CALCULATE YOUR PERSONAL FAIR TAX RATE COMPARED TO YOUR 2004 INCOME TAX-FICA TAXES

Yes, Kotlikoff's AK model uses

"real wage" = (pretax nominal wage)/(model CPI)

Withe "producer price" the numeraire in a single output business sector with only one level of business, which is the way the AK model is implemented, "real wages" are the result of adjusting gross wage for taxes plus the shelf price(i.e. producer price) of the AK model's single level business.
OTOH, in the real world, "real wages" are the result of adjusting gross wage by an index made up of shelf price alone.
It is meaningless to pretend the term "real wage" in the model output is equivalent to what is normally recognized as "real wage" in the current tax system's context, if it were the real world CPI would present a step change every time the government changed income tax rates, and real wages would display a stepwise fall.
The CPI, as constituted today, is meant to reflect price inflation, not rate changes of the tax system.
There is an inherent difference of what constitutes the meaning of "consumer price", to the average person, and as used in computing real world CPI and the term "consumer price" in an economist's equilibrium analysis.
The "consumer price", recognised by folks in Rio Linda, the shelf price in the market (i.e. the price to which state sales taxes are added in order to calculate the receipt total to be paid at the hardware store.), is actually the "producer price" of the AK equilibrium model.
The NRST tax is a component part of "consumer price" in the AK model in accord with the conventions of economists doing equilibrium analysis. In fact NRST is explicity included into the AK model's CPI calculated by adding NRST to "producer price".
OTOH the real world CPI of today includes neither income/payroll taxes paid by the individual before he is able to purchase products, nor the state sales taxes on those products.
In no way are the two forms of the meaning of "real wage" (AK model, vs real world) consistent leading to confusion and missunderstanding of what the economic analysis presents.

Jeez, AG. I was beginning to think you plagiarized again and copied this from someone else, but then I saw all the misspelled words.

Thus the calculated purchasing power of pre-tax nominal wage, (i.e. "real wage") under the NRST ends up being understated relative to the calculated "real wage" with respect to an income/payroll tax system.

I'm confused. Which "calculation" are you talking about?

This is due to the fact that CPI calculated in the NRST system includes the effect of the full federal tax burden lowering purchasing power of a household, while CPI calculated under the income/payroll tax system only accounts for a portion of the total federal tax burden that lowers purchasing power of pre-tax nominal wage of a household.

In which NRST system has the CPI been calculated? I wasn't aware of any NRST.

The calculated "real wage" (i.e. purchasing power) for the income/payroll tax system overstates how many constant dollars are available to purchase stuff with, by not taking the full federal tax burden on the household's earned wages into account.

Again, which calculation are you talking about? Kotlikoff's? Some other economists? They aren't limited to the BLS calculation of "real wage." There are many ways to calculated a "real wage" depending on the purpose of the statistic. If you are looking at the marginal product of labor you would probably want the "producer real wage." If you are concerned about labor supply responses, you would probably want the "consumer real wage."

Economists aren't limited to a government defined statistic. They are smart enough to know what's appropriate for the subject they are studying.

Jeez, AG. I was beginning to think you plagiarized again and copied this from someone

When unable say anything of substance, attack the messenger. The text is my own including any mispellings.

I'm confused. Which "calculation" are you talking about?

Those of the real world BLS CPI as well a that of Kotlikoff's paper.

As both use the same methodology in calculating a CPI. Kotlikoff, excludes income taxes and includes retail taxes from model CPI(i.e. consumer price level) for his simulations same as BLS calculation of CPI does.

In which NRST system has the CPI been calculated?

Kotlikoff's simulations of 5 NRST variants in his '96 paper in CPI indexing of Social Security benefits and calculating change in purchasing power of pre-tax nominal wage(i.e. real wage) etc.

The CPI in each of his simulation runs is "consumer price level" of each simualtion including the baseline against which changes are measured. Thus his model CPI calculation excludes income and payroll taxes and includes retail sales taxes in the same way the BLS calculation of CPI does.

Again, which calculation are you talking about? Kotlikoff's? Some other economists? They aren't limited to the BLS calculation of "real wage."

Kotlikoff's methodology in his AK model emulates BLS calculations of CPI in that income taxes are excluded and retail taxes are include in model CPI calculations.

The consequence of that methodology is to understate change in purchasing power (i.e. "real wage") of the 5 NRST simulations relative to the '95 tax law baseline of the model output.

There are many ways to calculated a "real wage" depending on the purpose of the statistic.

Irrelevant to the discussion as Kotlikoff calculates relative purchasing power of pre-tax nominal wage (i.e. real wage") using the consumer price level output as the model's CPI used in purchasing power calculations, such as indexing social security, calculating "real" wages, interest rates etc.

This model also incorporates CPI indexation of social security benefits. To be precise, the model's numeraire is the producers price of the model's single output. This price is set to unity. When direct consumption taxes are imposed, the consumer price of output rises by the amount of the tax. To offset the resulting loss in the real purchasing power of social security benefits, the model indexes social security benefits to the consumer price level.

In short Kotlikoff's baseline income/payroll tax case CPI excludes income and payroll taxes from consumer price level(i.e. model CPI), while the NRST runs incorporate the full federal tax level in consumer price level (model CPI.)

The net result understates the change in actual purchasing power of wage, interest rates etc. of NRST simulations relative to the purchasing power of the baseline wage, interest rates etc.

Real wage would just be (nominal wage)/(CPI) to provide "real wage" expressed in constant purchasing power dollars.

Problem is the CPI for baseline excludes federal income and payroll taxes, while the CPI for NRST calculation incorporates those taxes as retail sale taxes in consumer price level.

The change in purchasing power ("real wage") of the NRST simulations relative to baseline calculation of purchasing power is understated because the basline CPI accounts for only part of the loss of purchasing power of pre-tax nominal wage due to federal taxes.

Get rid of the rebate and the rate could be lowered to probably 15 percent or lower.
But, for it to truly be a fair tax, it needs the rebate, which brings it up to 23 percent.

Actually you could only replace the income tax and not SS/Medicare taxes for a 15% rate.

Replacing income and payroll taxes, with no rebate is a 19-20% NRST replacing tax law as it existed when the bill was first drafted and introduced to Congress.

If the Bush administration is successful in making its tax cuts permanent or the Fair Tax legislation were used to accomplish that feat, the Fair Tax NRST rate with rebate would fall to 18-19%, without rebate would come out around 15 to 16%.

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