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
Phone: 770-232-3005
Fax: 770-232-2909
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 “Let’s 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. Jorgenson’s study: “If you’re looking for scholarly support for the proposition that prices will fall once the embedded taxes are removed, we can check back with [Jorgenson’s] “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, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social security taxes, or Medicare taxes and you’ll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.”
Dr. Jorgenson’s 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 else—will 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 Jorgenson’s 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 “Here’s 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. Jorgenson’s 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.
Rob
Dr. Jorgenson responded:
From: Dale Jorgenson [mailto:djorgenson@harvard.edu]
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?
August 24
Dear Rob,
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]
Best,
Dale
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:
Dr. Jorgenson,
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?
Regards,
Rob xxx
Dr Jorgenson responded:
August 24
Dear Rob,
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.
Best,
Dale
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.
Sincerely,
Rob xxx
xxxxxxx
Ultimately, politics and emotion drive these discussions more than economics or math. The math just gets in the way of good talking points!
The fallacy in this argument lies in this statement. Businesses pay an additional tax over and above what you as a worker pay on your money. There is no reason to believe that employers would decrease anyones pay. Their savings would be on the amount they pay in on you over what you pay in (approximately the same amount held out of your wages). Check all the facts before you decide someone is right.
You Troll.. Love all your anti fair tax post..hmmmm...hmmm...LMAO!LMAO! yourself, who's the fool now?----
Knock off the troll comments
Thanks
I've spent at least 40 hours on this and I'm about through I figure, I'm not sure that it is time well-spent because someone else would've shot it down along the way before passage, but I was tired of watching the DC Chapter and the people in Crawford get to do all of the actual activism and wanted to do something besides post on FR about this.
I will followup with Linder and I am trying to get a meeting with him.
You Troll.. Love all your anti fair tax post..hmmmm...hmmm...LMAO!I'm right, you're wrong...live with it...LMAO!
If you are talking about the employer half of payroll taxes, we've included that in all our previous discussions-- employers match is 7.65% of labor. They do NOT match income taxes. We've agreed that business could save maybe 10% max, with corporate taxes included where they apply.
I believe labor contracts are for gross pay, not after tax income. By what mechanism does the Fair Tax eliminate every labor contract in the country?
Just go away quietly if you have nothing new to add to the conversation. We get it that you think we are evil.
So, explain to me how a 10% savings for the employer is bad. Explain to me why the employer would need to cut my pay down to my post tax levels in order to save money. Explain how getting my full paycheck is a bad thing. I think we can debate the black market as a reasonable possibility. I'm just not real clear on your other points. Enlighten me please.
While the Fair Tax Book remains number 1 on the Best SellersWOOO, like I care.
Except now it's confirmed fiction...it was only fact in your's and other pea brain's world...Including the authors.
How many other #1 best sellers have changed your pathetic life?
But the point is that Jorgenson is agreeing that you can't have both 1) workers keep same gross pay and 2) business realize cost savings to allow them to reduce prices.
A business can give it's employees a 25% take-home pay raise if they want, but they can't also save money on the elimination of the embedded worker payroll taxes. Put another way, You can't have your cake, and eat it too.
And yep, I'd agree that solely debating this on FR is of limited value ... it generally takes a only few replies before the name calling begins. Shortly after that come the "cut and pasters" and virtually nobody has the time, skills or inclination to check the algorithms, or verify the research.
Good luck with the next step; and I am interested in what Linder, Boortz and others might have to say ... once public figures "go public" re-direction is not easy.
I'm not going to repeat it all, search FR for Linder and look at the Open Letter from two days ago, the whole debate is already covered there. If you have questions after reading that, we can discuss.
No I think you love the current tax code. What is your solution Rob??
I just scaned over this Thread it because its late, and I am really tired. Like I said I am going to check it out later this week.
The main value is that it forces you to refine your arguments and come to some solid conclusions, these can then be used to engage the real world.
I also emailed Bruce Bartlett after I faxed Linder, Boortz and Jorgenson. Any other ideas are welcome.
I don't write tax bills and I don't study government statistics. I am in business and I know what the cost and tax structures of businesses are.
I don't have to have another solution in order to discuss the flaws in the FairTax. That would be a different discussion. I will likely leave that to the experts and when they get one in a form to debate, then we can do this all again.
The fallacy is that you get BOTH your full income AND a 20%+ reduction in prices if you adopt the FairTax. The SOURCE from whose research that fallacy was created has apparently confirmed that his research was MISREPRESENTED: you can't have BOTH, you can ONLY have ONE - either your full paycheck OR reduced prices.
To directly answer your question: IF you want prices to drop by 20%+, you MUST reduce your gross pay. If you want your full gross pay (plus the employer paid FICA taxes) you DO NOT get reduced prices as claimed by the FairTax proponents.
There is nothing "bad" about a 10% savings. It just isn't enough to pay for all the claims the FairTax proponents make.
What's to keep this 23% tax from increasing the minute we switch to the national sales tax?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.