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

[ancient_geezer]

I believe so. So far, they are preying on a relatively small portion of the population. If a "Fair Tax" was enacted, that population would increase by at least an order of magnitude.

Ohhhh, you mean like credit cards. Nasty thing credit, should be outlawed could lead to too much consum'n go'n on out there.

Can you then fathom the liberal media claiming that "the disenfranchised" are being taken advantage of and we should give them even more compensation? I can.

And why don't they do it know? Afterall it would only be a simple thing to extend the EITC in such a way as to be paid out though one's paycheck. You know something like reverse whithholding. OOPs. they do that now, nevermind.

Sorry, can't get excited about a sales tax rebate that goes to every legal resident being anything exceptional except for once everyone gets it, same as everyone pays the same tax rate.

Course we could just keep doing it like the income/payroll tax system we have:

Bush touts relief as tax day looms

Another 3.9 million Americans will have their income tax liability completely eliminated, officials said.

That's 3.9 million Americans more added to the spending constituency of 70% of the public clamoring for more from government, believing someone else foots the bill, and bypass the taxing them altogether too.

 

"As a matter of fact, what the income tax does — and this is the debate that I think we always try to get into in order to let you and him fight, see — and the people of this country are led down a path where the actual control of their resources, which in the end is the control over their will, is handed off to the government."

. . .

"The government then manipulates that will in order to destroy the freedom of our electoral system through the income tax structure, and we call the resulting slavery a free system."

"In point of fact, it is not as the founders understood, and the only way to restore real freedom is to give people back control over the income that they earn so that they won‘t, at the voting booth and in other phony issues, be subject to that manipulation."

- KEYES TRANSCRIPT (01/28/02)

 

The Honorable James DeMint (R-SC)
United States House of Representatives
APRIL 5, 2001

• "There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government.

[Always Right]

Just because YOU fail to recognize the exsistance of something does not at all mean that it doesn't exsist.

????? What are you talking about??? Jorgenson himself said the embedded taxes include employee taxes. This is not about something I fail to recognize. This is about a black and white issue of what is included in the 22% embedded taxes of Jorgenson's study. Geez, how clear can I make it.

[Always Right]

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

That's great. But sell the fair tax on its merits, not on some fairytale that everyone gets a 25% raise and all prices stay the same. I think there are some legitimate advantages to going to a sales tax, but most of what is presented are gross exagerations sprinkled with some big lies. I think going to a sales tax biggest impact will be on exports. Our exports will be cheaper, at the expense of imports being more expensive once our tax is added. That will have a positive effect on our trade balance, but will be inflationary to our consumers.

[Always Right]

That is possible. There is also another possibility. Here is what Chairman Greenspan said

Alan is a big fan of the VAT and he sees similar advantage with a sales tax. He is mostly sold on the idea of improving our trade balance. I really don't think Greenspan believes that everyone will get to keep all of their paychecks and prices will come down.

[groanup]

You gotta knock back how much of the economy runs through the govt's fingers.

I agree. But different debate for a different time.

I'd start with gradual Social Security privatization...

That horseshoe has been thrown. It wasn't even a leaner. Too many people, too stupid.

...how Social Security surpluses are currently being frittered away.

And exactly how many of your friends and neighbors are aware of that fact?

But once we did that, we'd take something like 6% - 7% of GDP away from the government and put it directly in the hands of individuals.

You're still talking about SS here. That is not the discussion. My question to you was: what about tax policy? What is yours?

Well, it depends on what you compare it to. To the possible havoc and chaos of a complete turning upside down of 100% of our federal tax laws might cause?

A couple of hundred years ago an entire nation was in upheaval. That nation adopted a set of laws that put all of the power in the hands of the people who dwelled in that nation. That had never been done before. Can you imagine the havoc and mania that should have occurred?

Well, it worked. Sure as hell did and here we are, on Free Republic debating as we should be. Free to be idiots or scholars, our choice.

[groanup]

Alan Greenspan and his ilk are Washington statists. If anything good comes out of these discussions it should be that we all accept that fact. Now let's come up with a good tax policy. The fair tax is the best place to start. I can't imagine a more fair way to collect taxes than a national sales tax.

[Bigun]

????? What are you talking about???

I'm talking about something you CLEARLY do not understand or are unwilling to admit the existence of. I'm talking about all sorts of costs, so many as to be virtually unquantifiable, imposed by the tax system that are NOT the taxes themselves and I have REPEATEDLY said that!

Think of them as unfunded mandates.

Since you clearly don't like hearing it from me maybe you will listen to someone else on the matter but I doubt it!

Here is an excert from remarks made by The John M. Olin Distinguished Professor of Economics at George Mason University, Dr. Walter E. Williams, in March of this year to a standing-room-only crowd of students, faculty, and guests at Hillsdale College's Constructive Alternatives Seminar:

"...Keep in mind that a working definition of slavery is that you work but do not have any rights to the fruit of your labor. Taxation and regulation constitute confiscation of some or all of the freedom to own and use property. This confiscation has reached unprecedented proportions. In 1902 expenditures at all levels of government totaled $1.7 billion, and the average taxpayer payed only $60 per year in taxes. In fact, from 1787 to 1920, federal expenditures never exceeded 4 percent of the Gross National Product (GNP), except in wartime. Today federal expenditures alone are $1.8 trillion - almost 30% of GNP - and state and local governments spend over a trillion more. The average taxpayer now pays more than $8,000 a year, working from January 1 to May 8 to pay federal, state, and local taxes. In addition to the out-of-pocket cost, Americans spend 5.4 billion hours each year complying with the federal tax code-roughly the equivalent of 3 million people working full time. If it were employed in productive activity, the labor now devoted to tax compliance would be worth $232 billion annually. The federal cost of hiring 93,000 IRS employees is $6 billion. If these Americans weren't fooling around with the tax code, they could produce the entire annual output of the aircraft, trucking, auto, and food processing industries combined..." Emphasis added.

