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
I can find numerous definitions for 'embedded taxes' from fair taxers and none of them match your new and improved fuzzy definition.
Fair Tax Book Debuts #1 NYT (Non-Fiction)
kevkrom: "You're completely ignoring compliance costs, that's why your math doesn't add up. "Embedded taxes" refer not only to the actual taxes paid by the businesses in the production chain, but also to their additional costs related to tracking, paying, and minimizing those taxes."
140 posted on 08/11/2005 1:08:17 PM EDT by kevkrom
#1. Embedded Taxes = Taxes paid by Businesses + Compliance Costs.
----------------------
mombrown1: "Under the Fair tax these embedded taxes are gone because companies are no longer taxed."
#2. Embedded Taxes = Taxes paid by businesses
50 posted on 08/11/2005 10:23:58 AM EDT by mombrown1
--------------------------
rwrcpa1: "They are paying the embedded tax. WE are paying the embedded tax + income tax + payroll taxes + estate taxes. Get it now?"
91 posted on 08/11/2005 11:56:26 AM EDT by rwrcpa1
#3: Embedded taxes = Corporate Income Tax
----------------------------------
Tax Reform: Now or Never(FairTax Endorsement);
Jan Larson: "It is very important to understand that upwards of twenty percent of the cost of retail goods and services under the present system represents the embedded taxes in the production chain. That is, the corporate income taxes and payroll taxes paid along every step of production are reflected in retail prices. When these taxes are eliminated, the final cost to the consumer of goods and services will remain essentially unchanged under the Fair Tax."
#4: Embedded Taxes = Taxes paid by businesses
CHIEF negotiator: "But they overlook the 15.3% payroll tax, and the corporate income tax and compliance costs that are embedded in every good or service we buy. These "hidden" taxes are designed to disguise the true cost of government."
#5. Embedded Taxes = Taxes paid by businesses + Employee paid payroll tax + compliance costs
Neal Boortz: "First, there are the embedded taxes on every single product or service you purchase at the retail level. 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."
#6. Embedded Taxes = Taxes paid by Businesses
Of course the only definition that matters is Jorgenson's since he is the one whose number is always quoted:
Jorgenson's Embedded Taxes = Taxes paid by Businesses + Taxes paid by Employee
Show us the exact quote by Dr. J. where he made that statement.
Well since the study is a closely guarded national secret, his exact definition is not known because the fair tax organizations won't release it. But from statements made by Dr. Jorgenson it is painfully obvious. Dr. Jorgenson is on record as saying these 'embedded taxes' amount to 20% in all goods and services. Dr. Jorgenson is also on records as saying "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 would fall by an average of twenty percent." Without the benefit of actually having the study, one can only conclude that these 20% embedded taxes are taxes on businesses and taxes that workers pay. If your buddies at AFFT would release Dr. Jorgenson's full study which showed his methodology, this debate would clear up real fast. But AFFT can't do that, because they would be exposed as LIARS. And until AFFT shows otherwise, they will be LIARS.
As I've told you before, percentage of revenue is meaningless when it comes to embedded taxes. Your continued attempts to use it to come up with a lowered number is pathetic.
Why don't you find the preponderance of major industries that pay a tax rate of less than, say, 30% on their profits.
As for the cascading tax example, the meaning is clear enough in that the developer intended the term "profit margin" to be the desired profit margin of that level. On L1, then the tax amount that is embedded is $0.33 x 0.34 = $0.11. The input plus the two other figures then total up to the selling price. Calculating the pre-tax profit as a % of the selling price is meaningless since the tax to be paid is the $0.11 calculated in the example and not figured on a percent of the selling price - that's merely your attempt to use the meaningless "revenue" as a base for taxation. The correct figure to use is the amount subject to tax ("profit margin" in the example) times tax rate ("tax rate" in the example). Taxes are calculated and paid with that calculation as a base ... check with the IRS if you can't figure that out.
Your similar attempt to redefine the calculation in L2 is also incorrect for the same reason plus your error in trying to add the profit from L1. The profit in L2 is, as stated, $0.48 (not $0.64) and the tax rate is 34.4% as stated which gives a tax due of $0.16.
Your attempt to redefine the example isn't going to work - mainly because it is not related to how taxes are derived. You'd no doubt LIKE to show taxes as a % of revenue, but that ain't the way it's done so stop the idiocy. You're fooling no one (except yourself - if you genuinely believe that).
You also missed (or don't understand /or don't wish to understand) that the example was never presented as representing a real world business but is a simple example of how the tax cascading mechanism works. So you can look at "income statements" until uou're blue in the face. Unless you learn how taxes are calculated, you'll always be looking at the wrong numbers as you are now.
Hint: Look on the P&L for something like "income subject to taxation" and " income tax paid" and divide the latter by the former. That'll give you a tax rate for most major industries of something like 34.4% for the 2001 IRS SOI.
And that's the tax rate used in the example in #399.
It's really unbelievable that you don't know how taxes are derived.
What's really unbelievable is that you can't admit that it is idiotic to claim that every wage earner in America can get a 25%+ pay raise, plus have everything he buys cost the same (on average) as it does now even when the FairTax is added, plus he's going to get an allowance from Mommy Sam every month. That you think this is remotely possible, and that this could possibly be a realistic plan, is hard to believe.
So really what you're saying is that this whole bit of trivia from you about what Dr. J. said and/or meant is entirely your own supposition. since you can't show a single instance of such a direct, unequivocal statement.
With that being the case and since my interpretations are at least as good as yours, I believe just the opposite. None of the statements you keep putting forth stand on their own and you continually spin them to your own ends, Why don't you, instead, look at the overall result of his work and the model's projections which are presented in many places?
