Herman Cain about the Fairtax issue TODAY (3pm ET) on RIGHTALK.com!

RIGHTALK.com ^ | 12-13-04 | Bob J

[lewislynn]

How many times are you going to float the canard that employers could ad hoc violate employment agreements by keeping the former income taxes from the employees for themselves?

Use some grade scool math and simple logic.

Employers retaining employee's taxes is the only mathematical way there can be anything near 20% price reductions. The only binding employment agreements I'm aware of are with unions and employers. Other than that, I'm pretty sure there aren't any.

[lewislynn]

What is obvious is that you care not for the truth, but you'll use anything you can latch on to -- even after it has been proven false

Unless the price reductions you brag about are statutory there is no proof they can or will happen.

The "proof" you claim to have is nothing more than words uttered by a hired economist in a meeting somewhere.

[phil_will1]

"I must not understand basic macroeconomics."

I agree with you. That has been demonstrated many times on the FR tax threads.

Have you had a chance to pick up an economics textbook and go over the section on the elasticity of demand yet?

[phil_will1]

"The only binding employment agreements I'm aware of are with unions and employers. Other than that, I'm pretty sure there aren't any."

I'll go out on a limb here and suggest that ALL employment agreements have an employer as one of the parties.

[Your Nightmare]

Have you had a chance to pick up an economics textbook and go over the section on the elasticity of demand yet?

Yeah, it says, with all other factors held constant, demand goes up or down as price goes down or up, respectively. What does that have to do with prices falling under the FairTax.

[Your Nightmare]

I'll go out on a limb here and suggest that ALL employment agreements have an employer as one of the parties.

I don't have an employment agreement with my employer, do you? Mine can cut my salary any time he wants. If I don't like it my only recourse is to quit.

[phil_will1]

"I don't have an employment agreement with my employer, do you? Mine can cut my salary any time he wants. If I don't like it my only recourse is to quit."

I thought you previously posted that you ran your own business. I am self employed.

Neither of which has much to do with your statement that employment agreements generally have either an employer or labor union as a party. I'm still not sure what the point of that statement was.

[phil_will1]

"Yeah, it says, with all other factors held constant, demand goes up or down as price goes down or up, respectively."

That's a good start. If you had read further, you would have probably learned that businesses exist to maximize profit and that profit maximization and price maximization are NOT, I repeat NOT, synonymous. IOW, you can actually increase profits in many cases by lowering prices. When a producer has a significant reduction in costs, that is one of those cases.

[Your Nightmare]

That's a good start. If you had read further, you would have probably learned that businesses exist to maximize profit and that profit maximization and price maximization are NOT, I repeat NOT, synonymous. IOW, you can actually increase profits in many cases by lowering prices. When a producer has a significant reduction in costs, that is one of those cases.

Sure, if you ignore all other elements of economic theory and only focus on price elasticity of demand. Otherwise, things are a little more complicated.

First, the only way producers can reduce costs anywhere near 23% is to reduce wages. The numbers don't add up otherwise. Does your economics book talk about "sticky wages"?

Second, you are assuming demand and supply (including labor) are perfectly elastic and that all markets are perfectly competitive so a producer will have to reduce prices to keep the same profits. That's a pretty optimistic assumption. I'm pretty sure supply and demand not totally elastic, so producers would not have to drop consumer prices by the full amount of any producer price drops. You see, businesses exist to maximize profit.

Third, assuming we get to keep our entire paycheck, you are ignoring income elasticity of demand (look that up in your economics book), which would counteract any downward pressure on prices.

Fourth, you are not accounting for any central bank response. The Fed could, and probably would, adjust the money supply to make sure that prices don't drop.

Things get a little more complicated when you put down the economics book and start to look at the real world.

[ARCADIA]

IOW, you can actually increase profits in many cases by lowering prices.

As you say, this would work in "many cases", but not in all cases. There are plenty of demand curves that are very resistant to price fluctuations. If you are on critical lifesaving medication and the price of the drug doubles or triples, you will continue to buy the same quantity of the drug for as long as you can; you have no choice. The same can be said for much of the US commercial market place. A US tax reduction would have no impact on foreign producers - which provide most of our manufactured goods; and, there are few if any domestic manufacturers available to replace our imports. In order for Demand Elasticity to work, the market must offer practical substitutes. You have talked about a cost reduction, but have failed to apply the theory to the reality of our present condition.

Some food for thought:
1) A 23% reduction in costs is a far smaller number then a 23% rise in retail price. Who would you think gets to eat the difference?

2) Before price reductions can occur you have to produce the goods domestically, where they can take advantage of the new tax structure; and do so with such advantage that they can price their goods at least 23% below where our imported goods are price today. Would your tax proposal provide that level of competitive advantage? Would the advantage be developed through the continued erosion of labor's buying power as dollar continues to decline?

3) When you change the pricing calculus to the extent proposed by a fair tax, you redefine goods. A block of wood purchased under the existing system would become a different economic creature under a fairtax regime. This would complicate whatever analysis we do with respect to trends. You would aways have to include some kind of adjustment to approach the pricing of things pre-post change. This in itself can create an opportunity to conceal additional taxes, and inflation.

