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
In a perfect world, maybe.Are you denying that competition, in this not-so-perfect world, affects pricing?
And this helps your argument how?
Embedded taxes do not represent taxes paid by employees. I still cannot understand how anyone with even a rudimentary understanding of economics believes this. Taxes paid by employees in the form of income taxes come from wages paid by the employer. The 23% has absolutely nothing to do with those wages. Do the wages affaect the overall price? Yes. But they are not part of the 23% of taxes embedded in the cost of products. The 23% comes from taxes paid by the employer and by the employer alone.
The salary is already being paid. It is not figured into the 23%. The 23% is from taxes paid by the employer. The wages affect the price, but they are a separate issue.
OK, why do you say it's only 6 or 7% when all the economists who were cited for the book say it's 23%?
Embedded taxes are whatever the person who did the research said they are. And the researcher who did the study and was paid for it by Americans For Fair Taxation (people who run fairtax.org) has stated clearly that he included taxes paid by employees as embedded taxes to come up with the often quoted 22% number. If you want to define it as something else fine, but the 22% number is meaningless with your definition and is in fact dishonest at that point.
Have you read this thread???
The employer's income is not being cut by 20% (it's 23% by the way). The taxes, which add 23% to the employer's cost per unit is cut. The savings realized by the employer is passed on in the form of a price cut. Cut the cost 23%; cut the price 23%, and the per unit profit remains the same.
THE economist cited, Dr. Jorgenson, has said that 22% number for embedded taxes includes taxes paid by the employee. How many times must this be said? The FairTax organization has been GROSSLY misrespresenting this number for years. My 6-7% number comes directly from figures from the IRS on total taxes paid by businesses including business share of payroll taxes and the NIPA numbers for consumption.
No it is not.
Their customers pay the 23% tax on the sale of their services, not them. The taxes they pay for personal purchases that have nothing to do with the business are a separate item anyway.
Any tax they pay when they spend money is a personal purchase that has nothing to do with the business. Under the Fair Tax, their business is not paying any taxes anyway. Neither would they pay taxes on any salary assigned to themselves as an employee of the business. They are currently paying an income tax. If they are fairly successful, you can bet it's higher than 23%. With the fair tax, they will pay their taxes in a different way. The benefit is the elimination of the IRS, and the fact that the Fair Tax doesn't punish productivity. like the current tax code does. The top 50% of income earners currently pay 96% of all federal income taxes. The Fair Tax shifts some of that burden off of the most productive people, and makes the folks who pay nothing start helping out. Even those folks will benefit, as the rebate check for basic necessities up to the poverty line will help them.
Nothing to do with the business??? Are you guys serious??? How can tacking a 30% (not a 23%) tax on a service not effect the business? Besides it is the business who must charge the tax as part of thier bill, and collect the tax, and remit the tax. That 30% tax has a huge bearing on whether I am going to pay someone for that service.
I would be there is not one Fortune 500 company that pays anywhere near 23% of their gross on federal taxes.
Neal Boortz has stated that this isn't a tax cut. It is a way to levy taxes in a more efficient and fair manner. Many who are paying nothing will now pay. The IRS, and the tremendous cost of funding that institution will disappear. Foreigners will now pay taxes in America, regardless of how long they stay, or what their status is. People disagree on the 23%. Fair enough. Boortz and Linder used the brains of many economists to write this book. I tend to believe his numbers. I guess that's where we disagree.
I have been following the hurricane threads. Have you heard anything from Boortz or Linder? I e-mailed Boortz and haven't heard a thing.
How can you believe the numbers when the economists who wrote them says they are wrong. Even fellow fairtaxer Mind-numbed Robot admited it was a mistake here.
You're right about one thing ... the "silly you" part. Additionally you've illustrated your complete lack of understanding of how the cascading of taxes works.
There were never any "generally accepted accounting practices" mentioned in explaining the example nor was there ever any thing described as "pigdog's term". What the example meant by those terms could be clearly understood either by viewing the example in #311 (if you bothered to think about what it meant) or by reading the description in #546.
In fact you even more clearly indicated your lack of understanding of the example when you pretended the input price was the real item of interest. Perhaps you really do not understand that "tax costs as % of sell price" is clearly the item of interest since it represents the percentage of tax coss that have cascaded and become embedded into prices and that percentage (which converges asymptotically to a given value as I have said) is what the end use consumer will pay as a percentage of whatever he purchases.
And you're now trying the age-old liberal stunt of trying to impugn someone who does not agree with you. In fact, it's apparent that you do not understand the cascading of embedded tax costs at all. You've clearly shown that without even realizing it.
"Hard facts"??? In whose opinion - let me guess ... yours???
How can you possibly still be in denial when it comes from the horses mouth? You are a piece of work. At least mind-numbed Robot has seen the light on this one.
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