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
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
"Depending on what businesses do with saved corporate income taxes, so are folks with lots of stocks."
Let me see if I understand this. Under the FairTax
1. the USA becomes the largest tax haven in the world
2. the cost of doing business in the USA decreases significantly
2. the demand for US produced goods goes up substantially
3. businesses would expand to meet the increased demand
4. $11 trillion in capital would be freed to return home and be invested in expanding our own businesses.
And in the midst of this, people owning stocks would get killed? Amazing the lengths you guys will go to, just simply amazing.
Tell that to Ma and Pa Kettle who have been saving all their lives and just retired last month with a fixed chuck of money. Or Uncle Irv who is retired on a corporate pension of $2300 per month fixed. Or for all the millions of people who have saved and invested part of their paychecks rather than spent all of their income.
Because, "on the off chance I'm right" they just got hammered big time. Their purchasing power destroyed.
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.
This is untrue, the FairTax crowd insist that the exact same amount of money is the government's (remember revenue nuetrality), they just differ in the way the govt collects it.
This is the point we are debating, point not conceded.
2. the demand for US produced goods goes up substantially
3. businesses would expand to meet the increased demand
With #2 in question, these are based on a flawed premise.
4. $11 trillion in capital would be freed to return home and be invested in expanding our own businesses.
I assume this capital is already being invested somewhere where it is throwing off returns.
These businesses are all going to get smaller by your version of the plan, because you assume that selling prices will drop substantially. So under Fairtax math, the company now selling $10 million worth of goods or services will become a $7.7 million in sales company, who also happens to collect $2.3 million in taxes for the government. And since consumption (or you can call it decadence like some) will be taxed so that could very well have the kind of impact that you would expect-- less consumption.
I don't think you can state with any certainty that the stocks would do much better under FairTax. They could just as well get hammered. But you need to get a handle on what the first tier effects will be on wages, prices, and profit margins before you can begin to estimate what will happen to the stock market which is several steps removed and is based on things like forward growth rates, and investor confidence, and how much money there is to be invested.
This study is not available anywhere on the net.
One study available on the internet of a barebones NRST replacing only the income tax compared with the Armey/Spector Flat Tax doing same came up with a 20% drop in prices received by the producer in first year for the NRST, 6-8 percent for the Flat Tax.
http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf (November 6, 1998 revised 1999)
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.
If you want a copy of the specific study done for the FairTax, all you have to do is drop AFFT an email and they will send you a PDF copy of it just as they did for me.
Here is a summary results taken from my copy that study:
| THE ECONOMIC IMPACT OF THE NATIONAL RETAIL SALES TAX By Dale W.Jorgenson May 18, 1997 Final Report to Americans For Fair Taxation INTRODUCTION AND SUMMARY The purpose of this report is to analyze the economic impact of substituting the National Retail Sales Tax (NRST)for individual and corporate income taxes,the Medicare,Social Security, and FUTA payroll taxes,and the estate and gift taxes.1 I consider a revenue neutral substitution-one that leaves the government deficit unchanged. Finally,I focus on the impact of this fundamental tax reform on economic growth over the next quarter century. I have summarized my conclusions in a series of charts: 1.The revenue neutral substitution of the NRST for existing taxes would have an immediate and powerful impact of the level of economic activity.The first chart gives a projection of GDP under current tax law. The second chart shows that GDP would increase by almost 10.5 percent in the first year.This increase would gradually decline to a little under 5.4 percent over the next twenty-five years. 2.Taxation of consumption would induce a radical shift in the composition of economic activity-away from consumption toward investment. The third chart shows that real investment would initially leap by a staggering 76.4 percent and then gradually fall to about 15 percent higher than under existing taxes. The third chart reveals that real consumption would initially decline by 9.1 percent. However,consumption would overtake the level under existing taxes within five years and grow rapidly under the NRST. 3.Holding net foreign investment constant,the fourth chart shows that exports would jump by 26.4 percent under the NRST, while imports would rise only modestly. This is the consequence of excluding exports from the tax base while including imports. The initial export boom would gradually subside, but exports would ultimately remain more than 13.3 percent above the level under the current tax system, while imports would fall a modest 0.9 percent below this level. 