The Fraudulent Tax

Advocates of replacing the income tax with the FairTax — a consumption tax in the form of a national retail sales tax (NRST) on new goods and services — regularly point to the complexity of the tax code, the millions of hours and dollars wasted on compliance costs, the evils of the withholding tax, and the abuses of the IRS to bolster their case for the FairTax.

The twin truths that taxation is theft (no matter how the money is collected) and that the US government should never be given a budget that is in the trillions (no matter how the money is collected) are concepts that FairTax proponents have never grasped.

The FairTax is intended to be revenue neutral; that is, the federal leviathan and all of its programs will receive exactly the same amount of funding as under the current tax system. Federal spending will remain at the same obscene level that it is now. This means that, although conceivably some people might pay the same amount in taxes under the FairTax plan that they do now, some will pay more and others will pay less.

Or, if we accept without reservation the claim of FairTax supporters that tax evaders, tax avoiders, workers in the underground economy, and others who don't pay their "fair" share will now be "caught," therefore increasing the tax base, we can, for the sake of argument, say that some people might pay the same amount in taxes, many will pay less, and the few that will pay more are the ones who were paying little or no taxes to begin with.

But even though the things that FairTax proponents say about the tax code, compliance costs, the withholding tax, and the IRS are certainly true, what most people care about is the bottom line. If an individual's taxes were lowered but the prices of all goods and services were at the same time raised, lower taxes might actually be a curse instead of a blessing.

The question is therefore not one of paying higher or lower taxes, but instead: Will I have more money remaining from my paycheck to save, invest, or spend on vacations and luxury items under the FairTax plan after I pay my bills and make my necessary purchases?

Under the FairTax proposal, there will no longer be Social Security and Medicare taxes, withholding taxes, corporate taxes, gift taxes, estate taxes, capital gains taxes, and personal income taxes. However, these will all be replaced with a national sales tax on all new goods and services. But never fear, says the FairTax advocate, even with this sales tax, the prices of most goods and services will still be about the same.

As talk show host Neal Boortz [1]claims in The FairTax Book: "The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax." The embedded costs of taxes in all consumer goods and services drive up prices because they increase the costs of doing business of manufacturers and service providers. As Boortz explains about suppliers of goods and services:

When you buy that loaf of bread, you're paying a portion of all of the bills, including tax bills, of every person or business entity that had anything to do with that bread, from before the wheat was planted up until the loaf of bread ends up in that plastic bag in the back seat of your minivan.

Have you thought about how much your doctor pays into the payroll tax system to augment his or her employees' Social Security and Medicare taxes? And what about all the embedded taxes your doctor paid when purchasing all of that sophisticated equipment, not to mention the endless monthly outlay for cotton swabs and tongue depressors?

Compliance costs are also "costs that are ultimately embedded in retail prices paid by consumers." Boortz's coauthor, Congressman John Linder (R-GA), in his November 5, 2003, testimonyin behalf of the FairTax before the Joint Economic Committee on " Rethinking the Tax Code," stated that "because of the tax component incorporated into prices under the current income tax code, we are already paying the equivalent of the FairTax!" This must include the prices of all goods and services, for Boortz maintains that "like retail goods, new homes won't be any more expensive, even with the FairTax added."

The rate of the NRST under the FairTax is supposed to be 23 percent. But as I have already shown in my first article on the FairTax (" The Fair Tax Fraud"), that is just the initial rate — it will be adjusted upward every year. And as I have already shown in my review of Boortz's book (" There Is No Such Thing as a Fair Tax"), the stated rate of 23 percent is really 30 percent — the new math used by FairTax proponents figures the rate inclusively (the tax is included in the price of the product) rather than exclusively (the tax is added to the price of the product).

To offset the full amount of this sales tax, retail prices would have to fall by a like amount if the prices of most goods and services are to "remain essentially the same." This is exactly what Boortz asserts will happen after the FairTax plan is implemented:

One of the beauties of the FairTax is that the price of consumer goods and services in our economy will go down by roughly the same amount as the proposed FairTax rate of 23 percent. This very nearly makes everything a wash.

Consumers of all incomes will be paying at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter, and transportation.

