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
Your lack of formating is only exceeded by your total lack of comprehending of what was said.
you and I know that Jorgenson is not going to appear on Boortz's show because Neal Boortz is not going to go through that embarrassment.
OTOH, he might. Jorgenson should have the capacity to rerun his simulation with an output for "takehome" wage with time. It might prove enlightening in light of the high 10%+ economic growth indicated by his study. Such conditions are not generally associated with falling discretionary income.
I'm not sure who is exploding what, but this is sophistry of the first order.
The only questions I can't answer is who is behind it and why.
"Their complete paycheck" is fraudulenty defined, because in the real world, the employee never has seen and will never see the withholding, other than taxes, that is part of his "total" pay.
All I care about is my "gross" pay. Will that remain unchanged? If the answer is "yes", I'm happy.
As soon as someone argues that everybody should get what is effectively a raise my BS and demagogue meter pegs.
If wages are on a "net" basis, the effective rate of income would go down initially, as the worker is not getting "back" his taxes (they are all going into my pocket as his employer), yet he has a new set of sales taxes. I can guarantee the unions would raise hell about this, as the negotiated wages are gross, not net. Also, the health insurance industry would clearly be affected, as the benefits no longer have tax consequences (group health rates are unbelievable!).
All that said, it still sounds like a good deal.
You WILL let us know if you hear from Boortz and Linder, won't you?
I reject the notion that is a new "lower" salary.
That makes sense only for a mind attuned to words like proletariat and the new man.
Well the arguement should be made in terms of freedom and not in terms of phoney economic benefits. I am a home builder, and this few percentages one way or the other, amounts to the prices of new homes being 17% greater than what existing homes are selling for. Over time, the prices of existing home will rise, but the immediate impact is I am out of business as new homes will not be competitive with existing homes. Just keep the arguement honest is all anyone is asking.
Sounds like furious backpedaling to me.--RobFromGa
Actually he has stated the case in that same way before. Mainly the issue presented being that you don't get out of paying taxes, afterall 23% of your payment at the cash register is taxes going to the government out of the earnings that you spend on consumption. For many folks that's often the entirety of their check and more (counting them credit purchases).
The answer no. The analysis which says price will fall 20% assumed your gross pay would be reduced, but your net pay would stay the same.
Thats a stretch. By that reasoning, all workers are providing a "service,"Yes they are, even by IRS rules. The difference is their "independence" from their employer. Do they punch a time clock? Would they be fired or reprimanded because they have another job to go to that day? Are they required to be at their work station? Required to show up everyday at a given time? Can't take a one hour lunch? Etc.
I have both worked as and hired independent contractors. Independent contractors typically are performing a service. I don't make up the rules I obey them.
Dear chronic_loser,
"Also, the health insurance industry would clearly be affected, as the benefits no longer have tax consequences (group health rates are unbelievable!)."
This is potentially a deal-breaker, especially in states that have high health insurance premiums (like mine).
Our average family policy (we offer a cafeteria plan with four choices) is over $800 per month. $10,000 per year.
I pay the bulk of that, and the employee must pay the rest. In both cases, because we have a cafeteria plan, payments are made with pre-tax dollars.
Under the NSRT, our average policy will now include a bit of sticker shock, with a $3,000 per year NSRT.
In that Dr. Jorgenson's model does not give back any of income or payroll taxes to the worker, this comes out directly out of the pocket of the worker.
We can hope that the cost of the health insurance plan falls 20% (and I think it's quite possible) to $8,000. Then, the tax is only $2,400, and the total bite is only $10,400, only a little more than what it's costing the worker now (because don't let anyone fool anyone else - even though I "pay" for most of the premium, the worker really pays for it in the form of significantly lower wages).
But to the degree that the employer pays the worker's premium, it becomes problematic. Here's why:
If the employer is paying 75% of the premium (pretty common in this area), then that's $7,500 of additional compensation that the worker is currently getting, even though it shows up nowhere on his check or his paystub.