4.As a consequence of the elimination of taxes on capital income,individuals would sharply curtail consumption of both goods and leisure. In addition,the implied subsidy to leisure time would drop to zero under the NRST; under the existing tax system this is equal to the marginal tax rate on labor income. The fifth chart shows that the NRST would generate dramatic growth in the capital stock and a sharp initial rise in the labor supply that would gradually decline over time. 5.Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart,would fall by an average of twenty percent.The seventh chart shows that industry outputs would rise by an average of twenty percent with substantial relative gains for investment goods producers. 6.In the long run producers’ prices, shown in the eighth chart,would fall by almost thirty percent under the NRST.In addition,the shift in the composition of economic activity toward investment and away from consumption would drastically redistribute economic activity among industries.The ninth chart shows that production would rise in all industries,but the increase in production of investment goods would be relatively greater. 7.The imposition of the NRST would produce a sharply higher tax rate on consumer goods and services, but the tenth chart shows that the initial consumption tax rate would be twenty-three percent at both federal and state and local levels or only 18.4 percent at the federal level. This would gradually rise over time,but remain below thirty percent or 23.8 percent at the federal level. |
"I don't think you can state with any certainty that the stocks would do much better under FairTax. They could just as well get hammered."
I not only CAN state that with certainty, I HAVE done so. If you want to deny the obvious, that is your prerogative. I know of no serious study of the economic impact of taxing consumption that validates your concerns or those of sitetest's. None whatsoever. Zero.
Your denial of the benefits of moving from a coercive to a voluntary tax system in your previous post was quite revealing. Your reasoning is that that difference is inconsequential, since the proposal is revenue neutral. If, after all this time of examining the FairTax, you still don't grasp that fundamental difference, there probably isn't anything that I can say. What I am learning is that some people understand the abstract concept of freedom, and some don't.
"1.The revenue neutral substitution of the NRST for existing taxes would have an immediate and powerful impact of the level of economic activity.The first chart gives a projection of GDP under current tax law. The second chart shows that GDP would increase by almost 10.5 percent in the first year.This increase would gradually decline to a little under 5.4 percent over the next twenty-five years."
Thanks for posting that, AG. It is good to put some of the comments on this thread in their proper context. The naysayers are quick to point to Jorgenson and interpret his meaning with respect to the treatment of employee paid taxes, but they completely miss the big picture of his study. 10.5% GDP growth in the first year is SMOKING. I doubt that the USA has had a year like that in the last century or so, not even in the go-go 90s. Other economists have shown similar findings, some, I believe, with even higher 1st year GDP growth estimates.
And yet here we have the naysayers predicting economic collapse and a stock market crash. Amazing, just amazing.
Are you new here? They've been posted on FairTax threads for the past several years. I used to post aggressively on these threads years ago, pointing them out, but I stopped when I realized the FT proponents have blinders on, so it's a hopeless cause convincing them.
Did you even read the article at the top of this thread?
Well I feel pretty Free right now. And I don't exactly see how paying the FedGov even more money than we do now, so they can in turn mail us back each our "allowance" every month is any more Free.
You saying it is more "Fair" and more "Free" doesn't make it so. I am still more concerned that those who are promoting it can't sell the plan based on its actual merits and instead find it necessary to embellish the benefits into fantasy land in order to draw backers.
The FairTax as it is sold is like one of those "Congratulations, you just won a 7 day cruise" faxes. The more you dig into the fine print the more realistic it sounds. You guys are still stuck on the misleading headline, and you want to talk about the free breakfast that comes with the cruise every day, rather than what the "free" cruise is gonna cost.
Because TANSTAAFL applies. (There Ain't No Such Thing as a Free Lunch) and a 25%+ increase in purchasing power for every American wage earner is like saying we'll give you your house payment for free every month. It can't happen, the money is coming from somewhere, either lower wages or higher prices.
