MONEY finds flaw in 'FairTax' bestseller [FairTax myth busted by major magazine]

CNN ^ | 9/7/2005

[Your Nightmare]

A bestseller advocating radical tax reform contains a critical flaw that misleads readers, according to a report in the October issue of MONEY Magazine.

...

While consumers would pay a federal sales tax on purchased items, the authors argue that prices at the store would stay the same. The reason: everyone involved in the process of production would no longer be paying taxes, so they could charge less for their goods and labor.

If true, that would mean a dramatic increase in Americans' purchasing power.

But, according to the MONEY report, the book fails to make clear that, in order for pre-tax prices to fall so sharply, companies would also have to cut wages they pay.

"Sure, you'd get to 'keep 100 percent of your paycheck,' as Boortz and Linder repeatedly write, but it would be a smaller paycheck," MONEY senior editor Pat Regnier writes. "That's kind of a big thing to leave out."

[Always Right]

Only a true-blue, full-blooded idiot would argue in defense of the present system - either that, or someone who has a big investment in maintenance of the status quo.

I am not defending the present system. I just insist that the proponents stop selling snakeoil. Prices will go up and I have to evaluate how that will impact the new housing businesses. Don't lie to me and tell me my prices are coming down when I can look at my expenses and know they are not. Trying to get fair taxers to admit the truth is like pulling teeth.

[ancient_geezer]

Ancient_Geezer is conspicuous by his abscence...

Very very strange, indeed. must be some kind of conspiracy, or perhaps hiding in a corner.

Or perhaps ancient_geezer does not respond to pings never received from those who would rather not have him show up as they gossip.

Perhaps, even the omniscient ancient_geezer does not view threads before the time he gets up in the morning.

However since ancient_geezer is here now, lets just look at what your bug is all about. You know the meat in the actual reports that Jorgenson has published on the subject, rather than interpretaions of representations made about his model six years later after the fact and after Jorgenson has begun promotion of his own tax reform idea (the Efficient Tax).

You know, the "obvious" assumptions Jorgenson makes in constructing his general equilibrium models concerning wages that Jorgenson fails to mention in his descriptions, even for his "Efficient Tax", you know the assumption that every one makes, that employers are expected to steal witholding from their employees when income taxes are repealed.

Of course not mentioned by the opponents of the NRST and the article of this thread is the engaging result provided by Jorgenson's study. Namely, in repealing income taxes alone prices to the producer are expected to fall 22%, providing a net increase in purchasing power of the consumer (with tax included) of 3% in the first year rising to 10% in the 25th year. All for an NRST replacing only income taxes and leaving SS/Medicare tax inplace.

Of course everyone should naturally expect wages themselves to go down with results indicating:

• more than 10% GDP growth,
• more than 70% increase in personal savings and investment,
• more than 25% increase in exports from US industries closing the trade gap,
• production quantities rise more the 20% for most of the 50+ industry sectors in his model

all of which must assuredly force wages in the dumps. At least according to opponents of the FairTax legislation.

Yes indeed it is a real strange conclusion that maybe wages would at least stay about where they are today with such results, lacking any statement to the contrary in his published studies or in assumptions made in their model descriptions.

---

 

For those who care to look beyond the hoky headlines, here is a link to Jorgenspn's IGEM preformance in a national retail sales tax replacing only income tax, (not to mention anything about SS/Medicare the Fair Tax act also implements.) Interestingly it also provides a comparison with FlatTaxes as well. Are we to make a conclusion concerning falling wages with Flat Taxes as well?

 

http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Revised April 12, 1999.
THE ECONOMIC IMPACT OF FUNDAMENTAL TAX REFORM
by
Dale W. Jorgenson Harvard University
and
Peter J. Wilcoxen University of Texas, Austin

This paper was prepared for presentation at the
Baker Institute Conference
on Tax Policy Reform
Rice University Houston,
Texas November 6, 1998

---

We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described.

The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided.

 

If Fair Tax proponents have made an error in interpreting Dr. Jorgenson results, perhaps you can point out where Jorgenson has indicated which direction wages trend in his papers, and what one is to make of his conclusions on the basis of what he actually published rather than interpretations of his communications 6 years after the fact.

The conclusions begin on page 25 of the PDF, after his description of his IGEM model implementation, for those who would rather get to the meat of the results first. However I highly recommend reading his descriptions to determine just what his model is held to represent.

[ancient_geezer]

Your Nightmare:My agenda includes the Flat Tax. It's a workable consumption tax that isn't being promoted with lies.

You mean, other than trying to sell an income tax (including retaining the VAT-like effects of corporate income taxation) as a "workable consumption tax"?

Or trying to sell people on the idea that the IRS disappears with a stake in its heart for lack of information on a post card.

"I have written a book, Flat Tax Revolution: Using a Postcard to Abolish the IRS"
-- Steve Forbes

When just the opposite is quite obvious to any with an understanding of what the IRS is there for. Namely : to wonder about and audit folks to determine accuracy and veracity of the content of said post card.

