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
That's what the prebate would attempt to rectify -- although if these people should make sell property or stock they would keep all the capital gain.
But you make a good point.
it is their children and grandchildren who will suddenly have 25% more take-home money. Does this sound Fair?
What is fair now in our tax code? But it's not a matter of fair. It's a matter of bestest for the mostest.
Won't throwing a bunch of new money without any increase in productivity just create inflation? Isn't it almost the definition of inflation?
You're not creating new money i.e. nothing is being printed that would otherwise be printed.
Dear woodbeez,
"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."
Good! Then Bob's in good shape, here.
But that means that under the current system, he's paying no corporate income taxes. And that means, his business won't be getting them back, because he's not paying them in the first place. And that means that for Bob's business, prices can't be lowered from the corporate income taxes he is no longer paying. Because he wasn't paying them in the first place.
If you do a little spreadsheet showing cascaded taxes, when you get to Bob's level, the amount of taxation he adds to the final product that would be removed by the NSRT is 0%.
sitetest
The prebate is going to everyone, it does not solve the relative unequal treatment of "old" accumulated wealth, as compared with "new" earned wealth.
I'll change my statement to include prebates to make this clear.
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 plus a prebate, it is their children and grandchildren who will suddenly have 25% more take-home money plus the same prebate. Does this sound Fair?
You're not creating new money i.e. nothing is being printed that would otherwise be printed. You are putting 25% more take-home pay allegedly in the hands of every wage earner in America, instead of giving it to the government. I would imagine money supply will have to be increased.
So many people seem to miss the real power of this thing ...
I want to be able to determine how much tax I pay.
If the government won't listen to my views, well ... I buy used stuff.
Being able to opt out so to speak. It will put a little power back in the hands of the people.
Money is power , who controls yours?
Good, I'm tired of trying to explain myself to you. I take the time to lay out a fairly detailed example and all you have is exasperation and throwing "the book" at me."Read the book" is becoming the new catchall for any questions about the FairTax. This is just a way to dodge answering the question. If the person saying "read the book" had read the book and understood it, they should be able to provide the answers.
I am generally a supporter of the Fair Tax, but this is one major flaw.
Dear Vinnie,
"Lets say I have $1mil in the bank. I've paid taxes, income and capital gains on it.
We switch to the fair tax.
Anything I buy with that money will be taxed 20%+."
You know, I hadn't quite looked at it in this way before, but in a sense, this is a one-time devaluation of American monetary assets by about a fifth or a quarter.
Most current income doesn't lose its value, because current income won't be taxed. But accumulated monetary wealth, cash, or cash instruments like certificates of deposit, bonds, etc., take a one-time hit.
I suspect that all financial assets ultimately take a big hit, because unless the stock market goes up by 20% - 30% just on the enactment of the NSRT, the value of equities is similarly devalued.
The income stream from financial assets isn't hit as hard, because at least the 15% tax on dividends and capital gains goes away. But I don't think that will quite make up for the increase in prices from the sales tax, itself.
However, should someone decide to spend the actual accumulated asset, itself, should someone decide to sell the bond or the stock, and spend the actual capital on a major purchase, well, they're screwed.
Oh well, it's a bit like Robin Hood, steal from the rich, give to the poor, I guess.
sitetest
Obviously the owner can set prices as high as he wants, but competition will drive prices down among any businesses that wish to stay open (just as it does now).
Remember, our current tax code started as a flat tax on a very select and small portion of the population.
And we all know how well that flat tax worked out and how flat it stayed.
The FairTax rate on purchases is actually estimated to be 30% on top of the price of goods and services.
I agree with the statement the we need to adjust the current system first as you say. Plus we need to reform the spending side of the equation, most importantly Social Security that is going to dwarf the rest of our spending a little ways down the road. This needs to be privatized.
Dear Amalie,
"Presently, all of my income is reported as Schedule C profit/loss, and I pay with a normal 1040."
