OPEN LETTER TO BOORTZ/LINDER (FairTax)

self | August 22, 2005 | RobFromGa

[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

[Always Right]

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?

That's the problem, they are counted but fair taxers deny that they are. Dr. Jorgenson when he said prices will fall 22% when embedded taxes are removed, included taxes paid by employees. But fair taxer claim that prices will fall 22% AND employees will pocket all their taxes. That is contrary to what Dr. Jorgenson said, and in effect double counts $1 Trillion so it appears to be a huge windfall for employees.

[Always Right]

What part of the second sentence above do you not understand?

The part where Wal-Mart actually sells American made goods.

[RobFromGa]

Sure we can. We have stated many times that the compliance costs of the current system are enormous and that they get imbedded, also.

Compliance costs are enormous, but are small as a percentage of our super-gargantuan economy. Like less than a percent. Most accounting functions have nothing to do with taxes and will be done anyway to operate the business.

Can you explain why income and payroll taxes cannot legitimately be counted? Is that a rule that you just made up?

I almost can't believe that you are asking this question, it shows such an utter lack of understanding of the main point we are discussing that I find it hard to believe that you aren't just pulling my leg. Do you really not understand where this "rule" came from? You might want to look at Fairtax Book page 111, Time For a Quick Review! to get the answer. Look for the part where the employees get the raise, because their income and payroll taxes are no longer siphoned off.

Or ask pigdog, he'll tell you that the employees keep all of their paychecks under FairTax so these are not going to save the business owner squat. Or just re-read my letter, I tried to explain it there.

[RobFromGa]

Rob, Are you going to let us know if you get a response and share it with us?

Of course I will.

[jackbill]

If we ever get a "Fair Tax", I'm going to invest all of my money in gambling equipment, alcohol, narcotics and small loan operationg.

I saw Boortz on C-SPAN the other day and he was explaining how everybody would get a government check on the first of each month to reimburse them for the sales taxes that they would pay.

In his example be mentioned something like $400 per month for a family of four.

Oh, yes indeed. That all that we need. Hundreds of millions of people getting a government check on the first of every month. Any guesses as to what they will spend it on? Any? And how fast they will spend it?

Within six months there will be stores everywhere loaning them money against their next government check. Or next years'.

[RobFromGa]

At least they'll know exactly where everybody is all the time.

[phil_will1]

"That is a pretty ridiculous statement, it may be complex but people do understand it, and in fact become expert at it esp within their own little niches."

Oh, is it ridiculous? Please explain the following results, then. Money magazine used to do a test of the income tax system. They sent the same set of fictitious tax input data to professional tax preparers all over the country and requested that they fill out 1040s based on that info. The last time they did that was for tax year 1996 (if memory serves), with results published in March 97. They recived 47 different tax returns complete by 47 different professional tax preparers and they recieved 47 different answers back. They weren't off by a few dollars - they were wildly different. That year was only slightly higher than the norm for the results they recorded during the 10-12 years they did the test.

The tax system is far more complex now than was the case for 1996. Unfortunately, Money no longer does that test. I guess they felt they had proven their point. Apparently, there are a few unconvinced diehards.

As far as your contention that people become experts at it within their own niches, it wasn't clear if you were referring to tax professionals or business people. If you were referring to business people, are you saying that business decisions should be dictated by the necessity of staying in their tax "niches"? If you were referring to tax preparers, does that mean you have to use multiple tax preparers as your business grows, who are specialized in the various areas of the Code that your business takes you into? Actually, that is what happens to a certain extent when you use the more sophisticated regional or national CPA firms. What a collossal waste of human resource!!

[phil_will1]

"Within six months there will be stores everywhere loaning them money against their next government check. Or next years'."

Sounds like a pretty risky business to be in to me. Would you be interested in opening up a busines like that? If not, why do you think other people would?

[phil_will1]

"No, it needs to be reformed and made simpler."

Which is what we have been trying to do for a little over 90 years now. I once heard insanity defined as doing the same thing over and over and expecting different results.

[RobFromGa]

Oh, is it ridiculous? Please explain the following results, then. Money magazine used to do a test of the income tax system. They sent the same set of fictitious tax input data to professional tax preparers all over the country and requested that they fill out 1040s based on that info. The last time they did that was for tax year 1996 (if memory serves), with results published in March 97. They recived 47 different tax returns complete by 47 different professional tax preparers and they recieved 47 different answers back. They weren't off by a few dollars - they were wildly different. That year was only slightly higher than the norm for the results they recorded during the 10-12 years they did the test.

Most of them were off by a few dollars, a few were wildly different. There are incompetent and dishonest people and in any business, tax preparation is no different. And Free Republic is no different.

By niches, I meant to imply business scenarios like equipment depreciation, or real estate transactions, etc. Yes the tax code has many little hooks and loopholes in it that people learn about over time. I agree it is too complex, and that it must be simplified.