Are you concerned that some might not buy into your beliefs??? You've certainly got reason for that, I'd say.
We'll certainly see shortly after it becomes the tax law of the land, won't we??
And, yes, there has been a sufficient amount of economic analysis done on the different aspects of the FairTax to believe that to be the case. And that ignores your abilities as an economist - which certainly have yet to be demonstrated. This is at least partly due to your obstinance in refusing to see that there is a sizeable amount of tha costs embedded into prices which will be removed under the FairTax. But that's your problem and not that of the FairTax.
When pigdog's fly. Actually, I'm not too concerned about it's chances at the moment. It might've had a chance if you could honestly represent it, but now that everyone is expecting the Free Lunch, it'll be hard to tell people that there ain't no such thing.
Despite whatever nits you might choose to pick, I see no great disparity in those quotes and "All goods and services produced in the United States already contain the embedded costs of the current tax system in their prices."
Dear pigdog,
"As I've told you before, percentage of revenue is meaningless when it comes to embedded taxes."
LOL. No it's not. Not if you want to talk about "embedded taxes."
Companies don't sell their profit. They sell stuff and receive REVENUES in return.
Wal-Mart sold about $288 billion worth of stuff last year.
That was their REVENUE. That is approximately the sum total of all the prices they got for stuff that they sold in all their stores for the year.
It's YOUR spreadsheet that looks at tax as a percentage of PRICE, pigdog. Revenues are just the sums of all the prices received on all sales.
When someone goes into a Wal-Mart and spends $100, that $100 is REVENUE, not PROFIT. Profit is only a small piece of the sales revenue (in the case of Wal-Mart, about $5.60).
Do you understand that Wal-Mart doesn't actually keep all the revenue they take in, as profit?
On that $285 billion in sales, they made about $16 billion in pre-tax profit. They paid around $4 - $5 billion in federal corporate income taxes.
That's around 1.6% of REVENUES.
That's the relevant statistic, pigdog. Why? Because if you bought $100 worth of stuff at Wal-Mart, about $1.60 would be Wal-Mart's federal corporate income tax.
That's the percent of the $100 that someone spent that went to pay Wal-Mart's federal corporate income taxes.
If you get rid of the federal corporate income tax, that's the amount that could be saved on the $100 of purchases: $1.60, 1.6%.
"The correct figure to use is the amount subject to tax ('profit margin' in the example) times tax rate ("tax rate" in the example)."
Yes, as I explained to you.
The "amount subject to tax" is the TOTAL PRE-TAX PROFIT, not the AFTER TAX NET PROFIT.
Your "34.4%" is on the AFTER TAX NET PROFIT. The amount of money paid in corporate federal income taxes is actually a part of the pre-tax profit, pigdog.
The "amount subject to tax" is actually 44 cents - the TOTAL PRE-TAX PROFIT. And 11 cents of that is 25%, not 34.4%.
"Your attempt to redefine the example isn't going to work - mainly because it is not related to how taxes are derived. You'd no doubt LIKE to show taxes as a % of revenue, but that ain't the way it's done so stop the idiocy. You're fooling no one (except yourself - if you genuinely believe that)."
* chuckle *
Anyone who actually understands this debate knows who is fooling himself.
I'll give you a hint, it ain't me.
Anyway, again, your spreadsheet shows federal corporate income taxes as 11% of revenues. I challenge you to find 20 Fortune 500 companies with federal corporate income taxes of 11% of revenues or higher. I'll find 20 with federal corporate income taxes of 5% or lower. If we both get 20, we'll keep going until we each run out.
You should be able to demonstrate very easily that there are many, many companies that pay 11% of their revenues out in federal corporate income taxes, as you've stated that this is the norm.
I betcha you can't.
sitetest
Dr. Jorgenson directly attributes that 20% fall to "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".
Jorgenson is as clear as clear can be. He states precisely why prices will fall, and it is totally attributed to taxes on profits and wages paid by both the producer and the worker.
Gee I don't see anywhere in his statment or anywhere else in his whole paper which way the wages would go that workers would no longer pay taxes on. In fact I have searched his entire manuscript and wages are never mention again.
However I do remember Jorgenson clearly indicating investment rising over 70%, production quantities rising more than 20% in most business sectors, exports rising more than 26%, GDP rising more than 10%, consequent demand for labor to accomplish all the above resulting in a large requirement for additional labor supply. Looks to me that Jorgenson's results clearly indicate folks have more to spend and invest with such strong economic growth factors.
Don't see any basis for wages to take a downward dive in all of that, whatsoever.
You sure seem to like to to read things in, that you want to believe don't you?
No wonder your responses are so screwed up. People who see things that aren't there tend to have problems coping in life. With such a proclivity I would suggest you seek professional help soon.
You are trying to quote this tax as if it were not embedded. It's embedded in the price, and will average between 22 and 24%.
Where do you get that the employee's withholding has to be retained to obyain the price reduction???? The price reduction comes when the employer's embedded taxes that he pays on each unit disappears. When cost goes down, then price goes down. The tax raises the end cost of the product back where it was before.
lol
Employer's are currently taxed. The average tax that ends up embedded in the price of each unit sold is approximately 23%. When employers cease to be taxed, then that embedded tax will disappear from the price of the product.
I am a fair tax proponent.
Start at the top of the post and read the letter and see where the discrepancy is, the whole debate is over what the 23% actually is. FairTaxers can't identify it, but KNOW it's there. The rest of us that aren't already convinced have carefully examined every place that the 23% could possibly be and can't find anything close to 23%. The debate is clearly stated above and until you've read that, it seems a bit preposterous to rehash the entire debate in order to keep you from having to read what is already on the record.
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