And how does Boortz know that this will happen? Why, Dr. Dale Jorgenson said so — or at least that's what Boortz claims. Back in 1997, Jorgenson, the former chairman of the Harvard Economics Department, authored a report for Americans for Fair Taxation (AFT) entitled "The Economic Impact of the National Retail Sales Tax." [2]Before writing his 1997 report for the AFT, Jorgenson had testified before the House Committee on Ways and Means in 1995 on "The Economic Impact of Fundamental Tax Reform" and in 1996 on "The Economic Impact of Taxing Consumption." [3]

Referring to this study, Boortz says: "On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes. That means that for every dollar you spend on a loaf of bread, twenty-two cents ends up being passed on to the government somewhere along the line in the form of taxes." Congressman Linder also referred to this report in his 2003 testimony before the Joint Economic Committee: "The FairTax plan creates transparency within the tax code. It eliminates the hidden tax component from the prices of goods. According to a Harvard study, the current tax component in our price system averages 22 percent."

Boortz believes that prices will fall because "if these embedded taxes were to disappear — that is, if the tax burdens of all the corporations, businesses, and individuals involved in the manufacture, marketing, and sale of these items were to be removed — these businesses would experience an immediate increase in their profit margins that would roughly equal that 22 percent." Then, once profit margins increase, Boortz presumes that "competitive market pressures" would "force prices down to a level where corporate profit margins are pretty much where they were before the passage of the FairTax." Linder likewise testified that competition would "bring prices down an average of 20-30 percent."

But this isn't all that Boortz has promised, for under the FairTax system everyone will get a raise because everyone will be able to keep his whole paycheck:

Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes.

The poor — along with everybody else — will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

But as we shall presently see, these four statements turned out to be lies and were subsequently altered or omitted in the new paperback edition of The FairTax Book.

Boortz's first misrepresentation concerns the rate of the FairTax. He maintains that in order to be revenue neutral the tax rate would have to be 23 percent figured inclusively or 30 percent figured exclusively. But here is what Jorgenson actually said:

The imposition of the NRST would produce a sharply higher tax rate on consumer goods and services, but the tenth chart shows that the initial consumption tax rate would be twenty-three percent at both federal and state and local levels or only 18.4 percent at the federal level. This would gradually rise over time, but remain below thirty percent or 23.8 percent at the federal level.

Unlike Boortz, Jorgenson does not give us any baloney about inclusive and exclusive tax rates. But note that Jorgenson's rate of 23 percent includes federal, state, and local taxes. This is because of one of Jorgenson's assumptions:

Since state and local income taxes usually employ the same bases as the corresponding federal taxes, it is reasonable to assume that substitution of NRST for taxes at the federal level would be followed by similar substitutions at the state and local level. For simplicity I consider the economic impact of substitution at all levels simultaneously.

Boortz's rate of 23 percent (which is actually 30 percent) includes only the NRST. To this would have to be added any state or local sales tax rate. This means that in some areas of the country where the combined state and local sales taxes average 10 percent, consumers will pay a whopping 40 percent tax on all of their purchases. No wonder Jorgenson says that "as a consequence of the elimination of taxes on capital income, individuals would sharply curtail consumption of both goods and leisure."

But in Jorgenson's 1996 testimony at the "Hearings on Replacing the Federal Income Tax" held by the House Committee on Ways and Means he said that "the consumption tax rate required for replacing existing revenues from individual and corporate income taxes at both federal and state and local levels would be around fifteen percent. This would gradually rise over time reaching twenty-one."

The initial "revenue neutral" tax rate has already gone up twice and the FairTax hasn't even been implemented yet.

Other economists believe that the rate of a NRST would have to be much higher than 30 percent to be truly revenue neutral. This has been pointed out several times by Bruce Bartlett, and most recently by William Gale, an economist with the Brookings Institute, in his May 16, 2005, article " The National Retail Sales Tax: What Would the Rate Have To Be?"

Gale estimates that "a federal sales tax that maintains real federal revenues under current law and real federal noninterest spending over the 10-year period of 2006 to 2015 would require a tax-inclusive rate of 31 percent, or a tax-exclusive rate of 44 percent." This latter rate would actually climb to 49 percent by 2015. And these rates are assuming that there is no tax evasion or legislative erosion of the tax base.