He's claiming prices would fall by twenty percent because (since) producers are not paying tax on profits and workers are not paying taxes on wages.
Do you dispute that he thinks that this implies that the producer is expected to realize a cost savings from the fact that workers are not paying taxes on wages?
And do you dispute that the only way the producer is going to recognize a cost savings is if he doesn't give his workers 100% of the same gross pay he is now giving?
So, this means that Jorgenson's model was based on the wage earners NOT getting their entire 100% current paycheck, but instead they would be getting 100% of a new gross paycheck, about the same as what they are now getting after payroll and income taxes.
FairTaxers are misrepresnting this study to sell their plan.
10.5% GDP growth in the first year is SMOKING.
That kind of growth certainly does not support any ideas of falling wages or business profitablity with lower producer pricing structures due to the repeal/removal of federal business taxes from the backs of our businesses.
With higher production that goes with that level of growth, the increase in demand for additional labor precludes any such notion.
The following is a table constructed from the information in the Jorgenson FairTax study showing the increase in production quantity, change in producer price.
In the third the final column I computed the price,(based on a 23% NRST) paid for consumption by an assumed "retail" customer for each business sector via:
Price(consumer)% = 100*((1-Price(producer))/(1-Rate(nrst)) - 1)
and present the change in NRST inclusive price to a final consumer in the last column of the table.
Presuming sector goods or service are sold to a final consumer for each sector the net change to consumer is represented in the last (shaded) column. Those shaded red represent net price increases (NRST inclusive) to the consumer.
I would submit that those NRST inclusive consumer price changes are within ±5 percentage points of the actual values that can be expected.
| First Year 1996 Percentage Changes for FairTax legislation, replacing 1996 tax law | |||
| Business Sector | % Change Production Quantity |
% Change in Producer Prices |
% Change in Consumer Prices |
| Agriculture | 22.8% | -22.26% | +0.96% |
| Metal Mining | 31.96% | -22.51% | +0.64% |
| Coal Mining | 13.77% | -24.63% | -2.21% |
| Crude Oil | 5.10% | -13.25% | +12.66% |
| Other Mining | 34.99% | -23.50% | -0.65% |
| Construction | 55.28% | -24.48% | -1.92% |
| Food Products | 20.79% | -22.84% | +0.21% |
| Tobbacco | 34.00% | -25.14% | -2.28% |
| Textiles | 32.58% | -23.21% | +0.27% |
| Apparel | 17.89% | -19.19% | +4.95% |
| Lumber, Wood | 53.14% | -22.51% | +0.64% |
| Furniture | 73.63% | -22.36% | +0.83% |
| Paper | 28.13% | -22.81% | +0.25% |
| Printing | 15.22% | -24.91% | -2.48% |
| Chemicals | 33.91% | -21.83% | +1.5% |
| Refining | 6.22% | -16.05% | +9.03% |
| Rubber, Plastic | 49.96% | -22.66% | +0.44% |
| Leather | 24.13% | -15.25% | +10.06% |
| Glass, Inc. | 48.25% | -22.63% | +0.48% |
| Primary Metals | 38.62% | -20.72% | +2.96% |
| Fabricated Metals | 47.29% | -23.20% | -0.26% |
| Non-electric Machine | 55.86% | -22.26% | +0.96% |
| Electric Machinery | 55.25% | -21.04% | +2.54% |
| Motor Vehicles | 60.82% | -18.53% | +5.81% |
| Other Transportation | 16.90% | -23.80% | -1.04% |
| Instruments | 24.51% | -22.89% | +1.00% |
| Miscellaneous Manufacturing | 57.57% | -17.95% | +1.07% |
| Transportation | 17.71% | -24.45% | -1.88% |
| Communication | 14.79% | -25.30% | -2.99% |
| Electric Utilities | -9.05% | -23.51% | -0.66% |
| Gas Utilities | -8.29% | -20.03% | +3.86% |
| Trade | 28.87% | -25.43% | -3.16% |
| Finance, etc. | 16.93% | -24.87% | -2.42% |
| Other Services | 12.04% | -25.43% | -3.16% |
| Government Enterprises | 18.56% | -25.57% | -3.34% |
All of this Jorgenson stuff is based on the idea that workers will receive smaller gross pay, it all falls apart once you give the workers their full paycheck.
