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.
LOL. Because you say it? * chuckle *
"It's unfortunate you can't understand a simple example of cascading of embedded taxes which do not even include paroll taxes or commpliance costs."
I understand your example just fine. Better than you do. It comprises profits and taxes only. So, wonder of wonders, it has all "embedded" profits and taxes!! LOL.
Your example is the classic example of "GIGO," garbage in, garbage out.
Make a spreadsheet with real world, realistic profit margins, value added, and effective tax rates, and you'll see "embedded" tax costs of a couple of percent. If I have time to waste later, I'll do it for you.
However, we actually KNOW the embedded cost of corporate income taxes in the US. It varies from year to year. In recent years, it's been as high as nearly 2%, and as low as 1.3%. It's the percentage of GDP that's paid in corporate income taxes.
"Whatever value might be added is encompassed by the example and the fact you can't/won't see that changes nothing. In asddition, the fact that you are not a Sub C corp changes nothing. You business still accrues tax liaibilities even though they may be paid via your 1040. The effect of those taxes still remains in the business and pretending it does not is (at the very least) shortsighted."
I think you mean Chapter C corporation.
In any event, why don't you ask groanup's opinion of that? He seems to think that if you're not paying corporate income taxes, well, you're not paying corporate income taxes.
Why don't you explain for everyone here your theory of why all other workers should get back all their personal income and payroll taxes, but small business owners using Subchapter S corporations, LLCs, partnerships, and proprietorships, should not get back their personal income and payroll taxes?
"The effect of those taxes still remains in the business and pretending it does not is (at the very least) shortsighted."
You assert, assert, assert, in the face of all evidence and reason arrayed against you. LOL.
"As for the C-corp figures you present, I can only offer a big yawn and say 'so what'. If those are correct figures (and I doubt they are),..."
Look 'em up yourself.
"...there are many tax-abatement stunts that can be used (frequently short term ones) but over a longer term the taxes would most likely go back up."
Nope. These businesses just don't pay a lot of taxes. That's all.
" According the The Institute for Taxation and Economic Policy for 2004:
'ITEP's new report examines the U.S. profits and federal income taxes of 250 of the nation's largest and most profitable corporations over the 1996-98 period. Although big corporations ostensibly are supposed to pay 35 percent of their profits in taxes, the 250 companies in ITEP's survey paid only 20.1 percent in 1998. '"
I don't disagree with that.
You are confused, pigdog. You have confused "to pay 35 percent of their PROFITS in taxes," with "percentage of their REVENUES in taxes."
Wal-Mart paid nearly 30% of its profits in federal corporate income taxes. Nearly THIRTY PERCENT.
But, its profits were only 5.6% of its revenues.
For every $100 of sales Wal-Mart makes, they make a pre-tax profit of about $5.60. THAT'S their profit. That's all. And of that $5.60, they pay about $1.60 or so in federal corporate income taxes.
So, if you get rid of the corporate income tax, the price of $100 of Wal-Mart stuff could conceivably fall to $98.40.
Read what I've written very carefully, pigdog. You are confusing REVENUES with PROFITS.
It doesn't matter if the tax rate on profits is ONE HUNDRED PERCENT (the absurd case). If profits are only a very small part of revenues, then taxes will only be a very small part of revenues.
That should make you the #1 corporate taxpayer in the country. As a nation we collect less than $200 billion in corporate taxes.
"But its not so good if you have accumulated wealth that just took a 17% or so dive."
But if your accumulated wealth is in equities which increase substantially in value during the first two years of the FairTax, that pretty much wipes out any differences in how much you pay for bread, milk, socks and shoes during that two years, doesn't it?
Here come the attacks from the SQLs who will accuse me of promoting the FairTax as a cure-all when I point out another benefit. Flame away, guys, I have my asbestos boxers on!!
You are again arguing under the assumption that the FairTax is being described accurately. I am not.
Let me ask you an honest question: Just on the crazy chance I am right and the average worker were to take home 25% more income, and retail prices were to go up 17-20% (with the Fair Tax included) would you still support the Fairtax plan?
"For every $100 of sales Wal-Mart makes, they make a pre-tax profit of about $5.60. THAT'S their profit. That's all. And of that $5.60, they pay about $1.60 or so in federal corporate income taxes."
That assumes no cost savings from Wal-Mart's suppliers which get passed up the supply chain. To the extent that Wal-Mart is selling imports, that is a reasonable assumption. However, to the extent that they buy US produced goods, it isn't reasonable at all. It may also very well be that because of the price shifts which will make US produced goods more competitively priced, more of Wal-Mart's stuff will be US produced.
I have no interest in debating what the macro-economic effects of this plan will be on the future equity markets until we are able to agree that the plan as described is based on a fundamental misrepresentation regarding the effect on immediate retail prices.
A company is a company is a company. The suppliers don't have any way to save more than 10% on cost either and that is assuming 100% domestic production.
