Posted on 08/22/2005 6:53:28 PM PDT by RobFromGa
August 22, 2005
U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Phone: 770-232-3005
Fax: 770-232-2909
Dear Representative Linder:
I have met you before and briefly discussed your FairTax proposal years ago in downtown Norcross at a street festival. I also campaigned for you in my neighborhood when you were running against Bob Barr.
I have read your book, and I have spent quite a bit of time researching the FairTax. As a small businessman who lives in Norcross, naturally I am interested in anything that will reduce taxes and assist our economy, so the idea of a FairTax sounds good. But reading your book, the bill itself, studying the fairtax.org website, and reading the House Ways and Means Committee testimony of Dr. Jorgenson back in 1995 and 1996 as well as your most recent testimony, I am disturbed by the way the FairTax plan is being presented.
I don't think you fully understand the "embedded taxes" concept-- you are double counting this money by both giving wage earners their full 100% paycheck and still expecting their employer to be able to reduce their prices by about 23% on average.
Let's look at a wage earner-- call him George-- that grosses $1000 per week under our current system. You claim that, under FairTax, George will keep all his income (the full $1000) plus everything he buys at retail will cost about the same as George pays now. This is implausible.
Businesses will not be able to pay 100% of their paychecks to their employees, because they need these "embedded tax" savings to be able to lower their selling prices.
Let's look at George's purchasing power, now and under FairTax:
George currently gets $1000 a week from which his employer withholds $200 in FICA and fed taxes and $50 in state taxes, leaving George with $750 to spend. Right now, let's say loaves of bread are $1. Today, George can buy 750 loaves of bread for $1.00 each with his take-home pay.
Under the FairTax, you claim George will get his whole check, which is the same $1000 less George's $50 state taxes, for a take-home of $950. If your FairTax logic is correct, the price of the bread will quickly drop to about $0.77 (when Bob's Bakery gets rid of his "embedded taxes") and when they add the 30% FairTax at the register the final price will still be $1.00. George can now buy 950 loaves of bread with his $950 take-home.
You have increased George's purchasing power by 200 loaves of bread which is a 26.7% increase in his purchasing power. And you claim that FairTax will do this on average for every wage earner in America.
This is dishonest to make everyone think they will get a 25%+ increase in purchasing power. ("Get a 25% pay raise, and prices stay the same")
It is obviously illogical that every wage earner in America, with no change in productivity can increase purchasing power by even ten percent, let alone 25%.
The fallacy in your understanding of the "embedded taxes" is that Bob's Bakery cannot give his employees their full paycheck AND still reduce his costs by $0.23 per loaf of bread as you claim. He can do one or the other, but not both.
The baker could reduce his price by about 25%, but only if he keeps his bakery employee taxes that are currently withheld and going to the government. If he gives these "embedded taxes" to his employee, then his overall labor costs haven't gone down and he has no saving to pass along in his prices. His only big difference is he writes a check to his employee for $950 instead of two checks- one to his employee for $750 and one to the IRS for $200.
If our baker instead kept the taxes, his labor cost would now be $800, and the baker could now maybe drop his price to around $0.77 per loaf as you expect. George would still have his same $750 take-home income and he would still be able to buy 750 loaves of bread for $1 each ($0.77 cents price plus $0.23 taxes). George's purchasing power would still be 750 loaves of bread as it is now.
I think this is the honest way to look at the FairTax plan, but this is not what you are claiming.
The only other alternative is that George gets his full $950 and the price of bread drops to say $0.90 to reflect Bob's Bakery's savings on the employer portion of FICA (7.65%) for his labor costs and a few percentage savings for IRS compliance costs. When sold, the $0.90 loaves of bread will get $0.27 FairTax added for a total selling price of $1.17. Under this scenario, George has $950 take-home, which allows him to purchase 811 loaves of bread, a slight increase in purchasing power which is mainly due to the elimination of the employer portion of the FICA. (assuming Bob's Bakery kept that employers half of FICA which is really his employees money but that is another discussion)
But this second "inflationary" scenario would put retired persons, or anyone with accumulated wealth or any person on a fixed income at a relative disadvantage to wage earners because things would cost more in absolute dollars. So, this scenario won't work in practice.