Right. You pay ordinary personal income tax. You pay self-employment tax in lieu of FICA and Medicare payroll taxes. No federal income or other federal taxes that would be terminated by the NSRT.
You'd get back those taxes, and that would help you cope with the general increase in prices due to the application of the NSRT throughout the economy. So far, that's not so bad.
"Compliance on the Fair Tax will mean I need to CHARGE that tax above and beyond my normal retail charge - dropping it by 25% is not feasible, since my overhead does not CHANGE under a FairTax plan,..."
Right. If your business is like mine, you're looking around, trying to figure out where you're going to save all this money. As proposed by the NSRT proponents, you're not going to change the gross compensation of your workers - they're going to get back their federal income tax, and both sides of the payroll taxes. They'll be bleating about paying 30% on their health insurance premiums (whether you pay them or they pay them), and so you'll be doing well if you're not forced to pick up part of those costs. Ffor my average worker, just the NSRT on their health insurance premium will mean several thousand dollars per year in taxes - for many, it wipes out most of their "prebate." Oh well.
The landlord's not going to drop the rent. He's already generating income that's either tax-free, or pretty close to tax-free. In fact, he may want to raise the rent, if his real estate investments are throwing off enough tax shelter to reduce his taxes on other income (thus, he's not generating the tax savings to make up for the NSRT when he has to go out and purchase products).
However, as a business, you're exempt from paying the NSRT on the inputs for your business. So, the rent for your offices, the cost of your office supplies, the costs of any raw materials you buy, so on and so forth, will be exempt from the NSRT. I don't think that your overall business costs will rise, or at least, not by very much.
If you do not collect sales and use tax now, you WILL have to join that bureaucratic regime. And, because the tax is so very high, the enforcement will be tough, and compliance will be hard and high, so expect a rather rigorous compliance regime in that regard. And of course, even though you won't be dealing withholding of payroll and income taxes, you will still have to do all your accounting, you will still have to report wages and benefits (because benefits like health insurance will now be taxed with the NSRT) to the federal government for Social Security purposes, as well as for federal and state unemployment insurance, as well as to your private business insurer for workers' compensation, and for any life or disability insurance policies you may have for your workers through your company, etc., etc.
Nonetheless, if compliance costs rise, I expect they will typically rise by only a small fraction of overall revenues.
"I do not buy the idea that prices will fall, either."
I think it's possible they could possibly fall a few percent, although I'm not bettin' the farm on it. And I'd rather not bet the economy on it, either.
"The price will be what the market will bear, and getting a 400.00 check each month to simply offset food / clothing / gasoline / necessity purchases is a drop in the bucket."
Well, the check varies according to family size. A family of four will receive nearly $500 per month. Of course, a single individual will get only around $200 (I'm doing this from memory, so forgive me if I'm off a few bucks).
I know that the cost of gasoline is getting so high, the not-quite $500 per month will just about pay for the NSRT on my gas purchases (just kidding - but it certainly FEELS that way!! I just filled up two cars yesterday - $95 - YIKES!!)
"And, in truth, the IRS does not go away, since it will now be involved in making sure that tax collection is complied with; more hassle and expense for me."
Well, in all fairness, I don't think it will be called the IRS anymore. The federal compliance agency will be called something else. It will probably be smaller, too, because the federal government will likely "subcontract" a lot of the enforcement effort to the individual states. The states, I think, will get a small fee for collecting the tax. I imagine that the federal government will require some amount of enforcement to go with that. I'm sure most of the states will love that, as it will expand the tax-collecting empire of each individual state, and the federal government will be paying for it. Sorta like a hydra - cut one head off - the IRS, and 50 grow back in its place. Ouch.
"Frankly, the unfortunate part of the whole FairTax exercise is that I do not trust the government to enact it without special deductions, etc. anyway - in the end, regardless of what party is in power, it will not be fair."
Well, politicians COULD stop being politicians, I guess....well, okay, you're right, it's more likely to suspend the law of gravity.