Boortz's second misrepresentation concerns the amount that prices could fall once the cost of embedded taxes is removed from goods. He maintains that the price of consumer goods will fall by roughly the same amount of sales tax that will be added under the FairTax plan. But again, here is Jorgenson:

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, shown in the sixth chart, would fall by an average of twenty percent.

In the long run producers' prices, shown in the eighth chart, would fall by almost thirty percent under the NRST.

He is saying that producers' prices will fall by about 20 percent in the short term and about 30 percent in the long term. Producer prices are not consumer prices. That is why the government has a Producer Price Index (PPI) and a Consumer Price Index (CPI). So, in order for a price increase from a national sales tax and a price decrease from the removal of the cost of embedded taxes to balance each other out, a much higher tax rate will be required since it is not consumer prices that will be 20 percent lower.

There are, of course, three other problems with any talk of a decrease in producer or consumer prices.

First, how does Jorgenson know for sure that producer prices "would fall by an average of twenty percent"? Why, an economic model that he created says they will, that's how.

And even if producer prices did fall by about 20 percent, we still have the same problem: How does anyone know for sure how much consumer prices will fall? There is one thing we know and one thing we don't know. We know that consumer prices will increase by 30 percent under the FairTax plan; we don't know how much they will decrease because of the elimination of "embedded costs" in the price of goods.

Second, saying that because costs will fall by x amount that prices will likewise fall by x amount is a grave economic fallacy. Not only does this ignore the basic laws of supply and demand, it is based on the fallacy that the costs of inputs in the production of a good determine the price of the output they produce. As Ludwig von Mises has said about prices:

The ultimate source of the determination of prices is the value judgments of the consumers. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of market prices. But the larger the market is, the smaller is the weight of each individual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct. What is called a price is always a relationship within an integrated system which is the composite effect of human relations.

Prices are determined between extremely narrow margins; the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.

And third, the question of tax incidence — who actually bears the burden of a tax — is an elusive one that economists still debate. For example, many economists would argue that although a portion of the corporate income tax may be passed forward to consumers through higher prices, the majority of the tax comes out of after-tax profits and employee wages. Boortz is assuming that the full amount of all taxes paid by businesses are embedded in the costs of the goods they sell.

And what about the prices of imported goods? They would have no reason to drop at all.

Boortz's third misrepresentation concerns the reason that prices could fall once the cost of embedded taxes is removed from goods. He maintains that it is the removal of the embedded taxes in the cost of goods that will account for the price reduction of those goods. Let's revisit an earlier statement of Jorgenson:

How would workers no longer paying taxes on wages lead to a fall in prices? Workers currently have deductions from their paychecks for federal income tax, Social Security tax, and Medicare tax. Although employers remit these taxes to the federal government, the money does not come out of their profits — it comes out of each employee's gross pay. Jorgenson is saying that prices will fall because of two factors, not one.

Producers costs would be lower because not only would they no longer have to pay taxes on their profits, they would no longer have to remit their employees' deductions to the federal government — they would pocket them.

When Jorgenson testified on the subject of "The Economic Impact of Taxing Consumption" before the House Committee on Ways and Means in 1996, he made essentially the same statement that was quoted above from his report for Americans for Fair Taxation:

Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent.

After an inquiry by a citizen [4] who was concerned that the FairTax proponents were misrepresenting his conclusions, Jorgenson made his position perfectly clear:

A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increased economic efficiency.

Boortz is double counting. The portion of the worker's paycheck formerly sent to the government for taxes that will be now returned to him so he can collect "100 percent of every paycheck" is the same portion that producers will now pocket to help them lower their costs. This is because Boortz originally maintained that the embedded taxes that drive up the costs of goods and services are "in addition to the money taken out of your check in income taxes and payroll taxes." He has since changed his tune.

From his Nealz Nuze, here is Boortz on what will really happen to "100% of your paycheck":

On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck.

We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So … what does this mean to your paycheck after the FairTax becomes law?

When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay — the amount you can put into your bank account — will not decrease, and may actually increase.

On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax.