Please think about what you are promising here when you say that people will get their whole pay checks and at the same time all prices will be about the same. It cannot happen-- there is no 22-25% "embedded tax" savings once you give wage earners their entire paycheck.
Sincerely,
Rob xxxxxxxxx
XXXXXXXXXXXX
Dear phil_will1,
"They already have embedded taxes in them and would continue to do so under the flat tax."
The "embedded" taxes are, at most, very modest.
In 2003, the US federal government only collected less than $150 billion in corporate taxes.
All the "embedded" taxes in all the products and services provided in the United States, all summed together, cannot equal more than $150 billion
That works out to less than 1.5% of GDP.
Get rid of the corporate income tax (and I'm all in favor of that), and on average, costs of things economy-wide can only fall less than 1.5%, if that much (corporations may keep the additional profit to prop up long-term sagging rates of profitability).
Go look at the amount of taxes paid by firms who sell large volumes of stuff to the government. Boeing's corporate income tax rate is about 0.3%. Lockheed Martin's a hair over 1%.
Perhaps the government may pay $100 million less on a $5 billion aircraft carrier by eliminating the corporate income taxes "embedded" in the price, but the government is still going to wind up paying $6.36 billion for it, after the NSRT.
That's gonna leave a mark.
sitetest
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
You are confused, I don't think that.
"There is one consideration to the fair tax: Initially, people won't spend so much. But as they save, they will start spending."
Consumption may decline initially, but it (the decline)will be comprised solely of imports. Therefore, we get two beneficial economic effects
1. higher savings rate,
2. more demand for US produced goods
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
The current "employee pricing" in the automobile industry shows that. You're also forgeting about the individuals Bob's Bakery hires (that would not increase productivity yet need to be included in costs) to be compliant to todays taxes.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
You keep posting the same sorry discredited garbage as though it were the gospel and never address the root problem, that it is obviously illogical to expect the FairTax plan to miraculously boost everyone's purchasing power by 25%+ .
The fact that you continue to say that employees will keep all of their paychecks including the taxes that are currently withheld and that prices will also stay the same is so clearly impossible to justify that it is no wonder that you wave your arms and rant and rave and get personal about this, and trot our your tired pseudo-arguments.
Of course it is not about ME, it is about millions of people like me, and those that work for us that are being sold an illogical bill of goods by your FairTax crowd. Some of them understand that there is an inconsistency and are dishonest, others are just too enamored to even think that there might be a double counting going on, and others are just not informed enough to have a real opinion.
It is difficult to tell whether ignorance, dishonesty or fanaticism are at play with some of you.
Why don't you respond with your answers to the exact points I raise in my letter rather than trotting out your irrelevant canards?
"It is not perfect, but IMO the current system should be adjusted before some change this radical is brought into the equation."
We have been "adjusting" the current system for almost 100 years now and the result is the biggest mess that anyone has ever seen. Jimmy Carter referred to it as a "disgrace" in 1976 and it is far worse today.
"Get rid of the AMT, make the Bush cuts permanent, and simplify the code section by section so that it is more understandable."
".... at the rate we are going, by 2010 or so it will cost the country less (in terms of lost revenue) to jettison the income tax than it would to get rid of the AMT."
The FairTax Book, by Neal Boortz and John Linder, p. 156
So how would you propose making up the revenue lost by getting rid of the AMT?
Our overall system is what I am referring to, the freedom and the ease of starting and running a business and the skill of our workers and the incentives that are placed on various activities through the tax code have all added together and resulted in where we find ourselves today-- it has all been steered and corrected and elections have been fought and won to make changes for almost 100 years.
Our present tax code and how it influences behavior in so many ways to encourage home ownership, consumption and business formation, and capital investment, and risk-taking is a very complicated jumble. Unravelling it is not necessarily going to create Nirvana, and could have many unintended consequences that might take a generation to stabilize. Or it could be a fantastic transition and the economy booms, I think it is Russian roulette to pull the trigger on this radical of a change.
"Businesses will not be able to pay 100% of their paychecks to their employees, because they need these "embedded tax" savings to be able to lower their selling prices."
The business is paying that full 100% already -- split between the employee and the IRS. Giving all 100% to the employee makes no difference in payroll expense for the business.
