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JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
self | August 25, 2005 | RobFromGa

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


TOPICS: Government; Your Opinion/Questions
KEYWORDS: boortz; embedded; embeddedtax; fairtax; hr25; jorgenson; liar; linder; nrst; retraction; robpropaganda; scam; taxes; taxfraud; taxreform
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To: Dimples; RobFromGa
And yep, I'd agree that solely debating this on FR is of limited value ... it generally takes a only few replies before the name calling begins. Shortly after that come the "cut and pasters" and virtually nobody has the time, skills or inclination to check the algorithms, or verify the research.

I haven't read this book, um, I have followed the FairTax debates on FR, well, up until 2003 when the level of discourse fell off a cliff on this subject.

So I've been away from it for a while, you have any other forums/discussions/blogs/whatever where I can read the deeper numbers. I'm working on a masters in economics, and am an accountant, and have too much time on my hands until Sept. 1st, so the more complex the better.

221 posted on 08/25/2005 9:08:25 AM PDT by JerseyHighlander
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To: Always Right

He was promising extra dollars in your pocket before.

I don't see that he has changed that with the statement that RobFromGa highlighted as backing down. Which is the point I am making.

I doubt very much that Boortz has read this thread yet, much less adjusted his presentations in any response to it.

222 posted on 08/25/2005 9:15:11 AM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: Sprite518; RobFromGa
Well...that settles it.

I always knew my wife was a fraud.

She has three e-mail addresses..........

223 posted on 08/25/2005 9:18:05 AM PDT by Osage Orange (Long CNEH)
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To: sitetest; chronic_loser

Nothing "used" gets taxed.

Understand the definition of "used" under the legislation means tax has previously been collected on the taxable property being sold. Items are only taxed once. If they have been previously sold with taxes collected, they are not taxed again.

 

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.

Correct, as property and goods not held for business purpose prior to implementation of the national retail sales tax are grandfathered. Tax is presumed to have been paid via income and payroll taxes paid by the owner of the home.

Just new homes.

Which do not consititue inventory qualifying for transitions inventory credit, (again a situation of tax payed under the tax system being replaced by the FairTax legislation)

Thus only homes and goods that are newbuilt after implementation of the FairTax are subject to it.

224 posted on 08/25/2005 9:27:29 AM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: Always Right
When you state "Without the employer seeing those savings, the employer can not significantly reduce his prices." you are in fact willfully lying!

Is that plain enough for you?

The costs imposed, outside the taxes themselves, are quite significant and would allow very significant price reductions.

225 posted on 08/25/2005 9:49:46 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: Prime Choice; RobFromGa
I read Boortz's comments today. They were written on the plane to Austin yesterday, well before Rob posted this thread. His comments were not because of the thread, therefore.
226 posted on 08/25/2005 9:59:43 AM PDT by rwrcpa1 (April 15. Let's make it just another day.)
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To: chronic_loser

What part of "used" do you not understand?


227 posted on 08/25/2005 10:00:20 AM PDT by rwrcpa1 (April 15. Let's make it just another day.)
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To: Always Right

Most employees will not have their wages cut by their employere when/if the Fair Tax is enacted. So they would receive 100% of their paychecks. In addition, the employer would be relieved of its additional obligations to pay taxes that are to be repealed by the Fair Tax. How wages and prices would be adjusted in the immediate and intermediate period after enactment would depend upon the pressures of the market. We can agree there is no free lunch in terms of the full paycheck and the cut in manufacturing costs duplicating each other. But the employee will come out ahead financially under the Fair Tax.

His costs of complying with the income tax will be eliminated. He will get the use of all his wages all year long. His wages will increase with the increased investment in capital and equipment by his employer makes him more productive. His wages and hours of employment will increase as manufactured goods in the U.S. become more competitive in world markets as embedded tax costs are stripped out of our products. All of that (and more) will put real growth back into the American standard of living. This ought to be acknowledged by those who spend all of their time contending their objections require maintain the status quo.


228 posted on 08/25/2005 10:01:01 AM PDT by n-tres-ted (Remember November!)
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To: Always Right
225 should read

"The costs imposed, outside the taxes themselves, are quite significant and their removal would allow very significant price reductions.

229 posted on 08/25/2005 10:01:35 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: Bigun
The costs imposed, outside the taxes themselves, are quite significant and would allow very significant price reductions.

http://fairtaxvolunteer.org/pdf/BROCHURE.pdf

Page 11 states that $225 billion is spent complying with the income tax. That's about 2% of the GDP. Even if (big if) that is all for business and doesn't include individuals tax calculation expenses or imputed value for the time individuals spend on IRS forms, it is still only a small part of the 23% embedded taxes assumed by FairTax.org.

Very significant price reductions? No, maybe a couple of percent.

230 posted on 08/25/2005 10:03:02 AM PDT by KarlInOhio (Bork should have had Kennedy's USSC seat and Kelo v. New London would have gone the other way.)
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To: Always Right

That assumes a business pays little or no income tax to the Feds.