Because of Boortz's epiphany, he had to make some significant changes in his new paperback edition of The FairTax Book. Gone is the statement on page 55 that embedded taxes which drive up the cost of goods by 22 percent are "in addition to the money taken out of your check in income taxes and payroll taxes." Here are the other changes and omissions:

Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes — and you'll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.

Once the FairTax takes effect, you will be in complete control of your paycheck as nothing will be withheld — and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.

When we all start controlling 100 percent of our earned income in our paychecks.

Being in "complete control" of your paycheck no longer means keeping 100 percent of it.

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. If employers leave this money in paychecks instead of taking it out of price, most of those we categorize as poor would see an immediate 25 to 30 percent increase in their take-home pay.

Now the increase in take-home pay is tied to the generosity of the employer. Prices cannot be reduced and take-home pay increased at the same time.

When you factor in the lower prices caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.

When you factor in the combined lower prices/higher take-home pay caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.

This again shows that the fall in prices that may result under the FairTax is due to two factors, not just the removal of the embedded taxes.

In the "Time for a Quick Review" chart on page 111 of both editions, there are some substantial alterations:

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Our purchasing power for buying consumer goods and services remains essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Do these corrections mean that Boortz is no longer guilty of misrepresenting Jorgenson? Perhaps. But consider the following:

* The new edition of Boortz's book still states (on pp. 84 & 160) that people will take home 100 percent of their paycheck under the FairTax.

* The website of Boortz's coauthor, Congressman John Linder, still maintains that one of the results of the FairTax is that it "allows you to keep 100 percent of your paycheck, pension, and Social Security payments."

* The Americans for Fair Taxation website still claims that the FairTax "enables workers to keep their entire paycheck."

Boortz is very naïve to think that once the FairTax plan is implemented that employers will be able to lower employee wages just because the net amount an employee receives might be more than his current take-home pay. Not only will workers be extremely reluctant to take a pay cut, wage contracts will in many cases prevent an adjustment downward.

And consider the case of two workers who currently make the same gross pay but each with a different take-home amount because they claim a different number of exemptions. Under the FairTax plan, if wages are lowered to current take-home amounts, one employee would end up making less than the other and certainly cry foul. Can you imagine the number of workers who will, on the eve of the implementation of the FairTax, rush to change the number of their exemptions on their W-4 forms so as to increase their take-home pay before their employer has a chance to take it away?

Boortz's fourth misrepresentation concerns Jorgenson himself. Although Boortz quotes Jorgenson to give weight to his FairTax proposal, Jorgenson is not a devotee of the FairTax — he supports an income tax plan called the Efficient Taxation of Income. That's right — an income tax. That means an IRS and a 1040 form, not a sales tax.

In his 1996 article, "The Economic Impact of Fundamental Tax Reform," [5] Jorgenson states: "Changing the federal tax base from income to consumption is an idea whose time has come. This change will create important new opportunities for growth in the standard of living of all Americans." But that was 1996, long before Boortz wrote his FairTax book. Since then Jorgenson has written quite extensively about his income tax plan. Here are just three examples.

In his 2002 article for the Financial Times, Jorgenson called his Efficient Taxation of Income plan "A Smarter Type of Tax," and explained that

Efficient Taxation of Income is a new approach to tax reform that would introduce different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 per cent, while property-type income would be taxed at 30 per cent.

Also in 2002, Jorgenson testified yet again before the House Committee on Ways and Means on the subject of taxes. But instead of advocating a consumption tax like the FairTax, he presented his Efficient Taxation of Incomeproposal. Under Jorgenson's plan: "Income would be defined in exactly the same way as in the existing tax code."

In 2003, Jorgenson wrote an article for Harvard Magazine on the subject of — you guessed it — the Efficient Taxation of Income:

Efficient Taxation of Income is a new approach to tax reform based on taxation of income rather than consumption. This would avoid a drastic shift in tax burdens by introducing different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 percent, while property-type income would be taxed at 30 percent.

Besides the misrepresentations of Professor Jorgenson, there are other reasons the FairTax should be called the Fraudulent Tax.

