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.
Look it up, we have had two rounds of rate reductions since Bush was elected. In general the rates have been going down sporadically for fifty years.
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.
One can always take solace in their argument by ascribing incompetence perfiday to professionals.
I believe I would accept more from an econometrician well grounded in a broad range of empirical data than the average joe just guessing on the basis of personal anecdote.
We can't even dynamically score a simple tax rate decrease holding all other factors constant
Hmm, that my friend is not a dynamic score. Holding factors constant is not consistent with a dynamic economy.
Consumer, business, and government change behaviors in response to a change such as a tax decrease of even a narrow specified kind. That is the problem with current methodologies that rely on static assumptions as opposed to a dynamic equilibrium solution that takes such factor into account.
yet we are supposed to believe they can simulate the thoughts of billions of individual economic decisions made subconsiously every day.
The more individual involved, the easier it is to emulate the mass action many as an average response. It is the action of single independant persons that is unpredictable.
Acting in mass, people as a whole tend to be much more predictable. The key is isolating the modes in which groups interact and modify behaviour as it acts on a macro level, not on a micro simulation level.
They called it the "invisible hand" for a reason.
The "invisible hand" is quite subject to analysis of the consequence of a change and adapting simulations based on the observable effects of the "invisible hand" in mass.
No, Rongie, it is YOU who has misrepresented what Jorgenson shows with the study and you also seem hooked on the number "$1 Trillion" or even "$2 Trillion" as though it were some meaningful real number instead of just popping up out of your fevered brow..
"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."
Ohhhhh! NOW I see. Professional economists can't forecast the economy, but RobFromGa can. Got it.
WRT the AMT, let me ask you something.
"..... 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, Neal Boortz and John Linder, p. 156
So how do you propose replacing the revenues lost from AMT elimination if we stay with the current system?
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.And that assumes that the incidence of the corporate tax is fully on the consumer and not labor or the capital holders, which is almost certainly not the case.
From the Executive Order of the President of the United States setting up a Commission on Tax Reform in January, 05.
Since the fair tax allegedly does all that stuff, why is it the commission so far have not been enthusiastic about the fair tax. Could it be, most people who study it don't think the fair tax will do everything it claims?
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
"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?"
This should be good .... can't wait to hear the answer to this one.
tick .... tick .... tick ..... tick
Now you're going to start misrepresenting the position of those you are arguing against.
I used the word "position", and that is what I was implying that you are misrepresenting. My plan is only to understand the truth of what the FairTax is, as compared to what is being sold.
My position is that FT is a mis-representation of something that could have promise if it were sold honestly so we could address the issues that arise from same take-home and same-prices, with the taxes moved from the income to the purchases. That would be interesting to discuss.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
Anyone living on a fixed income, or who had accumulated any wealth would have their purchasing power destroyed.
I'm not proposing any fix for AMT, and I barely have time to discuss this one obvious fallacy with the FairTax. Just because I know this plan is being misrepresented, doesn't mean I've got to suggest an alternative.
"Really?? What sort of progress and how much??"
"Look it up, we have had two rounds of rate reductions since Bush was elected. In general the rates have been going down sporadically for fifty years."
You are talking about tax relief, we are talking about tax reform. We aren't even on the same page.
AG, can you post the graph of the number of pages in the tax system? That will dramatically illustrate the "progress" we have made with our tax system over the past 50 years.
I never said I could forecast the economy, I said 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 which I'm alleging as a fact. Since the plan is being described with a mis-representation, the plans conclusion of long-term growth is erroneous because it is based on that myth.
You on the other hand must think an overnight increase of purchasing power of 25% for every wage earner in America is possible, and that it will lead to growth. I don't believe in Santa Claus any more.
You asked me to show what I meant by progress, to me tax relief is progress.
You are correct, I was mistaken. I looked at the IRS Statistics here, quoted in millions:
Individual income tax $987,209
Corporation income tax $194,146
Employment taxes $695,976
Gift tax  $1,939
Excise taxes $52,771
Estate tax $20,888
The $1 Trillion I accused you of lying about is actually $987 Billion + 1/2 of $696 Billion, or $1.335 Trillion. I will use the more accurate $1.335 Trillion number when I talk about your lie instead of the $1 Trillion. Sorry again.
discussed, negligible, less than 1%
negligible, most accounting functions still needed to run business
very negligible, still needed to defend business deductibility of expenses
unquantifiable gobbledygook- for most businesses, zilch.
sounds a lot like the last one-- for most normal businesses, nada
negligible as a percentage of sales;
Show us the the wide range statistical studies supporting your assertions. Sorry singular anectdotes and personal WAGs don't fly.
They fail to account for measured effect on macro economic level.
An American Economic Review study found that every dollar of taxes could impose as much as $4 of lost output on the economy, with the probable harm ranging between $1.32 and $1.47
Edgar K. Browning, "On the Marginal Welfare Cost of Taxation," American Economic Review, Vol. 77, No. 1 (March 1987), pp. 11-23.
"Another study in the Journal of Political Economy estimated that the corporate income tax costs more in lost output than it raises for the government."
Jane G. Gravelle and Laurence J. Kotlikoff, "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, Vol. 97, No. 4 (1989), pp. 749-780.
Economic Burden of Taxation
William A. Niskanen
Presented October 2003
Federal Reserve Bank Dallas page 6.
"Given that the elasticity c implicit in recent U.S. fiscal conditions is about 0.8 and the average tax rate is about 0.3, the marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar of tax revenue. One wonders whether there are any government programs for which the marginal value is that high. Given the estimate of the long-term elasticity c from the U.S. time-series data, the marginal cost of government spending and taxes may be as high as $4.50 at the current average tax rate. "
Which your assertions fail to do miserable.
It would appear your statement:
At this point, just a reasonable paragraph explaining where the cost savings will come from would be nice, actual proof can wait.
was predicated on you being the judge of what is reasonable.
No one should be judge in his own case.
-- Publilius Syrus (~100 BC)
"No, I think tax rate reductions, coupled with the removal of death taxes and AMT would accomplish all of these goals."
"I'm not proposing any fix for AMT, and I barely have time to discuss this one obvious fallacy with the FairTax. Just because I know this plan is being misrepresented, doesn't mean I've got to suggest an alternative."
You suggested 3 alternatives to the FairTax, all of which are revenue negative, and all you want to discuss is the "one obvious fallacy" of the FairTax? Must be nice. You don't have to concern yourself with the major economic problems which are exacerbated by our current awful tax system, nor a workable approach to addressing them, you just want to talk about how you disagree with the imbedded tax estimates.
Some of us concern ourselves with solutions and getting something done about a tax system which is a national embarrassment.
"One of the Kool-Aid drinkers was at a meeting today in Cherokee County in Alabama. Our Congressman said it was unlikely that the 'fair tax' would come to pass, but that a 'flat tax' was possible."
The "flat tax" is more than possible, it is here now. It's called the AMT.
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