From an employee standpoint, where the business does save considerably in on the employer portion of wage taxes which you didn't mention. You seem to not be aware if the 7%+ for the employer portion of employee wages which is over and above the employees gross pay, and in "Bob the Baker's" case, the 15%+ of his wages that currently go to FICA & Medicare. How come you missed that part?
You also seem to ignore all the supplies that Bob the Baker buys and the average of 15-20% embedded income and wage taxes in those.
BTW. You business wouldn't have anything to do with Taxes, would it?
I'm not sure I follow your interpretation of embedded taxes in regard to what Boortz and Linder discuss in their book.
Embedded taxes refer to those taxes which are spent for components or products bought by the retailer (for instance, if I'm a baker, when I buy sugar for my cookies, I have to pay a sales tax on that sugar, plus the sugar's embedded taxes from the sugar refinery, which must buy the sugar from the cane producers, who must buy it from the cane farmers, who must buy land for their farms... etc etc.) All of those individual taxes add up and divide out, so that a little bit of the cost of paying all those taxes ends up in the sugar that I buy for my famous sugar cookies. Under the FairTax, however, embedded taxes (all those taxes added up from buying the sugar from the distributor who buys it from the refinery which buys it from the farmers which rents the land from the landowners) would be removed, thus lowering the cost by, ON AVERAGE, 22%. That number would obviously change depending on the goods in question, because not all goods go through the same amount of production, and not all goods are taxed the same. The basic idea is that, regardless of actual reduction, prices would go down by, on average, the same amount as the FairTax itself, meaning that all produced goods would AVERAGE OUT at about the same amount, on top of the elimination of federal income taxes, SS taxes and Medicaid.
Unless I've totally missed your point.
As they are selling the FairTax plan, if it was logical, it would be great. Every wage earner and businessman still engaged in creating new income would increase their purchasing power overnight by 25% plus get a prebate to boot. Every person living on accumulated wealth would have the same purchasing power as now, and even though they wouldn't receive a big pay raise, they would at least get the prebate.
It sounds great, and if that were actually possible I would be all for it. There would be no losers.
But in my opinion, the plan is being misrepresented. Can you answer the point I raised in my letter about how the plan is flawed. How a business cannot reduce prices by 20-25% if he pays his employees their full paychecks.
Please look at my letter and explain where my logic is incorrect.
And, I've spent more time discussing the FairTax on FreeRepublic this week alone than I spend on taxes both personally and for my business in a whole year. Does that mean that if I quit FR, I can lower my prices?
Bob is a small company and he spends at most 0.5% of his sales revenue complying with the present code. His accountant is mainly concerned with paying bills, collecting invoices, writing payroll checks, and helping Bob with long-range planning of their new line of Low-Carb bagels. He will still need to do all these things.
I don't understand. How is deprecitation a repeat purchase of land. It is merely tax avoidance isn't it?
you said you would quit posting to me, so please do as you promised. you obviously have no idea what you are talking about.
Under the Fair Tax, all of this depreciation would go away correct?
Correct!! Purchases for business use are not taxed under the FairTax legislation.
Only purchases for final consumption are subject to the retail sales tax implemented under HR25, business purchases are expressly exempted:
H.R.25Fair Tax Act of 2005 (Introduced in House) `SEC. 102. INTERMEDIATE AND EXPORT SALES.`(a) In General- For purposes of this subtitle--
`(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business' means purchased by a person engaged in a trade or business and used in that trade or business--
`(c) Investment Purposes- For purposes of this section, the term `purchased for an investment purpose' means property purchased exclusively for purposes of appreciation or the production of income but not entailing more than minor personal efforts. |
Another thought, this might encourage our headquarters in europe to send more business to us since it would be cheaper than in europe.
Actually it is highly likely to see European and Japanese businesses relocating here for the international trade advantages of a retail sales tax only system. With no federal tax levied on upstream manufacturers or suppliers U.S. exports become more competitive on foreign markets, as well as being a taxhaven for manufactures in the U.S.
Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX)
August 12, 1996
- "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
I answered that above. You are operating under the assumption that the witholding on employee wages are the only fed taxes paid by a business. You are dead wrong on that.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.