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

[pigdog]

It's no fairy tale and no "big lie" as you like to promote.

As to imports being affected - sure thay will be; by the amount of the FairTax on those things that are taxable. Whether this raises prices to consumers or not is hard to tell since probably its biggest effect will be to slow sales of imports meaning that consumers buy less of those higher-priced imported things (and not pay more for them, though a few will).

[SALChamps03]

The price reductions are a result of a lower cost per unit. Any businessman will lower the price when his or her costs are significantly reduced. You can sell more product, and earn a higher overall profit because you will sell many more units.This happens now.The average markup in perishable grocery items is 35%. I know because I spent 20 years in the grocery business.

Let's say bread costs me 75 cents a loaf at wholesale. I am being taxed at about 23% on my earnings, which raises my cost to 92 cents. Then I mark the bread up 35%, which brings the retail price to $1.24 per loaf.

Now, let's look at the fair tax system. Under this system, that 23% tax paid by the employer on each unit vanishes. Now it costs me just 75 cents per loaf, not 92. So, I mark it up 35%. This gives me a retail price of $1.01 per loaf. Now, when you add the 23% sales tax the total cost per loaf to the consumer is $1.24-exactly the same. There may be a variance of a few cents,but the price will be essentially the same. Therefore, I can sell the same amount of bread each week that I was selling before.

But, now the consumer is getting a larger paycheck each week because no taxes are withheld. So,the consumer might buy an extra loaf of bread per week, because he or she has more disposable income.

All the while this is happening, the IRS ceases to exist. The cost of paperwork to help look for tax loopholes is gone. The loss of productive time spent contemplating the tax implications of every business decision is gone. Now, if any business tries to keep selling bread at $1.24 before the 23% sales tax is added, then this pushes the cost to the consumer up to $1.52. How many loaves will I sell at $1.52, when everyone else is selling it for $1.24 total cost? This is a win-win situation for the government and for Americans.

[RobFromGa]

As to the depreciation, the only thing I found on that was its reference to the tax code. That is why I'm asking. If you could show me the other costs, I wouldn't have to "look less than Einstein."

It was already explained earlier that depreciation is not an additional cost, it is a way to spread a cost over multiple tax years so that the piece of capital equipment is used up and written off at about the same rate". There is no millions to save your company.

I've spent the last 3 hours reading that site trying to find where they calculate the 23% total embedded costs.

You can quit looking it is not there.

I hate to say it, but I'm starting to see where RobfromGa is coming from. I really want to believe in the Fair Tax.

It would be nice if everyone could gain 25% in purchasing power overnight but it is obviously impossible. There is no 22% embedded tax savings to remove from the average business without including the income and payroll taxes. It just isn't there.

[sitetest]

Dear pigdog,

You're still confusing rates of taxation on profit with rates of taxation as expressed as a percentage of revenues.

Get back to me when you understand the difference between profit and revenue.


sitetest

[Always Right]

It's no fairy tale and no "big lie" as you like to promote.

So $1.335 Trillion is not big? To me an error that amounts to over 10% of our total economy is pretty big, but that is just me.

[groanup]

I don't have to like your answer because, for one thing, it was evasive and didn't ANSWER. That's okay. We're used to it. We have been vilified because we simply want a fair system of taxation. You guys have pointed out valid problems with our solution. WE ASK: what would you, far more brilliant minds, do? We are successful in spite of our tax code. It certainly doesn't abet our commerce it inhibits it.

So we shouldn't go off and do the wrong thing you say. Well? The right thing is? Keep it like it is? I know there are people on this thread that would certainly like to do that. It was once said of some of them that they sell "How to Avoid Income Tax" kits. I believe it.

You see fiction in the embedded taxes, you see fiction in the economic effect.

I ask you again a question you have so far eluded: what would you do? Do you favor staying with the current situation or do you favor some form of reform? If reform, what? If status quo I have a pot full of acorns for you.

[Your Nightmare]

The FairTax base is consumption, not income. Your numbers are a bad set of mix and match foolishness - and untrue to boot.

That is consumption. I used the PA FairTax group's calculations as a guide>

You are mixing income tax bases and consumption tax bases - and the two are quite different and cannot be manipulated like that.

I am not mixing bases. You just don't want to believe it.

[sitetest]

Dear SALChamps03,

"Let's say bread costs me 75 cents a loaf at wholesale. I am being taxed at about 23% on my earnings, which raises my cost to 92 cents. Then I mark the bread up 35%, which brings the retail price to $1.24 per loaf."

Not quite.

Your earnings are your pre-tax net profit, not your costs. Not your selling price.

Income taxes are on income, not on revenues. Income = Revenues - All Costs.

