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
That's not what your source said:
Tax disincentive costs: the loss of production because of the discouraging effect of taxes on investment and labor. In recent years, a number of economists have made calculations of this "excess burden" for a wide variety of taxes. In a 1985 article in the American Economic Review, Michigan State economist Charles Ballard and his colleagues estimate that for each additional dollar in taxes collected the economy loses 33.2 cents of production.Costs of tax enforcement: resources expended in responding to the tax authority. Each act of tax enforcement--each audit, each notice, each levy--entails a burden for the citizen subject to it. Since these actions run into many millions every year, the time and expense for citizens is significant. Tax avoidance-- setting up shelters, using loopholes, litigation--entails further costs. My calculation of the enforcement and avoidance costs comes to 8 percent of tax revenue.
And, secondly, someting doesn't add up: If everybody (individual, businesses and non-profits) spend $194 Billion on compliance surcharges, as your post directly says, to collect $2,000 Billion tax dollars, then it looks to me like we only spend 9.7 cents for every dollar of tax collected (not 20.4 cents)
And out of that, the $86.1 Billion of that borne by individuals is not available to businesses to reduce prices. That leaves somewhere between $102 Billion and $108 Billion (depending on what percentage of the non-profits are commercial) available for cost reduction.
Again, that's a far cry from even the $250 Billion that most don't quibble about; it's light-years away from $662 Billion!
I guess I could say the same about yours; you're the one who trotted out a 1994 magazine article referencing a 1985 study suggesting the costs of the tax system are over 65% of tax revenue.
Are you implying that your source is invalid because it's dated?
Not a penny of "lost opportunity" cost will flow directly into price reductions.
So, far everything you've cited suggests that the amount of money available for cost reduction is between $100 Billion and $250 Billion. All the rest is growth potential, which is not bad, it's just not cost. And it won't directly flow into price reductions.
Again, that's a far cry from even the $250 Billion that most don't quibble about; it's light-years away from $662 Billion!
What is missing in the analysis, is that $250 billion is the costs attributed to everyone's filing returns. It is the basic number that is claimed by Flat Tax proponents that will be saved in going post card sized tax returns for individuals. Unfortunately it misses on several scores not to mention that business costs tied up in do not change substantially with the change to the Flat Tax.
The reason that most don't quibble with it is that most are advocates of one or the other type of tax reform and that number is used by all sides of the debate without any understanding as to what it really means. They agree as it makes good sound bytes for tax reform generally and avoids public debates just like we are having here.
The total unique tax related overhead incurred by all businesses due to the current tax system in comparison to the total unique tax related overhead incurrent by retail businesses only under an NRST is the base issue. I agree costs on business is poorly related to "compliance cost".. They are minimal in a business setting in relation to sales volume, it is the other hits that are significant overall.
The major opponents to NRST hit compliance costs for that very reason, that such can't be justified for much more than 1-3% of sales prices even though in comparison to the taxes paid by small businesses overall, $7 in such costs are put out for every dollar of taxes actually paid by them.
A business that can claim zilch taxable income still pays the accounting costs associated with that tax compliance number and there are many, many claiming zilch taxable income for a variety of reasons including tax avoidence schemes and out right evasion where the real costs get imposed in regard to how business must be done to achive low tax liabilities or hide evasion as the case may be.
But according to you, there are
"more uptoday estimates exist beyond those you cite"
After all Payne's biggest number comes from a 1985 study on lost opportunity, not direct cost.
I gave you 6 different references and only one is older than yours. Why the mention of a single source?
"While not precisely the same ..."
The two examples are not only not precisely the same - they are altogether different. The example in #311 is in fact a good illustration of the MECHANISM of embedded taxes and how they build into costs as a percent of the selling price of an item. You have missed the point that this is not discussing "revenue" or using "profit" as a percent of "revenue". You seem to be put off by the fact that some of he values used are - to your way of thinking - too high.
You may have missed the explanation I gave that this was not about the values themselves (so long as they were reasonably representative), but the mechanism of the cascading.
Also, my comments relating to the example converging related to the salient element of the table which is the value "Tax costs as % of selling price". This is the element of real interest in the example and it DOES converge to a particular value that varies depending on the numbers used for what are called "profit margin" and "tax rate". I have seen other somewhat similar examples that converge fairly similarly but to higher values, while this example converges to a lower value and is even more conservative (which is why I used it). It is also not intended to be a cost accounting breakout or presentation of overhead, etc. but a simplified example to show the effects of cascading tax costs (period).
Since you took the item cost as the factor to project (with or without the drum roll) certainly that value progresses upward (which is illustrative of the effect that cascading taxes has upon item cost). But that is not the point of the example - the "tax costs as % of selling price" is the item of interest. And, also, since you seem to be so picky, "selling price" here is the price to be input to the next level and "profit margin" is the desired or net or target margin hoped for or expected within each single Level.
