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
The impact on the illegal economy from the implementation of the FairTax is a matter of conjecture.What will really happen? In the words of Kellis91789:
"No way to know."
Don't overgeneralize. My comment was specific to how many nannies are smart enough to realize their bigger benefit is to work legally. Not that the entire question of underground economy activity was an unknown.
I left out the prebate because she is working under the table. She doesn't get a pre-bateWouldn't every American with a social security number get a pre-bate check? I didn't think it was dependendent on if you were employed, legally or illegally. Unemployed people still buy things and would pay the sales tax.
Someone is smoking something!!! Have you or the good Dr. ever been hired by a company? Net pay is never discussed or agreed to. An offer from a company is at gross whether the amount is an hourly rate or an annual salary. For a company to do what you and the good Dr. suggest would be a breach of contract and a cause for action not to mention the reaction of labor unions. THINK! and get real.
You are only looking at 1 step in the production cycle. The retailer obtains their inventory from a distributor, the distributor from a manufacturer, the manufacturer from his suppliers, raw materials or sub modules. Add them all up.
Rob, I just looked at you home page. It appears you are attempting to do good working with addiction. I think you should stay with that topic because you are apparently out of your league when discussing taxes.
And I think you are a jerk.
jcrew2187,
Rob's article is not really his own conclusion. He simply asked Jorgenson to clarify some oft-quoted numbers. Jorgenson provided answers that seem to disagree with the interpretation FairTax.org and Linder and Boortz have placed on Jorgenson's research.
Jorgenson created a model 10 years ago that addressed the entire supply-chain and showed results of cost savings from eliminating the tax-related costs -- both direct and indirect -- from each layer. The FairTax quotes his result but (apparently) misses the part of his model where he assumed the employee-side of income taxes and payroll taxes were actually a cost to the business rather than to the employee. This is a bizzare economic viewpoint to take, but his direct response to Rob seems to confirm that is what he did in his model.
We can all run our own analysis of various companies and industries, and we can reference work by other economists, and we can conclude that Jorgenson was either wrong all along or that he mis-interpreted Rob's question to him.
We can do all of those things.
But if we take Jorgenson's replies to Rob at face value, then we can no longer reference him as a source for the concept of simultaneous "full paycheck" and "price drop of 22%", because he has responded that is not what he concluded 10 years ago.
I wish Rob had followed up with a direct question like:
"Given that business continues to pay the same gross wages to the employee, and only realizes the savings of their direct taxes and their compliance costs, what was the cost reduction at retail ?"
If his model did not include this option, then I fail to see how he addressed the contract from the AFFT. He was paid to research this question, and his conclusions should have included this option.
The headline seems rather misleading; hardly an explosion of a myth. Rather it is a disagreement of terms of calculations.
Those who demand honesty should also exhibit it themselves.
Just to clarify my point: we all know there are some cost savings to businesses, we are only arguing about how much.
We can look at the 2004 IRS data book and see (roughly):
Corporate Income Tax: $200B
Payroll Taxes: $696B
Individual Income Tax:$900B
Half of the Payroll taxes are paid by businesses. Some portion of the Individual Income tax is paid by businesses in the form of sole proprietorships, partnerships, LLCs, etc. that are not included in "Corporate". Maybe another $200B.
The widely used figure for Income Tax Compliance is $225B, most of which would be business -- including individuals with a business, whose compliance costs are obviously much higher than for simple wage earners. So figure $150B for that. This figure does not count Payroll Tax Compliance, so figure another $50B, maybe.
So we could easily conclude a minimum of $950B savings to businesses. And it all had to paid from prices charged to customers.
The FairTax base for 2004 would have been $8.7T. So the $950B would be at least 11% of those retail sales. The portion of those retail sales which was produced in America was only $6.7T, because $2T of what was sold was imports, which had lower taxes and compliance costs embedded in them. So we are at somewhere between 11% and 14% without even trying hard.
Maybe Jorgenson needed to include the employees' taxes to get up to the higher percentages quoted. But certainly his response should not be interpreted to mean there is NO price reduction available without reducing gross wages.
I have agreed that there is likely 8-10% cost savings to be realized through:
1)elimination of employer FICA match both as it applies to the labor portion of the business costs, (about 7.5% of labor)
2) elimination of employer FICA match embedded in purchased goods (maybe 5% of purchased parts),
3) C corporate taxes (about 1-2%),
4) compliance costs (0.5-1% max)
To get to 23% there needs to be savings to the business from the employee half of FICA and income taxes.