If the bread costs you 75 cents wholesale, and your labor costs, rent, everything else, are another 20 cents, that totals 95 cents. If you then sell the bread for a dollar, you make a nickel.

Five cents is your pre-tax profit.

If you pay 35% of the nickel in taxes, that comes to 1.75 cents.

As to the corporate income taxes that supermarkets pay, well, supermarkets have notoriously slim profit margins, thus, they don't pay much by way of income taxes.

For the fiscal year ending Jan 1, 2005, Safeway, Inc. had:

Revenues (sales): 35,822,900,000
Pre-tax profits (earnings, income): 793,900,000 (2.2% of revenues)
Income taxes (federal and states combined): 233,700,000 (0.65% of revenues)

Thus, at least at Safeway, that $1 loaf of bread can be reduced to $0.9935 after reducing the price of the loaf of bread by the amount of Safeway's corporate income tax burden.

As for the 0.65 cent, don't spend it all in one place. ;-)


sitetest

[RobFromGa]

Your post is full of errors, but I'll point out one. You say:

Let's say bread costs me 75 cents a loaf at wholesale. I am being taxed at about 23% on my earnings, which raises my cost to 92 cents.

What is the relation between the wholesale price of bread and your earnings? Your earnings are not the wholesale price, they are whatever you have left over after you buy the bread, incur all the costs of selling it, and then you have a profit left over.

In your example, if the wholesale price of bread is $0.75 and you marked it up 35%, the bread price would be $1.01. After you finish selling it for $1.01 and subtracting the cost of the wholesale loaf $0.75 and paying off your employees and the cost of the store, you'd likely have less than $0.05 in profit left, which you would then pay 23% income taxes on. which comes out to between one and two cents tax, which is 1-2% of your selling price. Not 23%.

There are other equally incorrect assertions in your post.

[RobFromGa]

LOL, see my 329 I was typing about the same thing as you were at the same time.

[groanup]

In fact, the success we have speaks volumes about the entreprenuerial spirit of people in this country. Even thought they have the ball and chain of every dollar they EARN being partially ripped away from them and having their entire earnings history supplied to the IRS as SECRET information they still manage to create new ideas, jobs, companies, money and such things as life saving drugs, hit records, safer cars, quieter hair dryers, need I go on?

You guys don't really get the idea. You unleash the spirit of free people and you DON'T impose a tax upon their efforts. You impose a tax upon their decadence. It really isn't that hard to understand. If the fair tax isn't the way to do it what is? Or would you guys prefer to continue to tax my wages and profits?

[pigdog]

Sorry, Nightie, but it IS a cascading of taxation. The example you present is quite different and is your same old trick of trying to squash all the levels into one so that the result is warped.

It is you who are adding the tax at each stage ("cumulative tax") and that is unrealistic as is the cumulative tax so derived to calculate a meaningless "effective tax rate". This is the same thing you tried with your earlier examples and it is not meaningful (despite Tait's comment in his VAT elucidation).

The example I have given shows the mechanism more clearly and the 12 cents you comment on which goes to the next level is then cascaded by appearing in the input costs to that stage and some part of it being multiplied (a tax being taxed) by the parameters there. The fact that is does not pile up as rapidly as your example doesn't concern me nor does its upper limit since it is the mechanism that is being illustrated and your example does not do that at all well.

Interesting, though, is the fact that you are now arguing that not only that there are, indeed, embedded taxes (and remember we have left off payroll/withholding and compliance costs) but you now are claiming that they are much, much higher after all. The Squirrels may start nibbling on you, Nightie.

[pigdog]

Those are even less meaningful that the ones you come up with. His numbers are drawn from a cocked hat, it seems.

[sitetest]

Dear groanup,

"I don't have to like your answer because, for one thing, it was evasive and didn't ANSWER."

No, I didn't evade your question. I gave you my answer.

Cut the size of government first. A lot. Privatize Social Security. Good first start. Throw some departments over the side. Commerce. Energy, Education. You know, the actual Republican agenda for which we voted when we elected a Republican Congress in 1994.

There isn't the political will? Well, that's not a good reason to then turn to a bad alternative.

"You guys have pointed out valid problems with our solution."

Well, then, what's the problem? That I don't want to implement a badly flawed "solution"? That I don't want to jump from the frying pan into the fire?

I guess, my view is that we have cancer (Two entitlement programs that are overgrowing our ability to support them: Social Security and Medicaid.).

My vote is to treat the cancer.

You say, "No, we can't treat the cancer because we don't have the political will. So, let's treat the patient's slow-healing skin lesions. With this really neat medicine we just found in the closet."

I look, and you're holding a steroid that will certainly take care of the skin lesions, because it promotes growth of skin & things. And cancers, too. It makes cancers grow, too. Did I mention the patient has cancer?