Level 1 starts with an input cost of $1.00 and the business wishes/expects/hopes for/desires (etc.) to realize the indicated profit margin in forwarding their "thing" to the next level. To do that, they must be able to add the tax cost expected (assumed, guessed at, etc.) for the business (called "tax rate") to the desired target "margin" (or choose your preferred term) to arrive at "sell price" (which as I've said is the input price to Level 2 ($1.44 in the example). This allows the selling of the thing involved to Level 2 while covering both their expected/projected/etc. tax rate and margin. There is no "double counting" of tax (or anything else) despite your assertion. Nor is the "tax cost" removed by L1 paying its business income taxes. The tax cost is embedded within the input and passed on as input to L2.
Once the item enters Level 2 it a distinct known-cost item insofar as Level 2 is concerned and that cost ($1.44) has embedded in it the tax costs from Level 1 which, as they pass through Level 2, cascade and have the L1 tax costs increased by the operation of he L2 parameters).
Now - if the number in the example called "profit margin" (and remember, that's just what it's CALLED in the example) is so high as to drive you into apoplectic fits, then you certainly may use another so long it is nothing like the out-of-context 5-6% of revenue you proffer. We're not talking about revenue but that's something some seem to find hard to grasp. Use a profit margin value of, say, 15% if you like but certainly that is a fairly low number compared to businesses I'm used to. Your mileage may vary.
However many Levels there might be in the inceprion-to-consumption chain, it it the "Tax cost as % of selling price" that the end consumer must pay for the embedded tax costs. And the example applies to a business in general and not to any single form of entity (as one or two posters keep insisting by trying to use Subchapter C Ccorporations - that's where the tax rate figure came from BTW). There are other business entities and they all potentially pay taxes and embed tax costs into the things they sell.
You seem to think the example refers to the VALUE of embedded tax costs. That was never what was said, nor ever the intent of the example. It does show in simplified form how the cascading of business taxes (and remember, we're not including payroll/withholding tax or compliance costs) builds up in just a few Levels. Said another way, it is not the LEVEL of embedded taxes, but the MECHANISM that is illustrated. Many people on these threads do not understand how such a mechanism works. The example may help them grasp the concept.
As I've told Rebbie and others - that's your interpretation ... your opinion. It is not necessarily the correct interpretation, but merely one of many.
It is - like the Dr. J. flap - a fairly meaningless difference of opinion. As the FairTax progresses toward a vote this will become more clear.
The most difficult part of having this discussion with you is that you never actually answer direct questions with direct answers:
I ask you for a term we can all that has a common meaning; you send me a treatise on multiple terms. I use one of your offered terms exactly as your source uses it (since you offer no other definition), and you argue that my meaning is not your meaning. (Are you actually paying attention?)
I ask: "How man apples are we talking about?"
You reference a bunch of source material that researched the entire fruit population including how many apples there might be if we just didn't grow oranges.
I point out that your source is counting ungrown apples displaced by oranges and you say, "Well nobody properly counts apples anyway, and besides, it really doesn't matter how many apples there are, it's oranges that COULD be apples that really matters!"
And around we go again...
Since there appears to be no data you find credible on the matter of how much tax-related cost burden is directly available for price reduction under the FairTax (or any tax scheme for that matter) our discussion is moot. No matter what I say, you'll run away from your own sources if you feel cornered.
Since you can't even seem to agree to use your own terms consistently, the discussion is impossible. No matter which of your terms I use, you'll argue that the definition is now different than it was before.
This all makes our discussion unproductive, unconvincing and, frankly, rather pointless.
Interpretation?????????????????????????????????????????????????????????????????????????????????????????????
That was the assumption of Dr. Jorgenson's analysis. That is a indisputable fact. What are you talking about interpretation????????????????????????????????
This all makes our discussion unproductive, unconvincing and, frankly, rather pointless.
Agreed as your admission to overall tax related costs involved are much less than mine.
Bottom line I use Payne's work and 65 cents cost in for every tax dollar of revenue extracted by government based on a comprehensive overview of tax related costs. A source recognized by Hall & Rabushka, the architects of the Flat Tax.
You choose to prefer some other number or source limiting the assay of the burden imposed to a lesser level that you perceive as useful to your purposes.
In the two positions I can see no agreement possible as neither of us are going to budge from what we hold as credible assay of the situation. For the very call of whether or not a source is credible relies on ones assessment of such or willingness to accept another's assessment of credibility of a source.
I accept Hall Rebushka's assessment that Payne's work is a credible source as it is based on a broad range of studies and relatingto the burdens that the current income/payroll tax system imposes.
"You clearly have no grasp of what you are talking about."
Not so. Under the schema proffered by you and a (very) few others on these threads you take the position that money moved into the illegal economy (illegal aliens, drug dealers, etc.) has already been taxed and so is equivalent (somehow) to money coming from the illegal economy under the FairTax when spent for taxable things.