The worker is paying $2,500 of his pre-tax gross as his contribution to the premium.
After the NSRT, assuming a price decline of 20%, the employer will be paying $6,000 + 30%, or $7,800. However, to keep things equal, the employer will need to shift the tax to the worker. Otherwise, the employer did not receive a 20% cut in this very significant part of compensation, and he becomes unable to lower his rates by 20% through payroll savings.
So, the worker's initial contribution of $2,500 is reduced to $2,000 (20% price drop), but increased by the tax to $2,750 PLUS the $1,800 tax on the employer's part of the premium, for a total of $4,550. The worker is screwed out of over $2,000 per year, because of the fact that this part of compensation was never taxed in the first place.
sitetest
if the sales tax applies to new as well as old homes, this one flew right past me, unless you are saying that the 17% is not the sales tax itself on the purchase of the home but rather on the materials......
Ahhh, memories of being a gc. Bailing my drunk and disorderly subs out of jail, having drunk women show up on the jobsite screaming about no child support, and taking a roofer to the hospital for falling off a roof...... those were the days!
No. The FairTax supporters claim I get the gross for my paycheck with no federal taxes withheld. Therefore income tax and 7.65% SS and Med tax are my taxes and not the employers. If you want to claim that they are embedded tax for the employer, then I can only claim that my net income is really mine.
My 9% estimate came from assuming that 10% of the aggregate price of goods and services are imports at essentially 0% tax, 10% are corporate profits at 30% tax and 80% are wages at 7.65% SS and medicare. Each company's costs of goods sold, equipment, other companies' services, etc. are made up of the same components. Take 0 x 10% (imports) + 0.30 x 10% (profits) + 0.0765 x 80% = 9.12%.
Shortcomings of my assumptions are 1. There is a small total tariff (about 2%) I left out of imports, 2. aggregate profits are probably a little lower than 10%, 3. I made no effort to figure out how much of wages are above the $90k SS cap, 4. I left out the cost of unimproved land for things like mines and farms, 5. I made no effort to calculate indirect costs attributable to current federal taxes (accounting, filing forms, etc) - I was only calculating direct costs.
All of these shortcomings don't change 9% to 23%. This thread pointed out the missing link: Jorgenson's embedded tax calculations include the employee's taxes as an employer expense, but the FairTax supporters who claim that employees will get their current gross left out that part.
Really:
Boortz (8/25/05): "We aren't promising you extra dollars in your pocket "
Boortz: (8/13/05): "With the passage of HR25, you would receive 100 percent of your bi-weekly paycheck. If you make $1,000 a week, your paycheck would be $2,000 every two weeks."
He was promising extra dollars in your pocket before.
Dear chronic_loser,
Nothing "used" gets taxed.
Currently occupied homes sold by their owners (with or without the assistance of a Realtor) will not have the 30% retail tax applied to their sale.
Just new homes.
sitetest
Let's all remember that the Fair Tax Act of 2005 does not call for lower salaries. It calls for an end to withholding. So even if prices don't come down at all (which is unlikely), consumers would still have more money in their pockets to pay the tax.
If you are so right, then why don't you call Neal's talk show?Who's Neal?
Neal Boortz. Have you been following the thread?
Why do you persist in trying to make the spurious argument that the only costs imposed by the income tax system are the taxes themselves when you KNOW that to be untrue?
"All goods and services produced in the United States already contain the embedded costs of the current tax system in their prices." is a far cry from embedded taxes only!
"Your vote has been duly recorded in the 'I hate the IRS, and I don't give a crap what we replace it with or what happens to the country as long as we abolish the IRS right now' column. Thanks for participating."
I was tempted to commend you for your objectivity and maturity as displayed in previous posts on this thread, even though you and I are on opposite sides on this issue. That went out the window with this post, which was childish. That isn't what she said and it isn't what she meant and you know it. Since you won't even take the time to read the interim report of the President's panel, I guess this is to be expected. Too bad.
The current system is a national disgrace. Deny that all you want.
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