The FairTax does not abolish the IRS. Changing the name and some of the functions of the IRS does not mean that it will go away. The FairTax simply exchanges one federal agency for another. If there were no IRS or other enforcement bureau to enforce the collection of a national sales tax, then why would anyone bother paying or collecting the tax? Actually, the Fair Tax Act of 2005 sets up a "Sales Tax Bureau" in the Department of the Treasury. With a bureau comes an army of bureaucrats. And what Jorgenson said in his report on "The Economic Impact of the National Retail Sales Tax" shows that these bureaucrats will still have plenty of work to do:

Any definition of a consumption tax base will have to distinguish between consumption for personal and business purposes. On-going disputes over exclusion of home offices, business-provided automobiles, equipment, and clothing, and business-related lodging, entertainment and meals would continue to plague tax officials, the entertainment and hospitality industries, and holders of expense accounts. In short, substitution of the NRST for the existing tax system would not eliminate all the practical issues that arise from the necessity of distinguishing between business and personal activities in defining consumption.

The FairTax will abolish the IRS in the same way that it will abolish the income tax — by replacing it with something else.

The FairTax is not cosponsored by Congressman Ron Paul (R-TX). Every month or so since I began writing against the FairTax I have received an e-mail insisting that Congressman Paul is a cosponsor of H.R. 25, the "Fair Tax Act of 2005." Although there are fifty-eight cosponsors of this bill, Ron Paul is not one of them. Why is it that no one bothers to mention the names of the actual cosponsors of the FairTax bill?

FairTax supporters know that it is Dr. Paul who consistently votes to lower or abolish federal taxes, spending, and regulation. His support for the FairTax bill would further their cause more than any number of cosponsors or anything Boortz could ever say or write. The Americans for Fair Taxation website lists Congressman Paul as a " supporter" of the FairTax. This is strange since Dr. Paul has not taken an official position in support or opposition to the FairTax. His priority is reducing government spending and taxes, not getting sidetracked in debates about which type of tax we should have. As he has made clear: "The real issue is total spending by government, not tax reform."

So what about these cosponsors of the FairTax bill? Are they interested in reducing total spending by government? Out of the fifty-eight cosponsors, forty-four of them voted for the Medicare Prescription Drug and Modernization Act of 2003 — the largest expansion of the welfare state since the Great Society. Only six voted against it [6] (eight cosponsors were not members of Congress at the time of the vote. [7]) The sponsor of the FairTax bill, John Linder, also voted for the Medicare Act. No wonder the FairTax has to be revenue neutral now with adjustments every year! How else will the government come up with the billions of dollars it will need to pay for all these prescriptions?

The FairTax is not a voluntary tax. Calling the FairTax a voluntary tax has got to be the most ridiculous thing ever said about it. Boortz maintains in his book that "there is nothing coercive about the FairTax." In Congressman Linder's testimony before The Joint Economic Committee on "Rethinking the Tax Code," he stated: "The FairTax plan is a voluntary tax system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, by how they choose to spend."

Well, could we not also say that the current tax system is a voluntary tax system? Every citizen becomes a voluntary taxpayer, paying as much as they choose, whey they choose, by how they choose to work. Under the present system, if someone doesn't work then he doesn't pay any income tax. Sounds voluntary to me. Rather than being voluntary, the FairTax is a "permission-to-live" tax, as Murray Rothbard has described consumption taxes.

We know that retail prices will increase by 30 percent under the FairTax plan; we don't know how much prices will decrease because of the elimination of "embedded costs" in the price of goods. Because it is embedded with fraud, the FairTax plan is not the answer.

The income tax should be repealed, not replaced. The IRS should be gotten rid of, not renamed. Tax reform should reduce taxes, not be revenue neutral. Government theft of the wealth of its citizens should be abolished, not adjusted. The FairTax should be called the Fraudulent Tax.

Laurence M. Vance is a freelance writer and an adjunct instructor in accounting at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Send him mail. Comment on the blog.

[1]Congressman John Linder (R-GA) is Boortz's coauthor, but since Boortz has previous writing experience and his name appears in larger letters on the book's cover, I will refer to Boortz as the author of The FairTax Book.

[4]Rob Northrup, to whom also I am indebted for bringing to my attention the new paperback edition of The FairTax Book.

