Answer: Ok your key words, “he was NOT assuming that the worker would keep his current after-tax amount” That is not what the Doctor wrote, or well at least you posted. I have just copied and pasted what you said he wrote. The Dr wrote, “I am saying that the worker “WOULD” continue to receive the after-tax amount of $800.” This is even better! Thanks for posting this. Since the Doctor was assuming employees would still be taxed like they are today. It makes the Fair Tax (HR 25) incredible knowing that we would take home what we make before taxes. This would be a huge pay raise for everyone. And if the doctor did not factor this then our buying power should increase. Thanks for posting this  You said: By reducing the gross pay of the worker to the current after-tax amount, the producers would see a cost reduction that would allow them to reduce selling prices. Answer; If a company is paying an employee $30,000 a year, and the Fair Tax bill becomes law. That company would no longer have to worry about embedded taxes. So then why do you think the company would reduce the pay of the employee? How do you come up with that conclusion? LOL! Just think about it…. the company has no tax liability therefore it has more money now that it does under our current tax system. Embedded taxes are gone! How come you think the company would have less money? You wrote “. There would be no increase in take-home pay.“ Answer: Nothing could be further from the truth. Please read HR 25, or the Fair Tax Book. The Fair Tax eliminates ALL taxes and replaces it with a consumption tax only. You also wrote earlier in the same post : “Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers… would fall by an average of twenty percent” In this statement, Jorgenson seems to say that one of the reasons for the price drop at the producer level was the elimination of the tax on wages paid to workers. So, naturally if the business is going to realize this benefit it must reduce the workers gross pay be the amount that is currently being paid in the form of income and payroll taxes. This only makes sense because how can the business reduce costs if it gives the worker tax savings to the worker?” Answer: You came up with the wrong conclusion. If a business no longer has any tax liability, then why would they reduce an employees pay? The company just gained a lot of money since the embedded taxes have been eliminated? You also wrote, “Dr. Jorgenson’s report clearly showed that under his study the worker would not get their complete paycheck, because if he/she did, there would be no cost savings to the business and therefore no price drop associated with worker taxes. “ Answer: How in the heck do you come up with there would no cost savings? LOL! Now I see why you have all your numbers screwed up. You act as if the taxes that employee’s see they paid in their check is really being paid by the company and not the employee. LOL! No wonder why you are so confused! Now I understand Employers pay ½ of your Social Security, but companies are not paying your federal and state taxes. That is being paid by the employee. This is why we do our taxes each year. If the companies were paying our Federal and State taxes, then we would not have to fill out a 1040 every year. LOL!

[rwrcpa1]

By the way, did you tell Dr. Jorgensen you were going to put his response all over the internet? I think if I were him I would want to know. Just common courtesy, you know.

[Publius6961]

Dr. Jorgenson’s report clearly showed that under his study the worker would not get their complete paycheck, because if he/she did, there would be no cost savings to the business and therefore no price drop associated with worker taxes.

I'm not sure who is exploding what, but this is sophistry of the first order.
The only questions I can't answer is who is behind it and why.

"Their complete paycheck" is fraudulenty defined, because in the real world, the employee never has seen and will never see the withholding, other than taxes, that is part of his "total" pay.
All I care about is my "gross" pay. Will that remain unchanged? If the answer is "yes", I'm happy.

As soon as someone argues that everybody should get what is effectively a raise my BS and demagogue meter pegs.

[groanup]

Good work. (Someone once said that Free Republic is 80,000 bullshit seeking missiles.) I'm anxious to hear more. If Boortz is reading this thread he is not having a leisurely lunch.

If the fair tax only removes 10-18% from the overall price level, as I have believed for a long time now, it is still the best plan out there.

[Your Nightmare]

bttt

[Pagey]

Thanks for this post. As I've always thought, the term "FairTax" is really the definition of an oxymoron.

[Pietro]

Are you aware that employers match an employees SS tax? That is every nickle thats taken from you for FICA is matched by the employer.

Furthermore, the cost of a product incorprates far more than just labor, and every sub section and subcomponent is taxed at every step. Those taxes add to the total cost of the product.

[ArGee]

There is no pay raise with the FairTax plan, as many of us have stated, and been ridiculed for stating.

If I understand correctly, employers pay a payroll tax based on how much they pay us. This is not at all connected to the witholding of taxes from our paycheck. It is an additional tax. If the payrol tax is eliminated as part of the fair tax plan, the employer would indeed see a cost reduction while still allowing us to keep money that is taxed from our wages.

I don't know if the fair tax plan intends to eliminate payroll taxes.

Shalom.

[N3WBI3]

In this statement, Jorgenson seems to say that one of the reasons for the price drop at the producer level was the elimination of the tax on wages paid to workers. So, naturally if the business is going to realize this benefit it must reduce the workers gross pay be the amount that is currently being paid in the form of income and payroll taxes.

Ummm 12% from SS, and 2(?)% for medicare are not part of a workers gross salary... But you know what if I only take home 60% of my salary (lets say its 50,000) or 30,000... and someone comes along and says well drop your salay to 40,000$ but youll take home 35,000$ am I the worker really suffering?

[xzins]

If I have an income of 100 dollars and a tax of 10 dollars, then I have 90 spending dollars after taxes. I have a take home of 90 dollars that I am used to receiving.

If Company X produces a car that costs 100 dollars and it charges that 100 dollars instead of 90 dollars because 10 dollars represents imbedded taxes, then some car company might charge 90 dollars for the car if the 10 dollar tax is removed.