I appreciate that you want to take care of the skin lesions. After all, they can be sites of infection, they're painful, and they can lead to further health problems.

I just don't want to treat it in a way that fails to treat, or perhaps makes even worse the more serious, deadly disease.


sitetest

[sitetest]

Dear pigdog,

"Those are even less meaningful that the ones you come up with. His numbers are drawn from a cocked hat, it seems."

LOL. Actually, in some cases, the numbers, at least the revenue and the tax numbers, are drawn from corporate 10-K statements.


sitetest

[sitetest]

Dear groanup,

"In fact, the success we have speaks volumes about the entreprenuerial spirit of people in this country. Even thought they have the ball and chain of every dollar they EARN being partially ripped away from them and having their entire earnings history supplied to the IRS as SECRET information they still manage to create new ideas, jobs, companies, money and such things as life saving drugs, hit records, safer cars, quieter hair dryers, need I go on?"

I've started several companies over the last 20 years. A couple did pretty good, some, well, LOL, they're not around anymore. Expensive learning experiences.

I've encountered lots and lots of problems and difficulties, but I've managed to overcome them and succeed modestly, even to this day.

However, I gotta tell ya, groanup, the IRS and the tax code and my tax obligations are not my biggest problems. Nor my second, third, or fourth biggest.

Stuff like getting good workers, getting more clients, moderating the compensation demands of my workers, keeping my billing rates high enough, managing our work projects, managing my contracts, managing my employees, these all take more effort, imagination, and hard work than taking care of my taxes.

Taxes are too high. That the govt takes 20% of GDP distorts the economy, I agree.

But it's the size that matters, in my eyes, not the method.

"You unleash the spirit of free people and you DON'T impose a tax upon their efforts."

MY spirit's already been unleashed. For 20 years. I can't speak about your spirit.

"You impose a tax upon their decadence."

Ah... Is this what it's about? Consumption is decadent? LOL. I have a big house in an expensive neighborhood, three luxury cars, and a bunch of other good stuff. Am I decadent? * chuckle * Sounds like the cry of an angry class warrior.


sitetest

[lewislynn]

What justification would also require wages to decrease?

Actually it would be the withholding. The employee's withholding would have to be retained by the employer to achieve the 20% + price reduction...That means no 100% paychecks.

The justification is simple business logic and grade school math.

[sitetest]

Dear RobFromGa,

That was kind of amusing.

It seems to me there is more than one NSRT proponent who struggles with differences between income, and revenues, and costs, and tax basis.

Oh well, it's late. I have a long day ahead of me tomorrow.

Gotta carry my tax ball & chain to go meet potential new clients.

LOL.


sitetest

[lewislynn]

Let's say bread costs me 75 cents a loaf at wholesale. I am being taxed at about 23% on my earnings, which raises my cost to 92 cents.

You didn't earn 75 cents, you spent it...You don't add income tax to money you spend...

Then I mark the bread up 35%, which brings the retail price to $1.24 per loaf.

If the bread cost you 75 cents and you sold it for $1.24 your earnings are $0.49 If your tax rate is 23% on $0.49, your tax is $0.11 you could reduce your gross price/wage to $1.13 or about 9%...Then you'd owe 23% of the $1.13 to the Fairtax making your net income $0.87. From that you'd have to buy more bread, pay business expenses, rent etc. If it's all profit, what happens when you spend your $0.87? You know you still have tax to pay ..Your $0.87 will only purchase 23% of that or $0.67 worth of product....

Now, let's look at the fair tax system. Under this system, that 23% tax paid by the employer on each unit vanishes.

Where did it go?

Now it costs me just 75 cents per loaf, not 92.

You're adding the income tax before there's any income. You don't add your income tax to the purchase price....everything you've done after that is nonsense.

So, I mark it up 35%.

Mark what up 35%?

This gives me a retail price of $1.01 per loaf. Now, when you add the 23% sales tax the total cost per loaf to the consumer is $1.24-exactly the same.

The Fairtax when added is 30% not 23%.

The fairtax is "23% of the gross payment"....Your entire premise is grossly flawed, void of any logic.

[goldstategop]

On the off chance you're right, the higher prices would be canceled out by the higher pay workers take home. So you would actually be paying less than under our current system, all things being equal. The important thing to remember is you pay the tax ONCE. Now you pay taxes several times from the moment you make it to the time you spend it. So we actually pay more and that's true because we pay taxes SEVERAL times. The fair tax commends itself by making you pay just one time. And it doesn't grab 50% of your income through various embedded taxes you can't see but you feel in the little money the government begrudges you to keep. See, as a philosophical argument, it goes like this, if you put the math aside: the income tax crowd holds the money is the government's. The fair tax folks insist its yours. And to my mind, that makes all the difference.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)