[5]This appeared as chapter 11 of Frontiers of Tax Reform, edited by Michael J. Boskin (Hoover Institution Press, 1996), and was reprinted by the economics department of Harvard University as part of its Reprints in Economic Theory and Econometrics.

[6]Dan Burton (R-IN), Jeff Flake (R-AZ), Jeff Miller (R-FL), Charlie Norwood (R-GA), Mike Pence (R-IN), Thomas Tancredo (R-CO).

[7]K. Michael Conaway (R-TX), Dan Boren (D-OK), Thelma Drake (R-VA), Michael McCaul (R-TX), Ted Poe (R-TX), Michael Sodrel (R-IN), Lynn Westmoreland (R-GA), Tom Price (R-GA).

"BTW, Kotlikoff's numbers show the federal government paying itself $273 billion in FairTax and the states paying the federal government $326 billion in FairTax."

Since your numbers are on in one case and close in another I'll let you off the hook on the small error ... but as I said; so what? That's not the discussion (except with you talking to yourself). That's merely adding up the revenue base to be used and your applying the tax exclusive rate to it which means nothing except that your calculator works.

The actual formulas used for the derivation of the funds generated (and thereby the revenue neutral rate) are shown in Formula (24) on page 17 where in the term C₀₇+G₀₇+GS₀₇ these values are multiplied by the tax inclusive rate (23%) which means, of course that Koltikoff et al are saying that government wages are burdened at the 23% rate and that the proscribed employees we've been talking about when paid $100,000 in gross wages also cause $23,000 (less the adjustments I've mentioned in earlier posts which I don't think the paper considers but haven't time to check) in FairTax to be generated.

Let me try this once again ... the rate of tax on the considered wages of government as a taxable employer is 23% fof the gross wages. You guys are beating a dead horse. Got it???

No ... that's what YOU'RE talking about, not me.

At this point, I don't think you know what you are talking about.

No it does not include "all expenditures" at all but one of its primary components is government wages. The main part of those wages, as I've described, are taxed at the 23% rate of gross wages (which I've referred to as being much like an excise). Non wage expenditures are taxed (if purchased at retail) at a 23% tax inclusive rate (which means the retail price AND the tax amount are added - or thinking of it in the manner you prefer that the tax exclusive amount is added onto the untaxed retail price).

So show me where the AFT or Kotlikoff treated the wage expenditures different from non-wage expenditures.

With the government as taxable employer, though, this same situation does not apply since there is no retail sale or retail price involved since it's not a sale of services at retail

Show me where in the bill where it says a good or service must be purchased at retail for the tax to be included in the "gross payment."

What the bill states is "The term 'gross payments' means payments for taxable property or services, including Federal taxes imposed by this title" and that "There is hereby imposed a tax on the use or consumption in the United States of taxable property or services. In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service" and "the term 'service' shall include any service performed by an employee for which the employee is paid wages or a salary by a taxable employer."

The government is paying the employee for a taxable service. No where in the bill does it state that if the payment for a taxable service doesn't occur at retail, the gross payment doesn't include the sales tax. No where.

In fact I have - several times and from different sources of economists. One that I especially recall was the economist Michael Graetz who pushes a competing (and quite different) tax bill. He several times in the course of a debate stated the 23% figure on government wages. And he's opposed to the FairTax, preferring his own bill.

But it is 23%. Twenty-three percent including the sales tax. Don't tell me you were confused by someone quoting the 23% rate without specifying it was inclusive.

So show me where the AFT or Kotlikoff treated the wage expenditures different from non-wage expenditures.

You can ask that question until you are blue in the face, I don't see an answer coming anytime soon. However, we could get into a serious debate whether Kotlikoff numbers are in a 'table' or whether they are in a 'spreadsheet listing' as pigdog insists you call them. That is almost as intriguing of the debate on whether these are an inclusive or exclusive sales tax or whether it is some 23% excise tax on gross wages, which seems to be one of pigdog's latest inventions to sidetrack the debate.

The 23% part of the rate is not fixed for the years 2007 and beyond. The only part that the bill makes fixed is the General Revenue Rate of 14.91%. If the bureacrats determine they need more money, then their rates add to the fixed GRR and the fair tax rate rises above 23% without any action by Congress. So no matter how many times you have explained before, you are still wrong. From the bill:

`(b) Rate-

`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.