Course there are one or two other small exceptions to reality to be seen here:

Flat Tax as Seen by a Tax Preparer
by Vern Hoven

that we dare not mention as well.

[Your Nightmare]

Are we to make a conclusion concerning falling wages with Flat Taxes as well?

No, because the employee will be paying taxes on their wages so there is no change in the wage bargain. There is no adjustment of prices. There is no double taxation of current wealth.

This is a huge advantage of the Flat Tax.

[lewislynn]

Only a true-blue, full-blooded idiot would argue in defense of the present system - either that, or someone who has a big investment in maintenance of the status quo.

Only a true-blue, full-blooded idiot would equate the truth of one as defense of the other...

[Your Nightmare]

bump

[Lee'sGhost]

Thank you! I was thinking, gee, "that means my employer has been paying my taxes all this time. How nice. And all this time I thought I was. So did the IRS, come to think of it."

[lewislynn]

the employee will be paying taxes on their wages so there is no change in the wage bargain. There is no adjustment of prices. There is no double taxation of current wealth.

This is a huge advantage of the Flat Tax.

IOW, life as usual only better....

[carenot]

My employer is required to pay what was withheld from my check ( $ 250 ) PLUS additional taxes of almost $ 80 to the government.

I am sure you have more education than I do.
But, you would get the $1000.

The employer does't pay that. He takes it from your check and sends it to the IRS.

[litehaus]

"Money" is published by Time magazine.--- They have an agenda ---that doesn't include the Fair Tax."

Needs repetitive,redundant,repetition,repeatedly!

[carenot]

I just can't get into screwing over the poor and elderly as much as this plan would.

I am old and very below the poverty level. The Fair Tax would help me.

Thanks fer caring, though.

[ancient_geezer]

No, because the employee will be paying taxes on their wages so there is no change in the wage bargain.
This is a huge advantage of the Flat Tax.

While according to that Jorgenson study the revenue neutral tax rate under the Armey Flat Tax must increase to more than 25% on both business and individual instead of the Armey/Forbes et. al. advertized 17% and wages don't change to accomodate?

• With declining exports widening the trade gap, and
• essentially flat GDP of less than 1% increase over the current income tax system.
• while depressing savings & investment by and additional 8%, and fostering increasing consumption by another 3% over current levels
• depressing investment goods prices over 6%
• while managing to depress consumer prices on top of it all.

Looks like a lot of no change or malaise at best, or general loss of ground to me with more spending and less saving and investment, constrained business profitablility, with greater dependance on government subsidizing retirements with SS/Medicare.

Indeed a lovely trend being accelerated by the Flat Tax, that:

Rate of Personal Saving Plunges 100%
- to new record low -
$985 Billion missing

"If families have less inflation-adjusted income, despite mother working, then family personal savings must suffer as a consequence - unless, of course, families reduce their consumption. But, families increased consumption spending and, to cover this, they reduced savings to historic lows and increased household debt to historic highs. Dangerous Trend !!!"

And we still get to keep that pesky IRS and volumes of tax code defining what is taxable and not in business as well.

Flat Tax as Seen by a Tax Preparer
by Vern Hoven

Just lovely.

[carenot]

Prices will go up and I have to evaluate how that will impact the new housing businesses. Don't lie to me and tell me my prices are coming down when I can look at my expenses and know they are not.

I am very sorry that your prices won't go down. I have bought a lot of houses, (7) all used. Never bought a new one.

[Kellis91789]

It's nice to see the author had no agenda. You couldn't possibly interpret him as a tax-and-spend liberal based on little statements like

"Just eliminate most federal taxes -- income tax, Social Security tax, corporate tax, what's left of the estate tax -- and replace them with a big, fat national sales tax."

or

"...and points out that a decade ago nobody in Washington thought the estate tax was vulnerable either."

I love watching the word choices authors use. It tells you so much about their politics.

"Counting Social Security and payroll taxes, your marginal rate may be north of 30 percent."

As though there is some doubt.

"They make a very big claim that isn't debatable at all. It's just wrong."

Not debatable ? We debate it all the time. This is just the author's conclusion and that of Dale Jorgenson. Yawn.

Oh, and a "tax law professor". As though he would be impartial when his livelihood depends on the arcane mess we have now. He's not an economist, and he would apparently say the same thing to a company that proposed using a more efficient method for anything -- "It is practically and logically impossible for the [any entity] to be collecting the same amount of money as before and have everyone suddenly be better off." Sure. Try telling it to the company that kept it's books with paper and pen 50 years ago. Try telling them there is no such thing a productivity gain. He apparently puts zero value on all the labor his own students will ever perform. Won't they be surprised when they hear it ?

[Non-Sequitur]

Bump

[GregoryFul]

What they are pointing out is that the employee must settle for a reduction in his (virtual) pay to arrive at his (take home pay). But the fair tax argument is that the employee will see an increase in (take home pay) and a reduction in wholesale price due to elimination of (corporate taxes) the (net take home pay) will cancel the increase in (price) for the goods the poor employee is bidding for.