If this is incorrect, I would appreciate it if someone would spell it out in simple terms for a simple mind.

Prior to the tax removal, my 90 dollar income would not pay for the 100 dollar car. After the tax removal, my 90 dollar income might pay for the car if the company responds to tax cessation by reducing it's price to 90 dollars.

[sauropod]

mark

[Tempest]

Thanks for exposing the scam that I already knew that it was.

[Paul C. Jesup]

There would be no increase in take-home pay.

But the increase in personal freedom and privacy would be well worth it...

[RobFromGa]

I never pinged you to this, not sure if you saw it.

[Your Nightmare]

RFG, did you ever hear from Linder (or Boortz)?

[SALChamps03]

You still don't understand economics do you?

[RightOnline]

No way. Employers wouldn't cut their employees' pay to their current after-tax levels in such a way; that's utter nonsense.

[HighWheeler]

This is part of The Plan. Make the new tax plan very confusing, gain confidence from your constituents that you know what is going on and that it's good for them, then screw them to the wall on more taxes.

Congress should just make social security an optional "benefit" for everyone and I'll be happy beyond belief. In fact, I'll abandon all my future claims to SS if I could get out now and forever.

[Sloth]

There is no pay raise with the FairTax plan, as many of us have stated, and been ridiculed for stating.

It seems more accurate to me to say that there IS an effective pay raise (i.e., no withholding) under the FairTax, but that the price of consumer goods will not drop as much as has been projected.

BTW, I still want it. Anything that ends income tax gets my support.

[Kellis91789]

Interesting bit of correspondence, Rob. It isn't quite as lucid as I would prefer, but it certainly seems that Jorgenson is not claiming price reductions simultaneously with full take-home pay.

Does FairTax.org or Linder and Boortz actually attribute these simultaneous claims to Jorgenson ? I know Jorgenson is one of the economists sited for the price decrease. I don't recall FairTax.org citing him for maintaining full wages at the same time.

I realized long ago that price reductions required that businesses pass-thru their savings in taxs to their customers. What is not obvious was always that this meant small-business owners could not reap the "raise" that employees would reap. But now you make a convincing case that employees would not reap the "raise" either.

I am not convinced Jorgenson is right, just that he is not making the same claim FairTax.org makes. Personally, I've taken the simple approach to checking whether price reductions are a reasonable expectation without wages falling. I check the financial statement for an industry leader and see how much removing their direct taxes would save them. Then I eliminate some employees that might be doing nothing but tax-related tasks. Then I apply that same savings percentage to their non-payroll operating expenses -- on the assumption that their suppliers will have similar savings.

I generally can come close to the 20% level of price reduction. So I am surprised Jorgenson's model required wages to fall to current after-tax levels. Here is an example for Bank of America, if you are interested:

This financial statement from Bank of America is a good place to start, because the cost of money affects all other businesses.

View: Annual Data | Quarterly Data All numbers in thousands
PERIOD ENDING 31-Dec-04 31-Dec-03 31-Dec-02
Total Revenue 63,324,000 49,006,000 46,012,000
Cost of Revenue 6,275,000 4,908,000 5,434,000

Gross Profit 57,049,000 44,098,000 40,578,000

Operating Expenses
Research Development - - -
Selling General and Administrative 25,745,000 19,910,000 18,218,000
Non Recurring 618,000 - (630,000)
Others 3,433,000 3,056,000 4,195,000

Total Operating Expenses - - -


Operating Income or Loss 27,253,000 21,132,000 18,795,000

Income from Continuing Operations
Total Other Income/Expenses Net 2,123,000 - -
Earnings Before Interest And Taxes 29,376,000 21,132,000 18,795,000
Interest Expense 8,155,000 5,271,000 5,804,000
Income Before Tax 21,221,000 15,861,000 12,991,000
Income Tax Expense 7,078,000 5,051,000 3,742,000
Minority Interest - - -

Net Income From Continuing Ops 14,143,000 10,810,000 9,249,000

Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -


Net Income 14,143,000 10,810,000 9,249,000




You can see from the top and bottom line that BofA had revenue of $63B and net profit of $14B, after paying $7B in income taxes. $8B was interest on money they borrowed and then re-lent.

Not shown here, but found from the BofA website is that they employ 175K full-time equivalent employees. I can’t find any figures on wages, but if we guess at the average for the financial sector, we could use $60K per employee. That means $11B in wages which means $800M in payroll taxes.

So, if there was no income tax and employer side to the payroll taxes, what would happen to BofA costs ? That means saving $7B income taxes + $800M payoll taxes out of $49B in total costs. That would mean 12% of their revenue (what they charge customers) is taxes passed along. But ... remember the $8B in interest ? If we suppose that has taxes built in by their lender at a similar level, that would reduce their cost of borrowing by $1B. So their costs would really be $9B less than they are under the business tax scheme. That is over 14% of their revenue that is taxes passed along.

Also, BofA has over 5,000 branches. The interest component of the leases on those properties includes similar taxes that the lessor is passing along to BofA. Same for all their other operating expenses. So figure 14% of the $20B non-employee operating expenses means saving another $1.4B giving us a total of $10.4B in savings. That is 16.5% of revenue. And how many of those 175K employees do you suppose are dedicated to calculating and attempting to comply with the income taxes they must pay ? So that would be additional reduction in operating expense. Eliminate the employees and costs for tracking and reporting billions of 1099’s and other tax-related compliance costs, and we have additional savings. Getting to the 20% neighborhood shouldn’t be difficult at all.