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
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
If the market can bear $1.23, then that's all it can bear. If the vendor is still getting $1.23, then you are not adding the 23% tax, which will make the price $1.61. So this vendor, whose cost has been reduced by 23% is trying to get $1.61 for a loaf of bread, when everyone else is lowering the price and selling more loaves, which results in a higher total profit. Competition will make the price go down.
If the market can bear $1.23, then that's all it can bear. If the vendor is still getting $1.23, then you are not adding the 23% tax, which will make the price $1.61. So this vendor, whose cost has been reduced by 23% is trying to get $1.61 for a loaf of bread, when everyone else is lowering the price so that the total price including the tax is about $1.23, and selling more loaves, which results in a higher total profit. Competition will make the price go down.
The Biggest lie about the fair tax is that everyone gets to keep 100% of their current paycheck AND prices still fall 22% because of 'embedded taxes'. The argument quotes a 1997 study done by then Harvard Professor Dr. Dale Jorgenson. Boortz tells us:
"Harvard economists have estimated this embedded tax to be around 22 percent of the cost of those goods. That 22 percent represents the payroll taxes and corporate business and income taxes paid by every manufacturer, shipper, wholesaler, merchandiser and retailer having any connection whatsoever with the product you have purchased. These taxes are all added to the cost of consumer goods."
According to Neal the 22% embedded taxes does not include the $1.3 Trillion of taxes paid by employees through income taxes and FICA. However, the Harvard economist who did the study says otherwise. In testimony the House of Representatives (see page 105 on link http://www.access.gpo.gov/congress/house/pdf/104hrg/26312.pdf), Dr. Jorgenson says:
"Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay income taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent."
There is no evidence to support this claim. Why would wages have to decrease after taxes on businesses, that are passed on to consumers ANYWAY are eliminated. What justification would also require wages to decrease?
There is no evidence to support this claim. Why would wages have to decrease after taxes on businesses, that are passed on to consumers ANYWAY are eliminated? What justification would also require wages to decrease?
Exactly.
Because the taxes currently in the wages are also passed on to the consumer. If these taxes go in the pocket of the employee, the added sales tax will increase the price of goods. Employees will have more money to spend, but prices for everything goes up. The only way to keep prices level would be for employees to take a pay cut in the amount of federal taxes they currently pay. There is no free ride simply by shuffling how taxes get paid.
In 2001 (for which a goodly amount of numbers are available), taking only major industries (Form 1120) from the IRS SOI Tax Stats it seems that almost a million businesses had $595.4 Billion subject to tax and actually paid $204.8 Billion. This appears to me to be a tax rate of about 34.4% and nothing like the low percentage numbers you're been hyping for tax rates.
'Course the IRS is probably wrong, right?
In addition, there are many more S-corps, partnerships, and individual proprieterships and they pay taxes as well possibly even in a higher tax bracket but surely not dramatically lower.
Perhaps you have some better source thatn the IRS SOI?
$595 Billion of taxable profit probably represents more than $4 Trillion of Gross Revenues. Since the fair tax is taxing gross sales, looking at a percent of tax of the profits is not valid.
You've been making this claim regularly with no demonstration of its veracity. Show us where Dr. J. makes the inclusion of employeee taxes that you claim he did. And don't bother to post that ridiculous conditional statement that Nightie and others have been posting hoping to fool some people. That shows nothing of the sort.
Let's see your unequivocal demonstration where he did as you claim. Counting the employees taxes as you claim is nonsense.
Your post reads like a regurgitation of the book which includes the mis-representation that employees will increase their purchasing power by 25+% overnight with the FairTax.
The FairTax base is consumption, not income. Your numbers are a bad set of mix and match foolishness - and untrue to boot.
You are mixing income tax bases and consumption tax bases - and the two are quite different and cannot be manipulated like that.
"Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay income taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent."
This clearly shows when Jorgenson was talking about the 20% prices would fall due to embedded taxes, he absolutely included employee paid taxes. Of course the fair tax organization owns Jorgenson's study and could produce it anytime they want to. But of course they do no want to.
Just read this thread from start to end, it is all spelled out in black and white-- both sides.
If Dr. J's study is not available anywhere on the net, hopw is it you claim to know so much about it and how he does things???
Seems a BIT inconsistent.
Dear groanup,
" You're still talking about SS here. That is not the discussion. My question to you was: what about tax policy? What is yours?"
I told you, groanup. If you don't like my answer, that's fine. It doesn't change my answer, which is, until you start to resolve the problem of the size of the federal government, you're addressing the wrong question.
If what you're saying that it isn't politically feasible to do the right thing, that doesn't mean we should go off and do the wrong thing. I don't believe that the transition to an NSRT would do less than badly harm the economy, possibly permanently, as long as the government is trying to collect 20% of GDP that way. I also don't believe that collecting 20% of GDP in that way would be anything less than very harmful to the economy, even on a steady-state basis.
"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?"
Actually, the period between the beginning of the Revolution through some time after the adoption of the Constitution saw plenty of havoc and danger and difficulty, plenty of disruption and upheaval, death and destruction, and loss of fortune.
"Well, it worked."
Yup. It worked. Not without great cost. Nonetheless, it worked, and it's still working. Even economically.
While most of the rest of the world struggles, we seem to keep chugging along.
That's a key difference between now and 200 years ago. Two hundred years ago, things really WERE broken.
Today, there are things that could work better, but our economic system is far from broken. It is still the envy of the world.
From my perspective, you want to implement a proposal that I believe actually will break it. You don't see it that way, of course. If you did, you would oppose it, because you're a loyal, patriotic American, at least, from what I can see.
But so am I. And my perspective, that comes from my own experiences, experiences of a business owner of 20 years, experiences of someone with some formal knowledge in the matters at hand, experiences of an experienced, long-term investor, experiences of someone who has seen ideas come and go all my life, experience that tells me that 1. much of what is being promoted here is just fiction; 2. what is actually true and good about an NSRT isn't enough to put at risk an economic system that mostly works, and works better than mostly anywhere in the world.
I've tried to hammer at the fictions presented here in these threads. Seventeen percent embedded corporate income taxes. * chuckle * A small business owner's personal income taxes are now his business taxes. LOL!
That these and other proven fictions are bandied about by the proponents of the NSRT, and appear to be little questioned by any of you does not inspire confidence in me that your judgment is superior to mine.
I see neither the crisis that you see, nor do I see in the NSRT the solution to the problems we actually do have.
sitetest
"If you are really trying to be helpful, give me a link to a specific article"
http://www.google.com/search?hl=en&q=75+economists+fair+tax&btnG=Google+Search
Please, knock yourself out.
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