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

[Judith Anne]

You know, taxes are high under almost any situation anyone could name. For me, the biggest advantage of the NRST is that it's NOBODY'S BUSINESS how much I make. The demise of the IRS is a dream of mine, I'd love to see it come true.

One other advantage is that a lot of illegal money is spent on legal "stuff." It'd be nice if illegals paid taxes on all the "stuff" they buy here, if criminals paid taxes on their lavish lifestyles, and if NOBODY could ever be a criminal again for not reporting money earned, if April 15 were just another day...

For that, I'd even pay higher taxes under the NRST.

[phil_will1]

"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?"

That is possible. There is also another possibility. Here is what Chairman Greenspan said when he met with Congressman Linder in Feb 04. "Oh, you don't have to sell me, I've studied your plan and I don't think any serious economist will disagree with you. Your biggest problem will be the inertia and resistence to change here inside the beltway in DC."

Of course, as FR illustrates every day on the tax reform threads, inertia and resistence to change isn't limited to DC.

[phil_will1]

"I never said I could forecast the economy"

Here is the exchange in question.

"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."

One of the goals that your proposal would presumably accomplish is to create more jobs and to increase the rate of economic growth. Sounds like an economic forecast to me. What am I missing here?

[ancient_geezer]

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.

Here is the most uptodate which is based on a page count of CCH's Standard Federal Tax Reporter over time.

[Search4Truth]

This would seem like a really good deal for expatriates who who receive a retirement income from investments in the US but live abroad.

[phil_will1]

"Anyone living on a fixed income, or who had accumulated any wealth would have their purchasing power destroyed."

As previously stated, anyone with substantial holdings in equities would do extremely well. Of course, you don't wish to "debate the macreconomic effects" until FairTaxers acknowledge your supremacy in estimating tax costs. You would much rather just make unsubstantiated assertions.

I see you have quickly picked up a rather nasty habit of the FR SQLs in that you make an assertion that is counter-intuitive and not backed by any research whatsoever and you expect that once that opinion is stated, it becomes the "law of the land" as far as subsequent tax threads go.

My response to that position is indicated in my tag line.

[lewislynn]

The price of bread went up 17%. Which is ok for the people who got the take-home increase of 25% or thereabouts.

Not when the expectation has been pounded in your head that you would have more money AND prices would be about the same as they are now...

[groanup]

Anyone living on a fixed income, or who had accumulated any wealth would have their purchasing power destroyed.

Those on SS only would pay no tax whatsoever. Those who had any wealth inside qualified plans would benefit greatly. Those who accumulated wealth outside qualified plans would be able to continue the growth of that money tax free. Those who really could afford to spend a lot of money would be the only ones hurt. Not that they should be.

[Gvl_M3]

You have a pretty good understanding of the Fair Tax. I've asked some questions about depreciation, but no one as addressed the specific question, which I don't think I'm expressing very well.

Here goes:
The large corporation that I work for has 30 plants in the U.S. At my plant, we have to write off 1/7th of our capital budget each year for depreciation. This is roughly $1,000,000. Lets assume it is the same at the other plants.

Under the FairTax, would this $30,000,000 fall under our income, expense, or where? Is this some of the hidden burden of the current income tax?

From reading the Fair Tax book, I understand that there are burdens of the current system that are not direct tax dollars, but more the cost of complying with the current system. I'm just trying to figure out where these costs are located.

[ancient_geezer]

Depreciation is an income tax deduction taken for reduction in value of a business asset for wear and tear.

As regards the FairTax, all business purchases are tax exempt. Only customers purchasing for final consumption (i.e. personal as opposed to business use) pay the tax.

Depreciation of a business asset has no tax meaning under a single stage (i.e. tax once) retail sales tax except in the situation that asset were to be sold as a retail item to a consumer (as opposed to another business). Then the market value of the asset established by its consumer sale at that time, would establish the retail sales tax to be collected by the business from the purchaser.

The key factor is in the sale for final consumption. In general whatever value of an item exists at its sale to a consumer, as opposed to a business, is the basis of the retail tax paid by the purchaser.

[sitetest]

Dear groanup,

The very well-off seniors and the very poorly-off seniors do well under this plan.

Looks to me that the folks in the middle get crunched.

Here's an example.

Current system:

Married couple, both aged 65.

Annual income: $60,000.

Take the standard deduction (they get four because they're both 65 or older): $12,000

Marginal tax bracket: 15%

No payroll taxes, of course.

Total federal personal income tax liability: $6,500.

Spend pretty much 100% of income (what else are they gonna do?? Save it for retirement??).

Out of their $60,000, they get to spend $53,500 under the current system.


