Skip to comments.JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
Posted on 08/24/2005 9:40:44 PM PDT by RobFromGa
August 24, 2005
U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Copy: Neal Boortz, WSB Radio,
Dr. Dale Jorgenson, Harvard University
Dear Representative Linder:
I wrote to you two days ago regarding what I consider to be serious misrepresentations of the Fair Tax plan contained in your book, The FairTax Book. On page 2, you state Lets agree up front that this book is about honesty and I intend to hold you at your word. Since that time, I have been in contact with Dr. Jorgenson in an attempt to clarify his understanding of this Plan and his calculation of expected price declines.
On pp. 22-23, your book states: An extensive study of tax costs was completed a few years ago by Dr. Dale Jorgenson, then chairman of the Harvard Economics Department. On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes.
You then went on to show a Chart (Fig 5.1) which shows the expected price decline without embedded costs for various goods and services as prepared by Jorgenson during his study.
On page 55, you go on to explain that these embedded taxes are in addition to the money taken out of your check in income and payroll taxes.
On page 59, you again invoke Dr. Jorgensons study: If youre looking for scholarly support for the proposition that prices will fall once the embedded taxes are removed, we can check back with [Jorgensons] The Economic Impact of the National Retail Sales Tax and you quote his report:
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
In this statement, Jorgenson seems to say that one of the reasons for the price drop at the producer level was the elimination of the tax on wages paid to workers. So, naturally if the business is going to realize this benefit it must reduce the workers gross pay be the amount that is currently being paid in the form of income and payroll taxes. This only makes sense because how can the business reduce costs if it gives the worker tax savings to the worker?
Later on page 59, you state: Once the FairTax takes effect, youll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social security taxes, or Medicare taxes and youll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.
Dr. Jorgensons report clearly showed that under his study the worker would not get their complete paycheck, because if he/she did, there would be no cost savings to the business and therefore no price drop associated with worker taxes.
You continue this theme on page 83: Remember that the poor, along with everyone elsewill no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.
On page 84, you make it clear though that even though the workers will keep all of their paychecks for a big raise, you still believe that because of the disappearance of the embedded taxes, the total price paid for consumer goods will remain very nearly the same.
By assuming these two things together, you are misrepresenting Jorgensons report and double-counting the tax savings, first by giving them to the worker as a pay raise, and then at the same time assuming that there was a cost savings to the business.
On page 85 you make it clear the worker will get the pay raise.
And then on page 111, you tie it all together with a Quick Review in which you erroneously assert that Heres what happens when we pass and implement the FairTax plan:
We start collecting 100 percent of our earnings on our paycheck.
We all get virtual raises, since payroll taxes are no longer siphoned from our checks.
The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.
Dr. Jorgensons report seemed pretty clear to me, but I felt it was necessary to ask him directly what he meant so I sent him this e-mail:
At 09:29 AM 8/24/2005 -0400, you wrote:
Dear Dr. Jorgenson,
I am a private US citizen who is concerned that the FairTax proponents are misrepresenting your conclusions. Would you please comment on the attached letter I sent to Mr. Boortz and Rep. Linder? I think that they are being dishonest to imply that the wage earner will keep his entire paycheck, while at the same time businesses will be able to reduce costs? Your March 1996 testimony stated, in part:
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
Are you expecting business to reap a benefit from the taxes that that the worker no longer pays? It certainly sounds like that is part of where you see the business reducing its costs.
Dr. Jorgenson responded:
From: Dale Jorgenson [mailto:firstname.lastname@example.org]
Sent: Wednesday, August 24, 2005 10:28 AM
To: Rob xxx
Re: Fair Tax- Is your 1995-6 Testimony being misrepresented by Boortz/Linder book?
A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increase economic efficiency.
[He then went on to recommend his book called LIFTING THE BURDEN, about another tax reform plan he calls Efficient Taxation]
I wanted to be perfectly clear what he was saying, so I asked him to clarify his email:
At 06:41 PM 8/24/2005 -0400, you wrote:
Excuse me for my lack of understanding of your answer, when you say "workers would keep that after-tax pay" are you saying that if they are making $1000 a week now, and paying $200 payroll+income taxes now, that under the FairTax you were assuming that workers would get paid $800 and keep all of that? Or are you saying that you meant they would make $1000 under the FairTax?