`(2) FOR YEARS AFTER 2007- For years after the calendar year 2007, the rate of tax is the combined Federal tax rate percentage (as defined in paragraph (3) of the gross payments for the taxable property or service.

`(3) COMBINED FEDERAL TAX RATE PERCENTAGE- The combined Federal tax rate percentage is the sum of--

`(A) the general revenue rate (as defined in paragraph (4), and

`(B) the old-age, survivors and disability insurance rate, and

`(C) the hospital insurance rate.

`(4) GENERAL REVENUE RATE- The general revenue rate shall be 14.91 percent.

"... So show me where the AFT or Kotlikoff treated the wage expenditures different from non-wage expenditures ..."

They are treated exactly in the manner shown by the equation I pointed out in post #421 where all three terms are taxed at the 23% rate.

It's unfortunate that so many of you are unable to read the bill and understand what it actually says but it's fortunate that the economists can do so. When you say:

"What the bill states is "The term 'gross payments' means payments for taxable property or services, including Federal taxes imposed by this title" "

... the passage is certainly correct but you don't seem to wish to understand that the only thing "imposed and thereby included in the gross payments for taxable services" in this case is the 23% FairTax itself. There is no payment for taxable property or services. There is only the FairTax component.

Let me state it another way. There is no taxable purchase to add these taxes onto. These services are provided by government, not sold so there is nothing in the way of a payment amount to add the tax payment to ... IOW the only thing included as the "gross payment" are the taxes themselves. This merely means that the government as a taxable employer is not selling its employees services (but still provides them "free") but still must pay the tax

I've very thankful that you guys are not economists or everyone would be in serious economic straits - as would the country. Certainly Kotlikoff et al grasp the meaning of the bill.

"... we could get into a serious debate whether Kotlikoff numbers are in a 'table' or whether they are in a 'spreadsheet listing' as pigdog insists you call them ..."

Sorry, but I "insist" on no such thing with respect to the Tables in the paper. They are clearly Tables which, you might note, are what the paper calls them just as I called my spreadsheet listing a spreadsheet listing. You're "serious debate" falters before it even starts.

To see how all three terms are treated - as I said earlier - read post #421. The government wage expenditures in question are treated as I explain there.

"We have established that hidden taxes will still exist."

Actually "we" have established no such thing. You have claimed that but when I speak of hidden taxes I specifically mean those caused by the income tax system an the associated other costs as well. These are done away with by the FairTax.

With the FairTax in place it will become far more easily noticed to see that taxes are being raised as most of the populace will be much more attuned to realizing that a tax increase is a tax increase since everyone will be paying the FairTax and will not be to pleased to see any taxes raised whereas now many think that others pay all the taxes.

Since your numbers are on in one case and close in another I'll let you off the hook on the small error

They aren't off. I rounded the numbers - one up and one down.

That's not the discussion

That's why I said "BTW."

The actual formulas used for the derivation of the funds generated (and thereby the revenue neutral rate) are shown in Formula (24) on page 17 where in the term C07+G07+GS07 these values are multiplied by the tax inclusive rate (23%) which means, of course that Koltikoff et al are saying that government wages are burdened at the 23% rate and that the proscribed employees we've been talking about when paid $100,000 in gross wages also cause $23,000 (less the adjustments I've mentioned in earlier posts which I don't think the paper considers but haven't time to check) in FairTax to be generated.

They are saying no such thing. You left off a part of the equation–the part that shows that C₀₇, G₀₇, and GS₀₇ include the FairTax. Here is the equation in full:

R_FT = (C₀₇ + G₀₇ + GS₀₇)t_i (1+α)

Where:

R_FT is the tax revenue to be raised by the FairTax in 2007;

C₀₇ is personal consumption at market value in 2007;

G₀₇ is taxable federal government spending on goods and services;

GS₀₇ is taxable state and local government consumption at market value in 2007;

t_i is the is the tax-inclusive rate; and

α is the percentage by which market prices under the FairTax would exceed expected prices in 2007 under current law.