Some portion of the Individual Income tax is paid by businesses in the form of sole proprietorships, partnerships, LLCs, etc. that are not included in "Corporate". Maybe another $200B.
If you are going to give the wage earner his "full paycheck", you need to do the same for the business owner, so you cannot add this $200B to your savings. And the $225B compliance costs is probably quite overstated considering that businesses will still require their accounting staffs to do almost everything they now do, except fill out federal income tax forms. But all this information will still be needed to file with the SEC, to manage the business, and to document the business expenses to make it an airtight audit trail.
So, using your numbers I would get $350B (employer half of payroll) + $200B (corporate taxes) + maybe $200B (a guess)= $750B out of $8.7T for 8.6%. But we are at least in the same ballpark and in agreement that to get to 23% reduction, the money will have to come from Income Taxes and Employee portion of payroll taxes. 23% of 8.7T is $2T-- the money we are looking for is what you see referred to as the "missing Trillion" or the "missing $1.35T". It is an interesting coincidence (not really) that the individual income taxes + employee half of payroll taxes are equal to the missing amount.
The study assumed that the payroll and income taxes would accrue to the employer, and Jorgenson confirmed it. The "full paycheck" is a misreprentation.
THanks.
see #653
Not saying they can do it, I'm jsut saying that the model ASSUMES they can cut everyone's gross pay to their current after-tax pay.
And I've both been hired and hired people, ususally without a written contract.
Dear RobFromGa,
As an employer, I'll note that generally, unless I've signed something that guarantees something to the contrary, I can change the terms of employment with sufficient notice. My own attorney recommends 30 days.
sitetest
"If you are going to give the wage earner his "full paycheck", you need to do the same for the business owner, so you cannot add this $200B to your savings."
Nope, I don't.
I've always said this was the dirty little secret about the FairTax requiring businesses to pass along their tax savings in price reduction. When it comes to small-businesses, that means the owner doesn't see his net profit increase by the amount of tax he saves. For corporations, a similar requirement is that the portion of profits that was paying taxes cannot be returned to the shareholders as dividends -- it has to be passed along to the next layer of the supply chain and eventually to the consumer.
Your items (3) and (4) are each a little low. As I've said, the Corporate tax from the IRS data book is slightly more than 2%. Compliance costs look like 1.5% to 2%. But maybe we are talking about apples and oranges. I am taking the totals for the economy, and maybe you are talking about each stage of production ? So you are talking about the multplicative effect ?
"And the $225B compliance costs is probably quite overstated considering that businesses will still require their accounting staffs ..."
I don't think it is. This number would be meaningless if it didn't apply to just the ADDITIONAL costs. Although I've seen estimates anywhere from $200B to 600B for compliance, I think it is safe to assume a $225B figure is only for the costs businesses would not otherwise incur.
"But we are at least in the same ballpark and in agreement that to get to 23% reduction, the money will have to come from Income Taxes and Employee portion of payroll taxes."
Yes, and no. I said maybe Jorgenson needed to include the employee taxes. Not saying I agree with him. Remeber some of his industries had 30% reductions. 22% for goods and 25% for services were only averages. And I think you are including in the $8.7T the imports which contain a lower tax component. Strip out some of that and you get a higher percentage for "American-made goods and services", wouldn't you agree ?
[The "full paycheck" is a misreprentation.] Well, I wouldn't say that. I would say that "full paycheck and simultaneous 22% price reduction" is a misrepresentation. Remember that HR25 doesn't require anybody to change their prices or to change their wage structure. It could go all one way -- 22% price reduction and 15% lower wages. Or it could go 14% price reduction and full paycheck. Or anywhere in between. Free markets will decide.
Of course, we haven't counted the prebate, so even if there were lower wages, people wouldn't feel the full effect of it. And those already retired wouldn't feel a wage adjustment at all. If wages held at current full levels, a 14% price reduction is still possible.
The FairTax website shows an example of what happens if prices fall only 11%. People still came out ahead.
Employees get a higher take-home, owners don't.
Obviously owners will correct this imbalance. They are not going to give their employees a 20-25% windfall and stay the same themselves. They would be at a relative purchasing desadvantage.
If wages held at current full levels, a 14% price reduction is still possible. The FairTax website shows an example of what happens if prices fall only 11%. People still came out ahead.
Except for anyone who is already retired living on savings or a fixed income. The 11% price decrease, combined with a 30% tax on top of it is a 15.7% drop in purchasing power for every dollar already saved.
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.