Of course, the foreign TV or furniture or whatever will go up almost 30% overnight. And gasoline made from foreign oil will go up 15-20%.
"I never said there was."
Yeah, I know. I just was making the point that I absolutely don't accept that as a premise."
"Go back and read my post. 10% is what Rob came up with."
He was being generous.
"FICA savings plus compliance."
Right, but we'd all originally agreed, just ask pigdog, that workers would get back 100% of their taxes, including the employer's side of FICA and Medicare, because we all know that the money really comes out of the workers, anyway.
And that 7.65% was nearly all of the 8.8% that he could possibly get to, which he then rounded up, generously, to 10%.
"How much would Microsoft save if it didn't have to buy low income tax credits to offset its tax liability?"
I'm unaware that Microsoft "buys low income tax credits." Please document this.
However, I AM aware of "low income tax credits" as they apply to rehabilitation of housing, and renting it to poor folks. If you want to discuss this, I'm happy to, as I'm seriously thinking about delving into this part of the real estate business if I sell my current business.
When I look at Microsoft's financials, I see they actually do pay a ton of corporate income taxes. They are the exception to the rule. They pay fully 33% of their pre-tax profits in federal and state income taxes. If they're buying "low income tax credits," they aren't using 'em right.
"Also, how much would MSFT save if it could get rid of its tax department?"
Probably millions and millions of dollars. But much less than 1% of its revenues.
Microsoft's accounting is pretty straightforward compared to other companies of similar size. So are their taxes. At least compared to other companies with $36 billion in revenues.
Nice job, PD. One can always quibble about the assumptions, but your example clearly illustrates how tax costs get passed up the supply chain. I would hope that those SQLs who refuse to acknowledge the validity of the concept of tax costs cascading can finally concede that point. We can debate the magnitude of the costs which get passed up, but it seems to me that denying the existence of the principle is plain stubbornness.
As you point out, the numbers are for corporate income taxes only and they don't include payroll taxes and compliance costs.
They also don't include state taxes, which will harmonize with the FairTax in most cases, creating even more savings for US producers.
"Of course, the foreign TV or furniture or whatever will go up almost 30% overnight."
We currently have a tax system which is biased toward foreign producers at the expense of our own producers. The FairTax would put them all on a level playing field. It sounds like you have a problem with that. Why do you object to creating millions of good paying jobs here in the USA?
How do the Chinese get any savings under the fair tax to pass to Wal-Mart?
For a business there is a difference between cash flow and tax profit/loss calculations. If you buy a $50,000 car, it is listed on your balance sheet as an asset and it goes down in value over time on the balance sheet. During that time, you are hopefully getting more value from the car than the amount of asset you are losing. From a cash flow point of view you spent the money when you bought it. The money needed to be in your checking account. But, your company is not allowed to "expense" (write-off) the car as a business expense all in that first year because it still has value on your asset sheet.
The idea is to show the profitability of your company more accurately. You end up getting to write-off the entire $50,000 from your profit, but you do it a little bit each year.
One of the provisions of the Bush 2001 and 2002 tax bills was the ability to accelerate depreceiation on business purchases (to allow you to capture the business costs sooner and encourage people to buy things for their business and stimulate the economy. And it worked.
Hope this helps. I just tell my accountant each year what I spent on capital expenses and when they were put into service, and he sticks them in the software and it spits out the proper depreciation on the corporate tax returns.
You don't own a business, obviously. Or if you do, you just magically operate in a bubble with no competition! Must be nice...
"None of the FairTax crowd can identify any such thing as embedded tax costs that are not income or payroll taxes..."
Sure we can. We have stated many times that the compliance costs of the current system are enormous and that they get imbedded, also. Can you explain why income and payroll taxes cannot legitimately be counted? Is that a rule that you just made up?
You must be kidding, that spreadsheet is out of touch with reality and has already been discredited completely.
The opposite is actually true. You currently lease because the depreciation rules on autos limits the amount you can depreciate a year. Under a lease, you can expense every penny you spend on it. The rule is dumb. It was intended to stop people from buying $50,000 BMWs and depreciate them as a business expense. But now what is considered luxery is a Ford Escort. Then again, there were great rules last year that allowed you do immediately depreciate giant SUVs.
"That assumes no cost savings from Wal-Mart's suppliers which get passed up the supply chain. To the extent that Wal-Mart is selling imports, that is a reasonable assumption."
"How do the Chinese get any savings under the fair tax to pass to Wal-Mart?"
What part of the second sentence above do you not understand?
Rob, Are you going to let us know if you get a response and share it with us?
I was simply making the observation. I was not debating the merits of foreign goods going up 30%. Since I believe that domestic goods are going to go up almost 20%, the relative difference is not so great.
I do think that oil and gas (imported) could be a problem because they are a cost that goes into many things.
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