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
You say:
"His employees get their whole paychecks including FICA and payroll, but the owner of the business doesn't get to keep his whole earnings and is expected to give up his income tax savings?"
You didn't read the book or do much research. The owner of the business DOES get to keep everything he makes.
I suspect wages would have to drop 25% also for all the "changes" to occur.Ding-ding-ding-ding-ding....We have a winner!
I agree with you. Who says businesses will drop their prices? When the euro was introduced, there was inflation across a wide spectrum because storeowners knew they could get away with it in the currency change.
Rob two things are obvious. 1) you did not read the book!It's just a friggin book. It isn't an instruction manual or a bible.
Well the book makes it very simple to understand.. That is what makes me highly suspicious of Rob. He loves to punish the current tax code that punishes success, and rewards failure...
You didn't read the book or do much research. The owner of the business DOES get to keep everything he makes.Then where do the 20% price reductions come from?
He loves to punish the current tax code that punishes success, and rewards failure...LOL!..Right, there's absoluteley no chance to be successful without big government fixing itself...< /sarcasm >
Your problem with success is you, not "the present system".
So I am at point where well I guess its beyound his comprehension.I see it just the opposite.
"What do you say I'm paying?"
How can I be clearer. You are paying income taxes, whatever they are called. If you aren't paying taxes on the income you receive, in whatever form you receive it, you are cheating the government.
"So, it evens out. He gets to keep his personal income and payroll taxes, and with that, he pays the NSRT."
George knows exactly what he pays (and has control over what taxes he pays) under a NST. Sounds like a good trade.
"Okay, what about Bob? Bob makes $50K from his bakery, and pays $9K in personal income and payroll taxes. So, he takes home $41K. If he has to lower his prices by the amount of his taxes, he still takes home $41K"
No he doesn't because he IS NOT paying personal income and payroll taxes on his business. He makes $50,000 not $41,000. There will be NO income tax or payroll tax.
The rest of your argument is based on these incorrect assumptions
There is one consideration to the fair tax: Initially, people won't spend so much. But as they save, they will start spending.
It's human nature, especially for the US
LOL! I see you are a defender of the current progressive tax system. I am sure Karl Marx would be pleased
Bingo sitetest. "Fairtax" is a fad which will kill small businesses like mine.
As a small business, most likely sole proprietor, LLC, or S corp, Bob's Bakery pays zero corporate taxes. All profits are passed on to the owners and they pay personal income taxes on this money. Just like his employees, Bob the baker will need to be able to keep his whole paycheck and retain HIS income taxes.
It would be totally unfair to give Bob's employees a 25% increase in take-home pay but expect Bob the owner make do with his same old take-home.
as well as the slightly increased buying power (by your reconing) of supplies, like flower, milk, and eggs, as those suppliers will be able to slightly lower prices as well.
Not really, I assumed Bob's Bakery would see a 10% savings on all costs, the 7.65% that comes from savings on the employer half of FICA would only be saved on Bob's payroll expense, but I assumed that his suppliers would also save on their employer portion of FICA so I applied the 7.65% across the board to all Bob's costs. Plus I gave him the benefit of the doubts and added a couple of percent for IRS compliance costs, making it ten percent across the board cost savings.
I agree that this is the way it is promoted, I was just responding to your statement in post 13,
woodbeez: You forget that Bob the Baker pays income tax on his profit from sales. Businessess pay no taxes under the Fairtax. That is his main source of savings that he would be able to pass on to his customers
This sounded to me like you felt that Bob was going to pass along his income tax savings back to the Bakery to enable them to lower the cost of the bread, since you called Bob's income tax "his main source of savings" and also that these income tax savings would be "passed on to his customers". I guess you've changed your position.
Obviously, Bob cannot both keep his income tax savings and at the same time pass the savings along to the customer. This would be double counting, hust like saying that George can keep his entire paycheck and yet somehow George's employer is saving money on George's labor.
I see you can't stop talking about me, even though you've given up on me.
What are your paranoid fantasies about my motives? I am just a normal businessman with a family that I'd like to be able to support. I have the audacity to ask questions about your FairTax proposal-- which you obviously don't understand or you'd be able to clear all these supposed misunderstndings up with facts in a heartbeat-- and I must be some sort of what?
The fact that you are not able to show where Bob the Baker is going to take his current price of $1.00 per loaf and reduce it to $0.77 per loaf, while still allowing his employees to keep all of their tax savings, and allowing him as the owner to keep all his tax savings, tells us all we need to know about the plan.
Being generous, I was able to come up with $0.10 he might save. You can't handwave another $0.13 with murky phrases and economic gobbledegook. Think about a shoe shine boy or a masseuse or a personal trainer or a barber, these services have hardly any cost structure to wring out of them besides labor which will not go down much.
You can't expect goods to magically go down in price if the cost of labor hasn't, and letting the employee keep his whole paycheck ensures that the cost of labor doesn't go down significantly.
Not true for retirees, persons on a fixed (eg pension) income, or anyone with accumulated wealth. Those people will have exactly the same amount they have now, it is their children and grandchildren who will suddenly have 25% more take-home money. Does this sound Fair?
Won't throwing a bunch of new money without any increase in productivity just create inflation? Isn't it almost the definition of inflation?
And he wouldn't. He would keep his federal income taxes, "his portion" of FICA and Medicare, as well as the employer's portion. I don't understand the point you're trying to make here.
Mark
My point is that there are no corporate income taxes on Bob's Bakery.
In post 40, you said: You forgot the reduction (to zero) of federal corporate taxes
The only taxes on the profits of the business are Bob's personal income taxes on the profits, which we both agree that he is going to keep, so there is no "reduction in federal corporate taxes" for me to forget. I was just responding to your false statement that there would be savings to Bob's Bakery from federal corporate taxes.
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