Yes, I suspect that the liberals will push to exempt food and increase the tax on automobiles costing over $50,000. Or exempt rent or mortgage interest for residences valued under some arbitrary amount, and increase the tax on mortgage interest for residences above some arbitrary amount.
"It's fer the CHILRUN."
As well, because the NSRT will be passed without repeal of the 16th amendment, I suspect that we will eventually run into some "budget crisis" that will require re-instating a small, modest income tax on the "very rich" (defined by Bill Clinton, as an example, in 1993 as anyone who made over $75,000 per year).
"I also agree with the argument that the little money I have saved to date 'after tax' would now be taxed at 23% (which my feeling is that this is a conservative number; at this number, it would be at least 33% here in TN with the sales tax we already have in place) if and when I spend it."
Well, actually, if you look at it as we normally look at sales tax rates, it will be an added 30% on top of the cost of your purchase. Added to your state sales tax. In my state, it'll be a total of 35%. Ouch.
"It is not perfect, but IMO the current system should be adjusted before some change this radical is brought into the equation. Get rid of the AMT, make the Bush cuts permanent, and simplify the code section by section so that it is more understandable."
So, you're not willing to bet the whole economy on radical, disorienting change, either?
And you own a small business?
Hmmm.... seems to be a theme around here.
sitetest
If your old wealth is invested in munis ala Heinz-Kerry you will pay more because you will be taxed on the spending. If invested in a money market you will pay less because you will no longer be taxed on the interest. If invested in stocks, you will be taxed less, because you will not be taxed on the dividends or the sale.
It actually evens things out.
Does this sound Fair?
Will most seniors be better off? I think so -- as they would if we were to simplify the tax code via other means. Anyway, the status quo is anything but fair so, yes, the FairTax is more fair than the status quo.
You are putting 25% more take-home pay allegedly in the hands of every wage earner in America, instead of giving it to the government.
And the government gets the exact same amount of money back when it is spent, according to the plan. There is no reason to increase the money supply.
I suspect that all financial assets ultimately take a big hit, because unless the stock market goes up by 20% - 30% just on the enactment of the NSRT, the value of equities is similarly devalued.Alan D. Viard of the Federal Reserve Bank of Dallas has written two very interesting papers about the transition to a consumption tax. The second one discusses what you are talking about, but both are well worth a read.
You are buying into the plan's statement that prices will be able to drop, which I believe is not possible unless wages for employees drop by the amount of their income and FICA taxes. The original guy that developed this plan was Dr. Dale Jorgenson. This is the person that the FairTax people are quoting when they say prices will drop about 20-25%. Here is his testimony:
March 27. 1996 (104-46) at http://www.gpoaccess.gov/wmhearings/104.html
"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."
(the referenced fifth chart is the same basic chart that Boortz used in his book, Fig 5.1)
Sounds pretty clear that he expected the workers to give the money they saved by not having to pay taxes on wages back to the "producer" (their employer) to enable them to lower prices. Jorgenson was under no delusion that the wage earners would get to keep 100% of their current paychecks. He knew they would get to keep 100% of their new smaller paychecks (reduced by about the amount they now pay in income and FICA taxes).
This sentence is inaccurate and not what I meant to say, Jorgenson was the main economist that they used to determine the economic models and simualations of the effects of the plan.
Intersting, but I have one brief question for you: Are you an accountant?
That is one of the hats I wear as a business owner. I am an engineer, a salesman, an accountant, an accounts receivable clerk, a secretary, a copywriter, an advertising wizard, a trade show planner, an errand boy, mail room clerk, copy room attendant, bill payer, coffee maker, janitor and a psychologist as well as being an unpaid minion of the IRS for about 25 hours a year. And I do all of this out of my office in my house, and from my car and hotel rooms.
The accountant job is mainly paying bills, collecting invoices, monitoring cash flow, checking expense reports, and long range forecasting. I will still have all these hats to wear with a Fair Tax.
All business owners "pay" taxes, be they personal income or corporate income taxes. I say "pay," because these taxes are recouped in the purchases of goods or services by consumers.
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