For a tax proposal to be revenue neutral, the Feds will be getting the same revenue before as after. Since the individual is the only "real" taxpayer in the system, your real taxes will not be reduced. They will probably go up, because the leisure class will be able to avoid even more taxes.

My guess is that these "fair tax" people are going after the one time buldge in tax receipts they will get from the double taxation of the retirement savings from the "baby boomers" about ready to retire.

[Kellis91789]

You are forgetting the expenses to a business that will be removed -- without reducing the employee gross at all. Businesses pay an average of 3% of revenue as income taxes and 2% of revenue as employer-matching of FICA taxes. So that is 5% right off the top at the retail level. Now add in the expenses associated with paying and tracking those taxes. The employees that do nothing else. The business decisions that are made for tax reasons rather than sound business reasons. The higher cost of borrowing money because the lender must pay income taxes on the interest they charge. It goes on and on.

Now apply that same saving to each layer of a supply chain.

It is logically impossible that there would be no price reduction. That price reduction will be MORE than the taxes the business paid. It has to be, or else you are claiming all the other costs which did not contribute to the value of the product must have been FREE.

So you can esitmate the price reduction two ways:

1) Figure it for each business in a supply chain and add up the savings to each business.

2) Take the total taxes paid by businesses -- including non-coporate businesses -- and their compliance costs, then divide that by the total revenue for all those businesses.

The "compliance cost" is an unknown. Estimates range from $200B to $800B. The actual taxes paid are readily availabe from the IRS databook -- they total $800B. So there is somewhere between $1T and $1.6T that business will save with income and payroll taxes removed. That is not a trivial cost reduction. It is between 9% and 15% of the GDP. And it doesn't include any of the costs of the economic inefficiency of all that wasted effort or poor business decisions.

The 22% price drop may not happen. But it is fairly easy to see that SOME significant price drop is available.

If businesses can't drop prices more than 10% without reducing gross wages, then that is all they'll drop them. It seems unlikely that they'll fight employees to take a cut in gross wages.

As far as "double taxation" of retirement savings goes, how much of that is there ? If it was saved in a 401k or IRA, it never got income taxed. It did have SS taxes against it -- unless it was earnings above the SS cutoff point. If it is savings outside of a tax-deferred plan, then it is paying income tax on its interest earned -- and that won't be the case after the FairTax is in place. That money will grow faster without having income taxes siphoned off of it each year. And when it is finally spent, it will be spent on items that cost less than they would have under the income tax system.

Actually, if the income tax continues, the IRS is currently owed $3T on income that had its taxes deferred by going into 401K and IRA accounts. It seems unfair that Roth IRA and other non-deferred accounts have already paid income taxes and won't get as big a break as the tax-deferred account holders. In fact, there are two aspects of the FairTax I'm not wild about and would change if I could. This tax holiday on income-tax-deferred accounts is one of them. If the deferred income taxes were collected from those accounts, we could reduce the FairTax rate from 23% to 19%. The second thing I'd change would be the "Prebate". I see no reason why everyone shouldn't contribute to the cost of running the country on a flat percentage of what they consume -- progressivity is just a way of punishing success . Eliminating the Prebate would lower the rate still further -- from 19% to 16%. These two changes would reduce the temptation to evade the FairTax, as well as stop those that are currently paying no taxes from voting for more spending and higher taxes to pay for it.

[BADROTOFINGER]

I have not heard a decent arguement yet against the Fair Tax. Perhaps I should be following these threads a little more closely.

But you are correct. The payroll tax savings alone should be plenty to cut prices and increase profits for businesses. Or even give employees a raise...JFK

[lewislynn]

If I gross $ 1,000 per week, I presently take home about $ 750. My employer is required to pay what was withheld from my check ( $ 250 ) PLUS additional taxes of almost $ 80 to the government.If FAIR tax gets enacted, will I be paid:
a. $ 1,000
b. $ 750
c. $ 1,080

I just want an answer to that one question.

You would probably get $1000 but that doesn't change the government needing the $250 withheld from your check plus the $80.00 from your employer who won't be paying it anymore...Any guesses who will?

The 23% teaser rate is only for the first year. Do the math. You would be taking home $1000 but the government still needs the $330.00 previously paid (and then some)...that won't change, even the Fairtax brags that it's revenue neutral.

If you're single you'd get $69 a week rebate. The only way for the government to get that $330.00 from your $1,069 spending is with a 44.6% (not 23%, not 29.87% or even 33%) sales tax not including the cost of the rebate...("revenue neutral" AND a "rebate"...the "rebate" isn't a tax cut, it has to come from somewhere).

That's why I say your takehome pay should be $1080 + $69 ...Then the sales tax rate would (only?) have to be 40% (not including the cost of the rebate).

[balrog666]

What is the total fairtax charged on a 100.00 US item? Not a 77.00 dollar item, a 100.00 item.

$129.87 + State sales tax + local sales tax + city sales tax