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
Furthermore, the cost of a product incorprates far more than just labor, and every sub section and subcomponent is taxed at every step. Those taxes add to the total cost of the product.
Yes, I think compliance with the income tax costs 4 times revenues. The tax code costs us something like $8 Trillion and our whole economic output about $10 Trillion. I am sure I can find a quote somewhere from some unknown that proves this.
Yes well aware of it, it is 7.65% on the first $90,000 of wage income for each W2 employee. Search FR for Open Letter Linder and read my first letter of Aug 22, it is all in there.
As I understand the Fair Tax Bill employers will no longer "deduct "my" taxes for me.....so instead of receiving $70.00 out of a $100.00 paycheck I will receive $100.00.
So....before, the most i had to spend was $70.00 for that week
Now I have a hundred....the item I bought last week for $70.00 left me $0.00.....
This week i have a $100.00 in my pocket to spend......I go and buy the same $70.00 item PLUS 23% NRST and I spend....$86.10 w/tax.....or $90.91 w/tax if it is an inclusive tax (a little confused on how the tax is figured) (as a sidde note: if i go out and buy an upgraded item on credit for 100.00 plus NRST i am an idiot...but that's another discussion.....there is a learning curve involved under the NRST......)
Either way i have $9.09 - $13.90 left over in my pocket....which i can go spend on something else...."living paycheck to paycheck here....LOL"
Regardless....i am better off....i have more money to save....spend....burn....whatever.....and this does not take into accout..... POSSIBLE LOWER RETAIL PRICES!!!!!
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.What's funny is that the labor supply response in his model is tied to the tax rate on labor income. So with no tax on labor income under a NRST, the labor supply jumps 30% the first year even though labor would be making the same amount of take-home pay! Economists...go figure.
Yes, he is quite aware of that. That amounts to $348 Billion and makes up about 3-4% of all the costs of goods and services in our economy. Adding another $194 Billion for corporate tax, makes about $542 Billion in taxes that businesses pay. That is between 5-6% of the costs of all goods and services. The problem is, 5-6% is not 20%, which you can only get close to if you include all the taxes paid by individuals.
If I understand correctly, employers pay a payroll tax based on how much they pay us. This is not at all connected to the witholding of taxes from our paycheck. It is an additional tax. If the payrol tax is eliminated as part of the fair tax plan, the employer would indeed see a cost reduction while still allowing us to keep money that is taxed from our wages.
I don't know if the fair tax plan intends to eliminate payroll taxes.
Shalom.
The IRS personnel are no more. Read the bill. The collections are done by the states.
Oh, for crying out loud- compliance with sales tax is microscopic compared to income tax compliance. I know- I have to do both.
Get educated on the subject before you publish ignorance.
Dear feinswinesuksass,
"Is the Fair Tax plan contingent upon the repeal of the 16th amendment?"
No. The current legislation urges Congress to pass separately a Constitutional amendment to repeal the 16th amendment. Which would then have to be ratified by 3/4 of the states, which would be 38 of 50.
So, the enacting legislation doesn't even include the Congressional passing of such an amendment, no less ratification by the states.
At any time, Congress could reinstate an income tax.
I expect it would come when the deficit gets higher again, and folks say, "We have a crisis, it will be temporary. And we won't charge a lot, and only on the very rich."
And we'll begin all over again. Except, we'll have this NSRT albatross around our neck, too.
sitetest
Your example is not real. The fair tax replaces the exact same amount of tax under the income tax system. In theory, everything should come out equal, as all you are doing is changing the method at which taxes are collected. Where your example is flawed is most people may have a marginal rate at 30% or more, however the overall tax rate is much less. Half of the population pay an effective federal tax rate of 4% or less.
Only if every state agree. Otherwise, there will still be federal tax collectors. I would bet there would even be federal tax collectors anyways to deal with interstate transactions.
The payroll tax employers pay is entirely based on what they withold from your check. The employer also much match your FICA taxes.
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.
What a distinction without a difference an acronym can make!
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.
That's just what we need, more Federal control of State operations! Great idea!!!
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.
I can't, I can't, I caaaaan't. Sob!
It must be because I love the income tax... not. OTOH, if you ask a Canadian how much they like the GST, it's best to don a riot helmet first.
The real problem is spending. Cut federal expenditures to the point that they would consume less than 10% of sales and I think the NRST might be workable.
Is the Fair Tax plan contingent upon the repeal of the 16th amendment?
Is the Flat Tax or anyother income tax proposal contingent upon ratification of an amendment to make excise & general sales taxes unconstitutional, so we don't ever have both an income and sales tax in place at the same time?
Dear ovrtaxt,
Compliance costs with sales taxes are relatively modest right now because enforcement is scaled to the amount of attempted evasion. Increase typical sales taxes from 5% - 8% to 30% - 38% (remember, the state will be collecting their own taxes along with the federal tax, so in some states, on many items, the total sales tax will be 38%), and evasion attempts will skyrocket. Why? Because that will be where the big bucks are.
And enforcement will increase, fueled by two factors: even if attempts at evasion stay the same, there will be more money to collect, and thus, it will be worthwhile to enhance enforcement efforts - the point of diminishing returns will be substantially raised; and of course, more folks will try to evade sales taxes, thus creating an even bigger pile of money to be gained by enhanced enforcement.
As enforcement efforts for sales taxes increase, so will compliance costs.
In any event, my compliance costs for income taxes are almost entirely subsumed into my accounting requirements. So, my compliance costs are a fraction of a percent of my overall revenues.
sitetest
I don't know if the fair tax plan intends to eliminate payroll taxes.
It eliminates all federal payroll taxes as well as income and gift/estate taxes.
Ummm 12% from SS, and 2(?)% for medicare are not part of a workers gross salary... But you know what if I only take home 60% of my salary (lets say its 50,000) or 30,000... and someone comes along and says well drop your salay to 40,000$ but youll take home 35,000$ am I the worker really suffering?
Dear Carry_Okie,
"The real problem is spending."
Duh!! Do ya think?? Do you think that no matter HOW you collect it, 20% of GDP for the federal government really stinks? Do you think that whether you take it on the front side - income, or the backside - consumption, it will STILL distort the entire economy, in one way or another??
YOU must be a SQL TROLL!!
LOL.
Or just a skeptical soul who would prefer not to jump from the frying pan into the fire.
Welcome to our club. ;-)
sitetest
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