NSRT:

Annual income: $60,000

"Prebate": $4,402

Total income: $64,402

Their equivalent purchasing power after accounting for the NSRT is: $49,589.54.

Purchasing power old system: $53,500
Purchasing power new system: $49,589.54.

Looks to me like they're screwed.

Oh well, they can go work part-time at Wal-Mart to make up the difference.


By the way, if one or both of them is legally blind without corrective eyeglasses, they're even more screwed, as they'd get extra standard deductions, and would pay even less under the existing system.


sitetest

[groanup]

A few supporters:

http://www.google.com/search?q=75+economists+fair+tax&hl=en&hs=DG2&lr=&client=firefox-a&rls=org.mozilla:en-US:official_s&start=0&sa=N

[groanup]

if one or both of them is legally blind without corrective eyeglasses, they're even more screwed

Are you sure you want to throw that in there? Do you have any idea how many people get screwed under the current system vs. how many benefit BECAUSE other people get screwed? Well, of course you do.

In your example ma and pa never buy a used car, go the thrift shop, by anything off of e-bay or take a vacation abroad.

[groanup]

Also, your example doesn't take into account any earnings on their pool of money. That would be tax free also.

[jackbill]

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?

There are already thousands of "stores" out there loaning money to the "poor" on the basis of their future EITC checks and other "benefits" - Social Security, welfare, etc.. They must be making a profit, since they are still out there. The Fair Tax just enlarges their clientele.

[Fledermaus]

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.

The single most ridiculous arguement I've read to date opposing the Fair Tax idea.

I'll make this very simple: Business already pay 100% of the wage out every payroll in the pay the employee gets and the withheld taxes to the government. PLUS they have to pay their matching FICA along with state and federal unemployement taxes so they are paying MORE than 100%. Then you add in benefit withholdings to insurance companies, financial instutions for things like 401(k), etc.

What "embedded taxes" are you talking about here? These same business are also required monthly to pay in any tax collections (sales taxes, "sin" taxes, etc) from the previous month.

What a business needs to lower the selling price is lower costs. Since this plan would eliminate corporate income taxes and the matching of FICA taxes then business will now have money they are currently paying to the government out of their profits.

[carenot]

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?

Same place Sissy's Pies gets hers?

[sitetest]

Dear groanup,

Actually, I was assuming that the income was from pensions or qualified retirement accounts, since currently, these are taxed as ordinary income.

If I were to suppose that some of their income came from non-qualified accounts bearing dividends from equities, then it may be possible that some of their income would be taxed at the 5% rate. Which makes their situation all the more dire under the NSRT.

If I were to assume further that they were, say, spending the principal of their bonds, then that makes it much worse, as that money isn't taxed at all under the present system (or rather, it was accumulated after paying tax, and when you spend the accumulated capital, you don't get taxed again).

Let's say they had $750,000 in tax-free municipal bonds yielding, say, 3%. That'd $22,500 per year. Let's say they get $20,000 from Social Security, and draw down the $750,000 by $17,500 in the first year, hoping they don't run out of money before they die ;-).

Then, there federal taxes look more like this under the current system:

Tax-free income: $22,500
Income taxable as ordinary income: $20,000
Use of principal: $17,500

Federal income tax liability: $800 (after the standard deduction, they have nearly no taxable income, and they're in the 10% tax bracket [thank you, President Bush]).

Amount available for purchases: $59,200.

Under the NSRT, their equivalent purchasing power is still: $49,589.54.

That's WAY ugly. WAY WAY ugly.

That's because cash and cash equivalents become devalued instantaneously under the new system. That $10,000 you have in the bank that would have bought $10,000 worth of new stuff will now only by $7,700 worth of new stuff.

Folks with significant cash assets that they want to spend are screwed big, big time.

Depending on what businesses do with saved corporate income taxes, so are folks with lots of stocks.

If businesses lower their prices by the 1% - 2% they save from corporate income taxes, then shareholders are generally screwed. Upon selling one's shares, one may not have to pay the 15% capital gains tax (5% for middle class and lower middle class taxpayers), but that money just won't buy as much stuff taxed at 30%.

But if businesses retain those taxes, then net, to-the-shareholder earnings go up a good bit in many cases, and the shares of many companies will rise part of the way back to make up for the NSRT, and with no capital gains tax, I suspect shareholders in most companies would at least break even.

However, then those corporate income taxes can no longer be used to reduce prices.

Oh, well.


sitetest

[ancient_geezer]

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

Last time I looked around, there already are plenty in that business already. Are we, for some reason that you see as a national priority, supposed to be concerned?

[carenot]

Fair Taxers have totally misrepresented the Harvard Study concerning embedded taxes, but what only matters is you can fool people with the arguement.

OK, nevermind the embedded taxes.
I like the Fair Tax better than what we have now.