OPEN LETTER TO BOORTZ/LINDER (FairTax)

U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Phone: 770-232-3005
Fax: 770-232-2909

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.

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.

The amount of imbedded taxes in US produced goods may not be 22%.

That is not really the point. The 22% embedded taxes is a cornerstone of the fair tax argument. They quote a Harvard study as proof. Then the fair taxers tell us that embedded taxes are something different then what the guy who did the study says they are. It makes little difference if you agree with this point, it is a matter of indisputable fact.

nor will they appear in public and stake their own personal and professional reputations on their positions?

I sent this letter with my full name and address to these two men, I am attempting to engage the real world in this debate. I am not playing some anonymous naysayer.

With that said, being anonymous means that you have to look at the logic and reason of what is being said. And make up your own mind whether you agree or disagree.

I didn't respond to your post #152 because I didn't really want to take them time to read that people hate the IRS, I'll concede the point. They didn't miss the mark.

That doesn't mean we need to blow up what we have and start over.

Re: the trade deficit, it might or might not be a huge problem. We have full employment, rising productivity, rising wages and an aging population with significant accumulated wealth. There are other solutions to the trade deficit besides the FairTax (you mentioned tariffs). I don't see that as a reason for the FairTax, esp if US businesses are only going to see max 10% cost savings as I beleive.

Dear phil_will1,

"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."

I agree.

But I've been playing with "cascading" spreadsheets for the last couple of days, sticking in values that I find when actually looking at big company effective tax rates, and putting in companies that one might expect at different levels (manufacturers, distributors, retailers, service providers like airlines, etc.). I don't get to 17%. Or 7%. In fact, if you try to come up with representative examples of manufacturers (Whirlpool, GE, Dell), and distributors (TechData, Ingram Micro), and retailers (Wal-Mart, Sears), and other sorts of "end-consumer companies" (airlines, which over time, don't actually make profits), you usually come out with values in the 1% - 2%. Sometimes less, sometimes more. Especially when you realize that you're likely to have scattered through many value chains one or more of the 92% of business entities that pay no corporate income taxes at all.

But the OVERALL level of "embedded" corporate income tax across the entire economy is already known. It varies from year to year, but is usually around 2% or less.

sitetest

So I guess it boils down to who can convince the most people doesn't it. I like my side's chances!

And that the problem, you guys don't care that you are sell a huge lie. As long as the marketing is good. Fair Taxers have totally misrepresented the Harvard Study concerning embedded taxes, but what only matters is you can fool people with the arguement.

I don't think you can trust a one of them to know what end of the lightbulb to screw in. They produce what they are paid to produce, and they confirm the beliefs they already have.

We can't even dynamically score a simple tax rate decrease holding all other factors constant, yet we are supposed to believe they can simulate the thoughts of billions of individual economic decisions made subconsiously every day. They called it the "invisible hand" for a reason.

Not at all, Nightie. The example in #88 illustraates cascading very well, indeed. As a tax cost from one level is passed to the next, that next level's numbers have within them the tax from the previous level and that is operated on by the multiplicative effect of the calculations.

I seems likely looking at the way the example is made that it may cause the calculation to limit at 25% eventually in the case of the example, but that's not the point. The point is that it is an example that shows the mechanism you SQL types claim does not exist - and now you're attempting to suggest a better method of calculating cascading. If it doesn't exist, why try to "improve" upon it?

I've certainly never offered this an an example of any particular set of companys, but of the mechanism involved. It also is not offered as a pricing mechanism or anything of the sort. It is an understandable, simple example of tax cascading that does not include parroll taxes or compliance costs. And it illustrates that quite well in a simple manner. Whether or not the tax rate is the same or changes from level to level also is not the point - merely demonstrating the cascading mechanism was the point and the example does that nicely.

If, say, level 4 were to mis-price its thing (though this was not the assumption of the example, but your assumption in your effort alter the example to defeat it) and sold with no profit, then that level wold contain no cascading but it would have in the price the cascaded effects from the earlier 3 levels (rather than have them "wiped out" as you claim) and would resume cascading with leverl 5. The cascading would still be there with the same mechanism but with a lower overall accumulated cascaded cost at the end of level 6.

"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."