And he is only talking about DIRECT costs here not intangibles such as missed opportunity costs and the like.

[Gvl_M3]

To all FairTax supporters.

I am trying to understand where the 20-25% embedded tax/cost of compliance comes from.

I have read a lot of documents on taxfoundation.com. I have seen numbers around $150 billion just for the compliance to the Income Tax. Obviously corporate income taxes and the corporate portion of the payroll tax will decrease expenses that each company pays. I also understand how the costs cascade up the line from raw material to retail purchase.

Like I mentioned earlier, if depreciation is a compliance cost, our company could get a $30 million benefit from the Fair Tax.

Can someone give me a link to where this research is spelled out so I don't have to do all this myself?

[Always Right]

I have granted there are costs of compliance, with the business share being roughly $100 billion. But what does that have to do with the mammoth lie that everyone gets to keep all their paycheck and prices come down 22 percent? Jorgenson's study absolutely did not say that, but that is what fair taxers are saying it does.

[Gvl_M3]

Bigun

You posted while I was typing.

Do you have a link to this, or his research?

[SALChamps03]

It seems that you are the one who doesn't understand the embedded tax. The taxes deducted from an employee's paycheck do not go to the employer. Where did you get that idea? The taxes deducted from an employee's paycheck go to the government.

The embedded taxes are the taxes that are collected by companies and passed on to individuals through higher prices. If a company is taxed on their earnings, then they will merely raise the price until they are getting what they need to get for each unit sold. If those taxes are removed, then the price will drop accordingly. While this is going on, the employees are still getting 100% of their paycheck, minus voluntary deductions for retirement, etc. So, instead of paying withholding for social security and federal income taxes, an employee will not have these taxes deducted from their paycheck. Instead, the taxes will be paid whenever a purchase is made.

The purpose of the fair tax is not to cut taxes. It is to eliminate the IRS, and all the costly paperwork that goes along with this federal beast, and to pick up new sources of revenue. People who participate in the underground economy do not pay income taxes, but they buy gasoline, bread, cars, jewelry, etc. They cannot avoid these taxes. therefore, income that was not being collected by the government will now be collected.

So, the IRS is gone, prices are about the same, because the 23% is already being paid in embedded taxes that are passed on to the consumer, but now this 23% will only be paid when you buy something. There is no tax on savings or capital gains, estates, etc. Plus, rebate checks are given up to the poverty level for basic necessities. The biggest benefit besides elimination of the IRS is that suddenly, anyone, whether they are a citizen of the US or not, will pay taxes when they shop in the US. That's new revenue. Additionally, even illegal aliens can't escape paying taxes under this method. That's new revenue, because many pay no taxes.

[Sprite518]

I think you are a little bit confused. Dr, Jorgenson was only factoring his formula it from the Seller perspective, and not the consumer. The fair tax would thus eliminate those taxes since it is a RETAIL tax only. After all the real name to it is the National Retail Sales Tax or the NRST. The name the Fair tax came from people who studied it. They realized this would be the fairest tax, and thus that is why we call it the fair tax.

[Always Right]

Like I mentioned earlier, if depreciation is a compliance cost, our company could get a $30 million benefit from the Fair Tax.

The only thing about depreciation that is a compliance costs is the time it takes to track it and to fill out any applicable IRS form.

Can someone give me a link to where this research is spelled out so I don't have to do all this myself?

Dr. Jorgenson formally of Harvard did a study of embedded costs in 1997 for the fair tax organization. This study is not available anywhere on the net. I assume the fair tax organization has it, but since they grossly misrepresent what Jorgenson is on record as saying, I highly doubt they will ever release it.

[SALChamps03]

Any business that doesn't lower the prices will go out of business.

[SALChamps03]

OK, cite the lies and misrepresentations.

[groanup]

You should go get an accounting 101 book and learn what depreciation is. Until then you are making yourself look just a little less than Einstein.

[SALChamps03]

Why will wages have to drop 25%? The company has already figured their wage percentage. They can sell the same product at a cheaper price and make the same profit per unit. Explain why you feel a wage decrease is also necessary.

[Your Nightmare]

Ten percent is a maximum cost savings in my estimation, without the employer half of payroll it would be more like 2-3% cost savings.

Let's look at the numbers.

The FairTax base for 2004 would have been ~$9,716 billion. Add $1,173 billion in exports to that (they claim taxes are embedded in them too) and you get $10,889 billion. This is the amount that is suppose to be reduced by ~22% (btw, that would be a $2,395 billion reduction).

In 2004, corporate income taxes were $189.4 billion, add half of the employment and general retirement receipts ($344.6 billion) and you get a grand total of $534 billion in tax revenue from corporations. That is 4.9% of the FairTax plus exports! (If they squawk about including exports, corporate taxes would be 5.5% of the FairTax base alone.)

That's a loooong way from 22% ... about $1.85 trillion!

[groanup]

"Can someone give me a link to where this research is spelled out so I don't have to do all this myself?"

http://www.fairtax.org

[Always Right]

It seems that you are the one who doesn't understand the embedded tax. The taxes deducted from an employee's paycheck do not go to the employer. Where did you get that idea?

From the guy who did the study, Dr. Jorgenson. He included the employees tax when he figured out what the embedded taxes were. Without counting the employees taxes they pay, there is no 22 percent embedded taxes.