If economics and its theories worked as you describe, then predicting the stock market would be a mechanical science rather then an art. Economics is ultimately not about econometrics, but about describing the complex collective behavior of people. We will never have enough information to pull it all together as neatly as you would suggest.

[phil_will1]

"We will never have enough information to pull it all together as neatly as you would suggest."

Wow! I never thought of it like that. What you are really saying is that we have no choice but to wait until the current system inevitably collapses of its own massive weight and we have have a major financial crisis. Would you think that we could react to that then, or would you still advocate sticking with the status quo?

[phil_will1]

"The Fed could, and probably would, adjust the money supply to make sure that prices don't drop."

After-tax prices aren't dropping, only before tax prices. How in the world would the fed adjust the money supply for THAT? Not only that, but changes in the money supply would seem to affect imports and domestically produced goods equally. If we eliminate the bias that our current tax system provides to foreign producers over and above our own producers, how is the Federal Reserve going to restore that bias? More importantly, why in the world would the Fed want to do that?

YN, you have been turning cartwheels in logic, common sense and economic principles for years now trying to find the magic bullet that will kill the FairTax. You are welcome to keep trying, but you aren't convincing anyone.

[phil_will1]

"1) A 23% reduction in costs is a far smaller number then a 23% rise in retail price. Who would you think gets to eat the difference?"

What are you talking about? Who says a reduction in costs will lead to a RISE in retail prices? This question makes no sense whatsoever.

[Your Nightmare]

What are you talking about? Who says a reduction in costs will lead to a RISE in retail prices? This question makes no sense whatsoever.

It's pretty obvious he mean a 23% drop in retail price.

[Your Nightmare]

After-tax prices aren't dropping, only before tax prices. How in the world would the fed adjust the money supply for THAT?

Reduce the money supply and prices go up. If they don't accommodate a price increase, wages must go down so that after-tax wages don't change. Read "Monetary Implications of Tax Reforms."

If we eliminate the bias that our current tax system provides to foreign producers over and above our own producers, how is the Federal Reserve going to restore that bias?

I don't think the money supply would affect the "bias." Both domestic and foreign goods would be produced tax free and taxed upon consumption, just with a different value in dollars.

More importantly, why in the world would the Fed want to do that?

Because if prices fall dramatically it could lead to serious shocks to the economy (unemployment, stock market collapse, etc) that may take a very long time to overcome. Not letting prices drop is the safest route.

YN, you have been turning cartwheels in logic, common sense and economic principles for years now trying to find the magic bullet that will kill the FairTax.

And you are wallowing in ignorance. You are trying to get everyone to believe that gross wages and net prices will stay the same with the FairTax. That we will pay the same price for stuff inclusive of tax and take home what use to be withheld from our paychecks. That's not economics, that's snake oil.

[phil_will1]

"That we will pay the same price for stuff inclusive of tax and take home what use to be withheld from our paychecks."

I never said that. I have always said that we would pay more for imports. Over time, US production would increase to accomodate the increased demand. With all the excess capacity that we now have, that shouldn;t take very long.

[phil_will1]

"Because if prices fall dramatically it could lead to serious shocks to the economy (unemployment, stock market collapse, etc) that may take a very long time to overcome. Not letting prices drop is the safest route."

What in the world are you talking about? You have always been concerned with an INCREASE in after-tax prices, and now you are concerned about a precipitous DECREASE?

Any port in a storm, huh?

[ARCADIA]

What are you talking about? Who says a reduction in costs will lead to a RISE in retail prices? This question makes no sense whatsoever.

If I understand your argument with respect to prices, we would impose a 23% tax on the retail price of consumer goods. However the customer will never actually pay the current price +23% because the cost of manufacturing would be reduced by the same 23%. This cost reduction would be derived from eliminating taxes upon the manufacturing process. You have argued that the additional profitability would attract new makers and result in a price drop driven by demand elasticity.

I am merely pointing out that a 23% cost reduction in a manufacturing process is not equivalent to the difference generated by a 23% tax hike. Your argument is specious, and; yes, I am conservative when it comes to scraping the financial underpinning of this country and replacing it with a half baked cornball concept. We can achieve the same objective by exercising some fiscal discipline; and it is hard to take this seriously when our congress, the administration, and the leadership of both parties are the guys imposing the pork barrel.

[Your Nightmare]

You have always been concerned with an INCREASE in after-tax prices, and now you are concerned about a precipitous DECREASE?

I don't know what you mean by "concerned." I've always argued that pre-tax prices won't fall and that after-tax prices will rise by the amount of the tax. I think I've been very consistent in this opinion.

[Your Nightmare]

"That we will pay the same price for stuff inclusive of tax and take home what use to be withheld from our paychecks."

I never said that. I have always said that we would pay more for imports. Over time, US production would increase to accomodate the increased demand. With all the excess capacity that we now have, that shouldn;t take very long. I never said that.

Which part? That we will pay the same price inclusive of tax or that will take home what used to be withheld from our paychecks? You have stated on this thread "after-tax prices aren't dropping, only before tax prices" so you must believe wages are dropping. Is that the case?