Dr Jorgenson responded:
I am saying that the worker would continue to receive the after-tax amount of $800. Prices received by producers would decline to cover the cost of after-tax wages to workers and after-tax dividends and interest to investors. However, taxes paid at the retail level would include the Fair Tax.
So, Dr. Jorgenson, whose report you are relying on to support your calculation of embedded taxes, is stating that in making those embedded tax calculations he was not assuming that the worker would keep his current after-tax amount, NOT that the worker would keep all of his current gross pay-check. By reducing the gross pay of the worker to the current after-tax amount, the producers would see a cost reduction that would allow them to reduce selling prices. There would be no increase in take-home pay.
I think you need to carefully review the misrepresentations in your book and offer a retraction and modify subsequent printings to remove these errors. You have spent a large amount of time on this plan, and it is still a viable option for debate even without the bug windfall pay raise for everyone. I would enjoy the opportunity to discuss this with you further if you have questions.
I contacted Dr. Dale Jorgenson, the Harvard economist who did the FairTax models, earlier today. He said that he assumed workers would keep their current after-tax income, NOT their current gross pay.
There is no pay raise with the FairTax plan, as many of us have stated, and been ridiculed for stating.
Here is what I found out today. It backs up our contention that the FairTax Book is misrepresenting Dr. Jorgenson's testimony and report.
Pinging you to some detective work I have been working on today.
Dude, you have way too much time on your hands!
Dude, you have way too much time on your hands!
I happen to think it is important to make sure that this FairTax plan is accurately debated.
While I'm generally in favor of FairTax, I'm glad to see this post. I've always felt something didn't quite add up with this. I mean, if the government is taking in a certain amount of money via the current tax system, and after the FairTax they are still taking in the same amount of money, how can everyone be paying less taxes? You can alot a certain amount for the overhead that is eliminated, and you can also expect a certain amount of growth, but I don't think the proponents are counting on the growth in their models, and the elimination of the overhead doesn't account for all the benefits they are touting. It just doesn't add up.
He just can't do math.
As I say at the end of the letter, this plan is still worth debating without the windfall pay increase for every wage earner. And there won't be any income or payroll taxes taken out of the new lower salary. And efficiences can cause the amount to rise back up later to everyone's benefit.
The point is that we need to discuss this plan honestly.
are you saying that Dr. Jorgenson can't do math?
It should have been a giveaway that everyone can't come out 25% plus ahead in purchasing power.
Our first editions might be a collector's item when they make the necessary revisions to the FairTax Book.
That depends entirely on how you are currently paid. My brother's business, for example, pays his employees as contracted labor at a set rate. He does this to limit mandates and red tape from the government being imposed on him. The individuals are responsible for their tax burden, and the Fair Tax would eliminate that burden from them.
I have my own concerns about how the monthly stipend the Fair Tax advocates would be abused by the class warfare crowd, but increased take home pay is possible for many.
I had done some quick calculations and couldn't get the embedded tax above about 9% (employer SS+Medicare + tax on profits) + costs of collection and no one could convince me that the cost of collection was up around 15%. That would have implied that the total cost of collection in the entire economy was around $1.5 trillion/year. It might be a lot, but not that much.
Even with this I still like the FairTax. I could accept an 18% net increase in prices to keep my gross paycheck and eliminate all income and payroll taxes.
That won't work because it would screw people with accumulated wealth or on a fixed income. It also wouldn't help us be more competitive with foreigners.
The only workable approach is lower gross salaries, equal to what we take home now, with prices that remain the same for domestic goods.
"A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increase economic efficiency."
I think I'm failing to see the problem here. A person's income is a rate agreed to between the employer and employee. The taxes that are taken out of the salary of the employee are taken out after it's been accounted to that employee. It's a cost to the company through labor costs, not an tax paid outside of the person's wages. To assume that an employee would still receive their current take home pay is to assume that the employee would receive a pay cut and/or that a person's wages are artificially inflated to take taxes into account.
With labor costs remaining the same, a company might not elect to drop their products prices. Heck, a company might just enjoy trying to reap a bigger profit margin by keeping their prices the same. That would increase the consumers' prices with the large sales tax added on.
The point of the fair tax to me is to wrest back some form of control from Congress regarding our money. While Congress will still try to spend, more people will be aware of just how much the fed takes from them. It might make people more responsible, especially in elections. The talk of wage increases, price drops, etc. are not unlike President Bush throwing out an exact dollar amount of how much an average family would save with his tax cuts, instead of giving people a more accurate percentage figure.
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