This change in market prices is due the Fed accommodating the FairTax with consumer price increases. Kotlikoff explains α:

Assuming that the monetary authorities adjust only to the FairTax in setting policy for 2007, The (1-ti) term adjusts for the fall in gross income and in consumer prices (net of the FairTax), given the assumption of no monetary accommodation; with full monetary accommodation this term would drop out. can take values between 0 and t_e, so that 0 ≤ α ≤ t_e, where t_e is the tax-exclusive FairTax rate. With no change in real income or the velocity of money, the maximum amount that prices could increase when the FairTax is imposed is the amount of the tax, so the price would go up by a factor of t_e when there is full monetary accommodation.

C₀₇, G₀₇, and GS₀₇ include the FairTax, whether the monetary authorities adjust to the FairTax or not. If they don't, gross income declines (real income doesn't change).

It would me address the subject at hand if you would give some specific examples so that I would know exactly what you are talking about.

I am happy to do that for you.

Trash collection. There is NO reason on earth that this could not be an entirely private enterprise except for the fact that governments are allowed to use trucks purchased at prices which private parties cannot obtain them, which carry tax exempt license plates, which are fueled with tax exempt fuel, which are self insured with taxpayer money and protected from lawsuit by laws passed for that specific purpose.

Public Transportation systems of every sort under the exact same conditions.

Public housing of all sorts.

Education systems and many other things that YOU could youself identify if you would just stop and think about it a little.

"... You love pointing to your old posts where you showed nothing of the sort ..."

Those aren't "old posts" at all but ones on this current thread and they explain the very topic you're attempting to discuss. Moreover, they show why (while the bill indeed says what it says) the actions delineated by the bill would result in changes in the direction opposite the one you apparently assume them to be.

The 3 posts explain that for you since you've apparently not considered that as a possibility and don't understand what the effects would be.

You are an incredible piece of work. According to the wording of the bill, which any person with any intelligence could understand, the fairtax fixes only two rates. The 23% rate for the year 2007 only, and the General Revenue Rate is fixed at 14.91%. After 2007, the bill says it is the sum of three rates:

(1) General Revenue Rate which is fixed in law

(2) the old-age, survivors and disability insurance rate, (not fixed but variable)

(3) the hospital insurance rate. (not fixed but variable)

So the points you keep making that the 'three combined must be 23%' and it will be 23% 'unless change by Congress' are outright lies. You know better than that. I know you can read. Why do you pretend to be so obtuse just to shill for your pet bill?

Sounds to me like now that you know you've lost the argument of taxable employees you're trying to shift into some different argument.

Hey, wait a minute ... aren't you the one who just said:

"... You always change the question when you are shown to be wrong ... "

You said that when I WASN'T trying to change the question at all (you were) and now you're trying that very stunt yourself. Whoa, Nellie!!!

But your attempted "switch" shows that you know you've lost the argument ... and the term alpha you allude to as though it's a big deal is pretty meaningless since the paper says it can have the value zero (IOW, drop out of the equation). You still have nothing in the way of an argument and the sooner you admit it to yourself, the sooner we can stop wasting time on this nonsense,

"C₀₇, G₀₇, and GS₀₇ include the FairTax, whether the monetary authorities adjust to the FairTax or not. If they don't, gross income declines (real income doesn't change). "

Stop the smoke-blowing since the paper also says:

"... We assume that the monetary authorities do not accommodate the adoption of the FairTax, which is to say that they restrain the growth of the money supply sufficiently to prevent market prices from rising. As mentioned, this is merely a simplifying assumption. We could just as well have allowed for monetary accommodation, so that there would be no fall in producer prices under the FairTax. Doing so, however, would merely have made the algebra more complicated without changing the results..."

All of that including your comments have nothing at all to do with the fact that the government taxable employer wages we have been discussing are taxed at the 23% rate - exactly as I have said for hundreds of posts. You may not know it, but economists do.

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R_FT	is the tax revenue to be raised by the FairTax in 2007;
C₀₇	is personal consumption at market value in 2007;
G₀₇	is taxable federal government spending on goods and services;
GS₀₇	is taxable state and local government consumption at market value in 2007;
t_i	is the is the tax-inclusive rate; and
α	is the percentage by which market prices under the FairTax would exceed expected prices in 2007 under current law.