[Gvl_M3]

"For a business there is a difference between cash flow and tax profit/loss calculations"

This is where I'm confused. I understand the need for depreciation under the current tax system. Heck, I just found the 112 page IRS document that talks about. Didn't read it though :)

I'm an engineer, so I don't understand all this junk. Never did. I used to work for a small manufacturing company and the owner didn't understand either. He just paid cash for a piece of equipment. Now, he has to charge his company for the next 7 years on that piece of equipment.

How does this work under the FairTax? The only need for depreciation at that point would be for the net worth of the business, i.e. its value on the stock market. Like I said earlier, about 1/7th of our capital budget is just for depreciation. That is just for one location.

We currently have about 30 plants in the U.S. Since we won't have to depreciate our property against our income, we can lower prices, make more profit.

It could encourage us to build/expand more plants since it would be a one time cash expense. Instead of building in Romania or Mexico, we could expand here.

[RobFromGa]

I once heard insanity defined as doing the same thing over and over and expecting different results.

We have made progress in the past ten years. And the tide is moving in the right direction of personal responsibility. A government check each month screams "Mommy State" to me. But that is not my big problem with the plan, I could live with that part.

[RobFromGa]

I'm not sure of this answer but for a C corp, I think the SEC will still require you to show depreciation in order to accurately calculate profits for a given year in a uniform fashion. Otherwise, the costs would fluctate more erratically from year to year.

From a cash flow point of view, there would be no change. You would get the asset, and pay the cash when you purchased it. The money would be gone from your bank account and the asset would be on your balance sheet.

[ancient_geezer]

OOPs, lets try that again and get the image URL right this time :O/

We currently have a tax system which is biased toward foreign producers at the expense of our own producers.

Yep, as long as domestic manufacture is operating at a competitive disadvantage in relation to foreign imports which do not have the long U.S. supply lines with accumulative layers of income/payroll tax costs built in we can expect the world to continue to just keep spinning it same old s't, and folks blaming domestic businesses for problems created in Congress through any federal income/payroll tax system which by nature can be neither border neutral nor adjustable.

 

 

According to many economists, trade imbalances such as above are supposed to be corrected through the monetary exchange rates. Sure doesn't look to be happening above.

A retail sales tax only system operates as a tariff in bringing import prices more in line with domestic goods shifting consumers more to our own manufacture, encouraging growth of industry in the U.S., rather than acting as a disincentive to domestic manufacturing and our capacity to compete world wide.

[Bigun]

I would hope that those SQLs who refuse to acknowledge the validity of the concept of tax costs cascading can finally concede that point.

Despite their protestations some of them DO understand the mechanisms but they also realize that they CANNOT concede the point and stay in the game.

Unfortunately, your hope will never be realized no matter how well you prove the case.

[RobFromGa]

According to many economists, trade imbalances such as above are supposed to be corrected through the monetary exchange rates. Sure doesn't look to be happening above.

I thought economists were infallible?

[RobFromGa]

Despite their protestations some of them DO understand the mechanisms but they also realize that they CANNOT concede the point and stay in the game.

And we say the say the same about the FairTax proponents. Where so you think the 23% savings will come from for Bob's Bakery?

[RobFromGa]

Unfortunately, your hope will never be realized no matter how well you prove the case.

At this point, just a reasonable paragraph explaining where the cost savings will come from would be nice, actual proof can wait.

[phil_will1]

"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."

Well, we don't agree on that. I will concede that imports will be significantly more expensive and I do wish that Boortz and Linder had made that clear in the book. When I explain the proposal to people, very few have a problem with that. They recognize that we have a huge and growing problem with our trade deficit and that something has to be done. If it means we ship in less cheap stuff from China, sobeit. Most Americans don't have any idea about what is going on in China and India right now and what an impact it is going to have on us over the next couple of decades. They are still concerned about our balance of trade, even without that understanding. Most Americans instinctively recognize that we, as a country, cannot continue to consume more than we produce on a long term basis without serious economic repurcussions. The disruptions that you are so concerned about from converting to the FairTax now are trivial compared to what may very well happen if we continue to ignore our growing balance of trade deficit.

The amount of imbedded taxes in US produced goods may not be 22%. However, it is almost certainly well above the 10% that you come up with. Some of this is a "who do you believe" dilemma. Do I believe the independent economists (who in many cases don't support the FairTax) or do I believe a bunch of anonymous naysayers on an internet blog, none of whom will acknowledge the deficiencies of the current system nor will they present their professional economic qualifications, nor will they appear in public and stake their own personal and professional reputations on their positions?

I have to tell you, that is a very, very easy decision for me.

If you don't want to post to me because I don't take your accusations at face value, be my guest. Perhaps I shouldn't respond to you either, since I have asked you and the other defenders of the current system how the President's Commission missed the mark so badly in assessing the American people's attitude toward the current tax system and not one of you has offerred any explanation. See my post # 152 on this thread.