And Kotlikof makes the same assumption:
Yeah, tell that to my workers. And tell that to union workers who are under contract, or any employee under contract for that matter. It is not possible for producers to ring out all these costs. The extra money goes into the pockets of the workers, and we are immediately hit with a 15-20% rise in prices the day the fairtax take effect. Try running that through the models.
It's cute what they assume in their models (higher state taxes, lower gross wages) but never talk about in their little propaganda papers.
Kotlikoff et al throughout the paper actually take the opposite position that wages remain the same and prices rise by the full FairTax amount. Actually, neither assumption is probably going to be correct in the long run since what will most likely occur is that prices will fall a certain amount with the elimination of the income tax and then be raised by the overall effective FairTax rate for all taxpayers combined.
IOW, this price rise will be much less that the marginal 23% FairTax rate just as the effective FairTax rate is much lower than the marginal.
The more important point, though, is not the action of prices per se, but purchasing power. As has been shown repeatedly on these threads by actual examples, for a given level of income the taxpayers purchasing power (disposable personal income) is usually greatly increased under the FairTax as opposed to the income tax.