231 posted on 08/25/2005 10:03:09 AM PDT by Dead Dog
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To: sitetest
I know that a lot of NSRTers claim interest rates will plummet, but frankly, that strikes me as being as plausible that we are all about to get a 25% raise.

That's the most easily provable NRST claim of all. All you need do to convince yourself of the drop in interest rates is to examine the existing rates of taxable vs. tax-free bonds.

232 posted on 08/25/2005 10:04:43 AM PDT by kevkrom (WARNING: If you're not sure whether or not it's sarcasm, it probably is.)
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To: KarlInOhio
Page 11 states that $225 billion is spent complying with the income tax.

Indeed! Do you suppose that to be the ONLY cost imposed outside the tax itself?

233 posted on 08/25/2005 10:05:35 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: JerseyHighlander
Here is some info on the nuts and bolts of the IGEM model (the one used in Jorgenson's study).
234 posted on 08/25/2005 10:08:01 AM PDT by Your Nightmare
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To: Bigun
Indeed! Do you suppose that to be the ONLY cost imposed outside the tax itself?

What are the other costs? I've already estimated 9% direct costs for the employer's half of SS and Medicare plus corporate income tax on the profits. Now I'll add 2% (to be generous) for compliance costs. That still leaves 12% more (or about $1.2 trillion in total) to get to the point where embedded taxes and the NRST figures match so there is no net change in prices as FairTax.org claims.

Some of it is going to be in time and effort wasted in trying to avoid or defer income taxes. Also add some foolish investments promoted by the tax code. Some Senator likes Guatemalan fruit bats, so he puts a deduction in the tax code for investing in Guatemalan fruit bat farms and a lot of money gets wasted on those bats. Go to an NRST and you get rid of those stupid investments. Do those add up to the remaining 12%? Or do you have to count the employee's SS, Medicare and income taxes like Jorgenson said but FairTax.org claims you don't (because employees take home their entire paycheck)?

235 posted on 08/25/2005 10:19:01 AM PDT by KarlInOhio (Bork should have had Kennedy's USSC seat and Kelo v. New London would have gone the other way.)
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To: sitetest; JerseyHighlander; RobFromGa
Dr. Jorgenson's model does not permit giving the employee side of payroll taxes back to the employee.

In Jorgenson's model (IGEM), the price of labor is directly tied to the marginal tax rate on labor. The price of labor is defined in the model as:
price of labor = household value of time / (1 - marginal tax rate on labor)
So, to illustrate, if the household value of time (which is the numeraire and doesn't change) equals $25 and the marginal tax rate on labor is 20%, the cost of labor would be $25/(1-0.2), or $31.25. If the marginal tax rate on labor drops to 0%, as it would under a NRST, this changes to $25/(1-0), or $25.

In the model, the cost of labor to businesses dropped by the amount of taxes on labor. This could only happen if nominal wages were reduced.
236 posted on 08/25/2005 10:25:23 AM PDT by Your Nightmare
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To: Bigun
When you state "Without the employer seeing those savings, the employer can not significantly reduce his prices." you are in fact willfully lying!

No, that is a fact. I know in my business, there is no way I am going to save more than a few percent of gross. Unless I can ring out all the employment taxes of my workers, my subcontractors and their workers, and my suppliers and their workers, the savings of the fair tax is insignficant. I know my books. You can call me a liar all you want, but you guys are the ones with your hands caught in the cookie jar and have in fact been grossly misrepresenting facts for over 6 years.

237 posted on 08/25/2005 10:27:15 AM PDT by Always Right
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To: KarlInOhio
What are the other costs?

I have not tried to quantify them as I doubt that they CAN be quantified, either by me or Dale Jorgenson. That is in fact one of the MAJOR problems with the communist inspired progressive income tax.

Have you ever heard anyone say something to the effect that "I'm not able to work any more overtime this week as I won't see a penny after the government get's through with it"? That IS a cost imposed by the income tax system!

238 posted on 08/25/2005 10:29:13 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: Dead Dog
That assumes a business pays little or no income tax to the Feds.

I am not assuming anything. The vast majority of federal taxes in the country are individual income tax and payroll taxes. Corporate income tax is only about 10% of the federal government revenues.

239 posted on 08/25/2005 10:30:09 AM PDT by Always Right
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To: savedbygrace
there will NOT be lower taxes.

Bad communicating on my part. The tax rate necessary to generate the same amount of tax reveune will be lower.

I'll say that if retail prices are decreased, then that means the receipts that go into the federal treasury will be reduced..

Same misconception going on here. You will have more economic activity taxed and therefore more revenue for the same tax rate.

Retail prices are subject to market forces. You also assume that if prices are lower, total sales will therefore be lower. That's not true.

But I'm not going to accuse you of being dishonest. I think you should drop that tactic.

Certainly if you have a sales tax, tax revenue goes up and down with total sales activity. And this varies with the economy. But a tax on income also varies with the economy. So your problem here exists in both systems.

240 posted on 08/25/2005 10:30:39 AM PDT by D-fendr
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