Skip to comments.OPEN LETTER TO BOORTZ/LINDER (FairTax)
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
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.
I sent this tonight to Linder and Boortz.
I do think, however...that the economic boom that would result WOULD increase purchasing power...
That might be so, but it is not what they are counting on right out of the blocks for revenue neutrality.
Any system which would make it nobody's damned business what anybody else earns works for me.
The "Fair Tax" stuff will kill us small businesses who provide services. I am sure my clients will love to pay %20-30 taxes on what ever I produce.
To keep things at the same rate, I must drop my rate. I seriously doubt any business which will drop their rates just because "taxes" are not there.
Is there currently a tax on services?
The Kool-Aid drinkers are going to pile on any moment now...
I don't think Linder or Boortz will get it. They will still be convinced that employee taxes are not 'embedded taxes'. But it will be interesting how they respond.
You mean you currently aren't paying 23% of your gross in taxes and compliance costs?
Aren't "embedded taxes" going to vary greatly depending on product?
I don't think you fully understand the concept "embedded taxes".
Bob's Bakery will no longer have to pay either the employer portion or the employee portion of payroll taxes. The employee taxes, which are withheld from George's wages, are not an expense to Bob anyway. Bob pays George the same amount of money whether he withholds taxes or doesn't. George pays the tax, not Bob.
You forget that Bob the Baker pays income tax on his profit from sales. Businessess pay no taxes under the Fairtax. That is his main source of savings that he would be able to pass on to his customers. If Bob is feeling greedy and doesn't lower his prices, competiton from Jack's Bakery, who has the same tax savings and has lowered his prices, will force Bob to do the same or go out of business. That is unless Bob has really great cinnamon rolls.
Please tell me what would cause this "economic boom" to take place....
I just got finished reading "Flat Tax Revolution" by Steve Forbes. I have to say after reading that book I'm convinced more than ever that the Flat Tax is the way to go.
I still want to read the FairTax book to get a balanced perspective, but I'm a bit worried that the FairTax as I understand it may compel purchasers to buy used products whenever possible -- much like those who bought used cars and boats when the luxury tax was enacted -- and really hurt the new construction market.
The tax on services will mean that many things will get even more expensive, like college education. Moreover, even things the U.S. Government buys, like office supplies and fighter jets will have that extra overhead attached.
If you can find a copy (I got mine at my local Costco) I highly recommend reading "Flat Tax Revolution".
The fact that former Soviet satellite countries are implementing it and watching their productivity go through the roof seems to indicate that this is the way we should seriously consider.
Only a handfull of people would lower their prices.....It has nothing to do with GREED.....you work for money and would take more if offered, then you are "greedy" also...Why is it just the business owner who is greedy? If you are not greedy, then cut your own pay by 25 % tomorrow and have it sent to the needy......
If there were a Fair Tax, everyone would be waiting around for everyone else to lower their prices first and no one would ever do it...No one would cut their own salary, so businesses would not cut their prices..
Besides: The Gov-ment always wants more and the locals would raise their taxes to get any real savings if there were any..
"You forget that Bob the Baker pays income tax on his profit from sales"
Bob the baker is probably a sole proprietor or his business is a partnership, or an LLC, or a Subchapter S corporation, in which case, Bob pays personal income and payroll (although they're called self-employment) taxes on his income, which is the profit that he takes from his bakery. But in these cases, Bob pays no corporate income taxes. At all. Only Chapter C corporations pay corporate income tax, and most small businesses (in fact, most businesses) do not choose this form. In fact, in 2000, of 27 million business entities that filed a business tax return, only 2.2 million were C corporations. The rest owed no business income tax.
So, he is in the same position as any other wage earner - he pays personal income taxes, but not any kind of business income tax. He fills out a 1040 for his personal income taxes, like anyone else.
If Bob doesn't get to keep his personal income taxes, like everyone else does, then that puts Bob at a disadvantage to everyone else.
That probably isn't good for encouraging the formation and maintenance of small businesses.
Any system that has to be sold using lies and misrepresentations doesn't work for me.
The Status Quo Lover crowd will tell you that only C-corporations pay taxes and that those are "minor" and that no other business can have cascading tax costs.
Obviously, none of that is correct, but they'll keep right on insisting it is so (and citing their own businesses, conveniently, as "proof").
The cascading effect of embedded tax costs continues as even a simple example has shown and the build-up effect mounts up rapidly. None of these guys can admit that this occurs as it destroys their argument.
Also note that in his letter to Linder the poster fails to figure in the effects of the prebate which ALSO helps the wage-earners ... and all others. All-in-all a very poorly-reasoned letter and I would be surprised if they even bothered to answer the allegations he makes, many of which are grossly in error.
>If there were a Fair Tax, everyone would be waiting around for everyone else to lower their prices first and no one would ever do it...No one would cut their own salary, so businesses would not cut their prices.. <
Then explain Walmarts sucess and why video rental costs are about 25% of the price they were 5 years ago with less competitors.Come back after you take high school economics.
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