Let's examine that. Any after tax income put into the illegal economy would have yielded at best a fairly low tax rate since the "typical" individual tax rate is about 14% presently. Over and above that, though, such an example also pre-supposes that the person with the legal income actually PAYS income tax (not everyone does) so it would be necessary to offer some convincing data about the taxes paid (IF ANY) by those hiring day laborers.
In addition I take it you have not spent much time at work sites using numbers of illegal aliens when they were being paid. If so, you'd notice that the typical payment is NOT a check with neatly-printed deductions, etc, but greenbacks ands lost of them. Of course, one could suppose that the businesses doing this are actually reporting and paying income/withholding taxes to Uncle later as a good businessman would do. But then again, it is perhaps more likely that the business may fall within the 20-25% of tax revenue collected that is non-compliant (the IRS has no figures for the illegal economy or avoidance or criminal activity).
The point is that making the pretense that ALL of the money supposedly "after tax" is in fact after tax when some noticeable bit of it is never taxed at all is (at best) a strech. Even if taxed, the likelihood is that it would be taxed in the 14% or below rate which most individual taxpayers pay. There's no real way to quantify this, of course, but the corrolary of that is that you may not reasonably make the claim that all money going into the illegal economy is already taxed since that is certainly not completely realistic.
Moreover in the case of the drug dealers, etc., this is even more clear since a great amount of the money spent for drugs presently is stolen money - completely untaxed with no income tax paid at all (and the same comments as with the above example apply to any legal income involved). The FairTax will also yield considerable larger tax contributions fom this part of the illegal economy when spent for consumption. Trying to pretend otherwise is not something most would wish to defend.
Certainly it is true that only money transferring into the underground is taxed by the income tax (to some degree) and only money transferring out of the underground is taxed under the FairTax when spent for taxable consumption. Money that stays IN the underground is not taxed under either scheme. Those seem to be the only points of agreement but they leave a wide gap in tax revenues gained under the two circumstances.
The claim that has been made, though (I forget who made it), to which you seem to subscribe is that:
"... the money flowing into or out of the illegal economy gets taxed exactly once in either the current scheme or the FairTax scheme. No illegal transaction get taxed, therefore, given a revenue neutral system, the same dollar flow yields the same tax (just at different points in the flow.) ..."
... is simply not true and cannot be shown to be so. It is quite clear from what I have outlined above that the FairTax will draw greatly more tax "contributions" from the illegal economy than any present contributions made indirectly by income-tax payers. Your original observation about "... no grasp ..." then is VERY wide of the mark. It's good, also, that you don't INTEND to be "nasty" (accidentally, maybe???) since heavens to Betsy, it might make me faint!!
You don't know what the word "interpretation" means???
You catch on quickly.
Yes, but you seem to think hard facts are subject to interpretation. Facts are facts and you can't seem to face that.
Silly me for thinking the line labled "Profit Margin" wasn't really "profit margin" as is commonly understood, but is rather "pigdog's term for some number meant to illustrate a mechanism whose value doesn't matter and has nothing to do the term Profit Margin as used in accounting practice."
Silly me.
Silly me for thinking that profit margin was calculated against selling price (selling price becomes "revenue" in the accounting world, once the sale is made;) I should have known you were calculating "profit margin" against cost.
Silly me.
Silly me for suggesting that your example might be a compound interest model (a non-convergent series) even though the formula
FV=P(1 + r)^nEXACTLY reproduced the numbers in your table given you inputs. (BTW the MECHANISM, as you are so fond of shouting, is commonly known as "the magic of compound interest.")
Silly me.
Many people on these threads do not understand how such a mechanism works.
Well, you've certainly proven that!
Are any of you familiar with any other work, by any other author, seeking to quantify ALL costs imposed on the economy by the income tax system other than the one previously cited on this thread by Ancient_Geezer @ #534?
A comprehensive review of all the studies that attempt to measure the costs associated with the federal income tax appears in James L. Payne, Costly Returns: The Burdens of the U.S. Tax System (San Francisco: Institute for Contemporary Studies Press, 1993).
I am NOT familiar with any others but would LOVE to see them if they exsist.
If you are going to talk about ALL costs imposed by the income tax on the economy, you would also have to evaluate what the cost to the economy would be to a 30% sales tax. How many billions of dollars will consumers not spend to avoid paying that tax? The problem with these types of numbers are they are just guesses.
Yep, all the 15% bracket folks hire nannies, housecleaners and gardners.
Yep, all contractors paying an illegal workforce are only paying 14% in income tax.
Yep, nobody will steal goods or attempt to black market goods under the FairTax ... it wouldn't be "fair."
Yep. Drug dealers are very careful about the money they steal ... they only steal money that was completely untaxed.
Like I said, you really have no grasp of what you are talking about.
However, I did cite 6 publications in post 536 which are authoritive sources on the cost of the tax system. But, I'm sure they got it wrong too (because of that "definition" thing again!)
Who is James Payne and what hole did he pull these numbers out of?He based some of his numbers on the flawed Arthur D. Little study from the early eighties. The other's he pulled out a hole. I have his book and it is just a hatchet job.
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.