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
The FairTax base for 2004 would have been ~$9,716 billion. Add $1,173 billion in exports to that (they claim taxes are embedded in them too) and you get $10,889 billion. This is the amount that is suppose to be reduced by ~22%. In 2004, corporate income taxes were $189.4 billion, add half of the employment and general retirement receipts ($344.6 billion) and you get a grand total of $534 billion in tax revenue from corporations. That is 4.9% of the FairTax base plus exports or 5.5% of the domestic FairTax base alone.
Page 11 states that $225 billion is spent complying with the income tax. That's about 2% of the GDP.
The same figure that Dr. Williams uses.
Dr. Walter E. Williams, March 2000:
http://www.freerepublic.com/forum/a39b6487a1fb0.htmThe average taxpayer now pays more than $8,000 a year, working from January 1 to May 8 to pay federal, state, and local taxes. In addation to the out-of-pocket cost, Americans spend 5.4 billion hours each year complying with the federal tax code-roughly the equivalent of 3 million people working full time. If it were employed in productive activity, the labor now devoted to tax compliance would be worth $232 billion annually. The federal cost of hiring 93,000 IRS employees is $6 billion. If these Americans weren't fooling around with the tax code, they could produce the entire annual output of the aircraft, trucking, auto, and food processing industries combined..." Emphasis adde
All that is, are the accounting costs associated with the income/payroll tax system referred to as compliance costs.
That does not begin to cover the costs arising from tax avoidence and income sheltering schemes that provide nothing to productivity of a business, audit/litigation costs, fines and penalties paid by businesses in resolving conflicts with the IRS, loss due to market inefficiencies introduced by income and payroll tax system that drive prices higher and consequent lower sales volumes resulting in loss to profitability.
There is alot more to the impact of the income/payroll tax on businesses (and individuals as well) than just that number of $225 billion for "tax compliance".
The actual total impact on the economy is estimated by Fed Reserve economists to be somewhere between 2 and 4 dollars for every additional dollar of revenues collected and expended by the government.
Economic Burden of Taxation
William A. Niskanen
Presented October 2003
Friedman Conference
Federal Reserve Bank Dallas page 6.
www.dallasfed.org/news/research/2003/03ftc_niskanen.pdf
- "Given that the elasticity c implicit in recent U.S. fiscal conditions is about 0.8 and the average tax rate is about 0.3, the marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar of tax revenue. One wonders whether there are any government programs for which the marginal value is that high. Given the estimate of the long-term elasticity c from the U.S. time-series data, the marginal cost of government spending and taxes may be as high as $4.50 at the current average tax rate. "
http://www.heritage.org/Research/Taxes/hl565.cfm
- An American Economic Review study found that every dollar of taxes could impose as much as $4 of lost output on the economy, with the probable harm ranging between $1.32 and $1.47
Edgar K. Browning, "On the Marginal Welfare Cost of Taxation," American Economic Review, Vol. 77, No. 1 (March 1987), pp. 11-23.
- "Another study in the Journal of Political Economy estimated that the corporate income tax costs more in lost output than it raises for the government."
Jane G. Gravelle and Laurence J. Kotlikoff, "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, Vol. 97, No. 4 (1989), pp. 749-780.
That is a lot of room for improvement, substantially more than 2% of GDP, I would say.
If the fair tax only removes 10-18% from the overall price level, as I have believed for a long time now, it is still the best plan out there.
"....give me my ENTIRE PAY CHECK, NO IRS, UNTAXED INTEREST, NO ESTATE TAXES, NO CAPITAL GAINS taxes and I'll show you a WEALTHIER more PRODUCTIVE and FREE AMERICAN!!!!"
AMEN!
"Who do you think pays for tariffs and business taxes? Clue: it isn't the nation importing goods or business providing goods and services we pay for as consumers."
I am not deceived into thinking we do not pay taxes exerted on the businesses which we patronize.
How about this, then. Rather than eliminating the tax altogether, how about we require taxes be paid, rather than being withheld in the average worker's paycheck?
That would have nearly the same effect as eliminating it. I am fine with that instead.
Thank you!
Busy day here and I had temporarily forgotten about the research you linked us to.
I KNEW that I had seen that somewhere! It is what I was refering to the other day on another thread.
bttt
Get it?
I've run my business out of my home since 1986. You're really barking up the wrong tree here. Your concern is misplaced- it's really a small factor in the big picture. The IRS is way more dangerous, and the concept of taxing income itself is more an instrument of control than revenue collection. (Check my home page for a few interesting quotes on that subject.)
Thanks for this post. As I've always thought, the term "FairTax" is really the definition of an oxymoron.
Dear Originalist,
I don't put any particular stock in Dr. Jorgenson. I'm not a proponent of the NSRT. However, he's the guy who developed the model to support the idea of the NSRT, and thus, figuring out precisely what he said clarifies the discussion. That's all.
That being said, I CAN understand his reasons for developing the model in the way that he did, passing the saved taxes to consumers, in that this model seems intuitively to me to create more overall economic advantage, than returning the saved taxes to the employee.
However, I truly doubt whether the model can be implemented as he has designed it.
sitetest
This post has to do with the implications of replacing the Federal income tax with a Federal flat value added tax, and everything that you posted has to do with a system that would be scrapped.
This thread has to do with a National RETAIL Sales Tax, replacing all federal income and payroll taxes (e.g. SS/Medicare).
No VAT is involved as the retail tax is collected only from sales of goods and services for final consumption, and is not collected on purchases for business use as VATs are collected.
The NRST implemented by the FairTax legislation would be collected from the consumer, not from intermediate sales of good or services used for business purpose.
Dr. Jorgenson's research is what many of the fair taxers predictions are based on. In fact, the research is paid for and owned by AFFT, a fair tax advocate. The point of the post is that the fair taxers have lied about what Dr. Jorgenson's report actually said by the tune of $1.3 Trillion.
Once the Federal government is organized around collecting taxes on your sales receipts, what makes you think that the same IRS personnel won't be as aggressively dedicated to assuring that they get their cut?
Dear Carry_Okie,
"Once the Federal government is organized around collecting taxes on your sales receipts, what makes you think that the same IRS personnel won't be as aggressively dedicated to assuring that they get their cut?"
Because the NSRT legislation ABOLISHES the IRS.......
.....and sets up a new bureaucracy with a different name to administer the NSRT.....probably with many of the same folks from the IRS.
As well, much of the duties associated with the NSRT will be handled by the states with money from the federal government. So, instead of their being ONE FEDERAL AGENCY chasing folks down for money, there will be FIFTY BEEFED-UP STATE AGENCIES, with a new stream of revenue from the federal government, to chase us around.
Remember, now, compliance costs WILL go down. Compliance costs WILL go down. Compliance costs WILL go down. Keep repeating that. At least until you believe it.
sitetest
Exactly, and read the bill. Who does the bill make liable for the tax???? The consumer. The consumer must have a valid receipt showing he paid the tax in order to shift the liability to the retailer. The bill also says if they suspect you owe taxes they can audited you. The biggest change with the enforcement is the new collection agency will watch your outputs more than your inputs.
I haven't been able to read the whole thread yet since I've been out all day, but I haven't heard anything from anyone. I faxed and email this to Linder, Boortz and Jorgenson at 1130 or thereabouts last night.
I called Linder's Georgia office this morning and requested through his scheduler to arrange an appointment, with no word. I am not saying there is anything wrong with this, I do expect him to respond eventually as I am in his Congressional District.
I have to go back out again and just wanted to bump the thread. I hope that everyone is playing nice.
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