You would still have to recoup all your operating costs, including plant and equipment, through the pricing of your product. At least, that is what we FairTaxers believe. The naysayers say that costs exist in one part of the business universe and prices exist in another and never the twain shall meet. If a business is profitable, it's just a coincidence. FairTaxers view that as silly revisionist economics.

The difference is that you would not have the expense and administrative hassle of maintaining two sets of books on your depreciable assets and that you would not have corporate income taxes, payroll taxes and their associated compliance costs. Your suppliers would also have similar savings and could pass those along to your company with no erosion in their profit margin.

The USA would be the largest tax haven in the world and your business would be one of many expanding here, rather than overseas.

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

Here's a few sources off the top of the head:

Reduced planning & tax avoidence costs;
Reduce tax compliance losses, due too errors, tax accounting and filing costs;
Reduced litigation/audit costs over government controversy concerning deductablity/exemption/depreciation rules and pushing the envelope;
Increased efficiency in use of business resources and operating capital;
Increased productivity and growing markets by reducing deadweight loss effects in intermediate & export level businessees;
Repeal of the actual taxes remitted by manufacturers and other intermediate and exporting businesses upstream from retail sales.

The naysayers say that costs exist in one part of the business universe and prices exist in another and never the twain shall meet. If a business is profitable, it's just a coincidence

Now you're going to start misrepresenting the position of those you are arguing against. Well I guess since you misrepresent your own plan, its no surprise that you'd try to misrepresent ours.

In our "universe" costs and prices are extremely linked, if they weren't we could create the 22% cost savings out of thin air like you do. But since we are living in a real world where PRICES= COSTS+PROFITS we can't reduce Prices without reducing COSTS or PROFITS.

"We have made progress in the past ten years."

Really?? What sort of progress and how much??

The prebate may spell "Mommy State" to you but it merely spells "Help Untax the Poor to Some Degree" to most folks when they - like everyone - will have to pay the same tax rate on every taxable thing they buy.

"I don't think you can trust a one of them to know what end of the lightbulb to screw in. They produce what they are paid to produce, and they confirm the beliefs they already have."

"These options should:

(a) simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws; (b) share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and (c) promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace."

From the Executive Order of the President of the United States setting up a Commission on Tax Reform in January, 05.

Sounds like you have a fundamental disagreement with the President on the goals and objectives of tax reform. After all, if economists can't be trusted to estimate the economic impact of tax system changes, how will we know which proposals will "create long-term economic growth and job creation"?

Reduced planning & tax avoidence costs; - discussed, negligible, less than 1%

Reduce tax compliance losses, due too errors, tax accounting and filing costs;- discussed, negligible, most accounting functions still needed to run business.

Reduced litigation/audit costs over government controversy concerning deductablity/exemption/depreciation rules and pushing the envelope;- discussed, very negligible, still needed to defend business deductibility of expenses

Increased efficiency in use of business resources and operating capital;-- ;unquantifiable gobbledygook- for most businesses, zilch.

Increased productivity and growing markets by reducing deadweight loss effects in intermediate & export level businessees; sounds a lot like the last one-- for most normal businesses, nada.

Repeal of the actual taxes remitted by manufacturers and other intermediate and exporting businesses upstream from retail sales.-- what taxes are you talking about? the income and payroll taxes go to the earner, corporate taxes are negligible as a percentage of sales;

"Well I guess since you misrepresent your own plan, its no surprise that you'd try to misrepresent ours."

"Ours" - what plan would you have perchance - and is that you and the little mouse in your pocket??? The Nightmare Tax??? Certainly there has been no "plan" at all that I've seen but just a bunch of misleading, misstated facts altered as required as the debate moves along.

By all means, lets see your "plan" - in detail; and show us the language of your bill(s) in Congress, too?

"The naysayers say that costs exist in one part of the business universe and prices exist in another and never the twain shall meet. If a business is profitable, it's just a coincidence"

"Now you're going to start misrepresenting the position of those you are arguing against."

I didn't say that YOU personally made that argument. However, lewislynn, another in the SQL posse, has argued that point on multiple occasions.

Sounds like you have a fundamental disagreement with the President on the goals and objectives of tax reform.

No, I think tax rate reductions, coupled with the removal of death taxes and AMT would accomplish all of these goals. It says "reduce" not "eliminate".

And besides the FairTax can't increase the purchasing power of every American wage earner by 25%+ like Boortz and Linder are saying, so it's based on a misrepresentation and it won't promote long-term growth.

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