And it is ten years old, the tax code, and the world has changed. Businesses have become more global, and eliminated layers of cost, corporate and capital gains taxes have changed, income tax rates have been lowered.
Get Jorgenson to do a new study, and make it clear to him that you want him to be sure and keep all the workers and business owners getting to keep their income and payroll taxes as a windfall pay increase, and have him turn his Big Ol' Econometric Forecasting Machine back on and see if it doesn't spit out something awful.
Note that even under his flawed assumptions, he still had Crude Oil and Refining with large increases. With realistic current numbers those will only get worse.
What you're forgetting is that if you don't have to pay self-employment tax, social security taxes, etc., on the money you're getting from your clients, then you will be able to afford to reduce your rates significantly. Add the Fair Tax back in and your rate will stay the same or rise only slightly.
Tell that to the FairTax people, they are the ones claiming that any income and payroll taxes are the property of the person who was paying them, not part of the businesses way to reduce costs.
What you are saying is logical, just like saying wage earners won't need the extra money because prices won't go up, so the business will keep them. But the 100% paycheck guarantee is in place, and once you extend it to the wage earner, you need to extend the same rule to personal taxes paid by a business owner on the profits of a business. After all, the business owner could just as easily structure all of his profit as wages, and be a wage earner for all intents and purposes, leaving zero profits.
I agree that your take is the way it was intended to work, but this is not the way the plan is being sold.
He's claiming prices would fall by twenty percent because (since) producers are not paying tax on profits and workers are not paying taxes on wages.
And this implies wages are falling how? In a retail sales tax only system. wages and profits are not taxed. Consumption is taxed.
Do you dispute that he thinks that this implies that the producer is expected to realize a cost savings from the fact that workers are not paying taxes on wages?
Yep, 10% GDP growth in the first year, production increases and consequent demand for labor increases significantly as well precluding any fall in gross wages paid to employees.
In fact over time, with the increase in capital investment allowing advancment in techonlogical productivity, gross wages will increase as they always have done under similar conditions.
The business no longer paying tax on wages (i.e. employer excise on wages paid) does not imply lower wages anymore than an employee no longer having 7.65% FICA wages and Income tax withholding from his gross. Contracted gross wage remains constant with no withholding that is an increase in takehome pay for the worker, the business realizes the advantage of no longer paying or accounting for its 7.65% excise on wages paid that is a reduction in levy on the business.
And do you dispute that the only way the producer is going to recognize a cost savings is if he doesn't give his workers 100% of the same gross pay he is now giving?
Yes I do dispute that, as the real savings to the business arises our of reduction in overhead costs associated with repeal of the tax system with its imposed requirements on business and removal of need for business to implement evermore creative (and costly) ways of tax avoidence.
So, this means that Jorgenson's model was based on the wage earners NOT getting their entire 100% current paycheck, but instead they would be getting 100% of a new gross paycheck, about the same as what they are now getting after payroll and income taxes.
Sorry, doesn't fly at all in the face of high production growth, increasing GDP economy projected under the study.
You really should read the study in whole, rather than looking to warp statement of results to backfit into your predisposed personal opinions.
Nothing in Jorgenson's report done for AFFT or the earlier one, to be found on the net done for others investigating the potential of the Armey Flat Tax indicates decrease in contracted wages for workers. Quite the contrary, as both reports indicate very high GDP growth and increased production which pressures wage upward, not downward.
FairTaxers are misrepresnting this study to sell their plan.
Looks more to me like an income tax apologist warping the interpretation of a single conclusory statement our of a much broader study indicating conditions just the opposite of what the studies actually present.
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