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 $800. Prices received by producers would decline to cover the cost of after-tax wages to workers and after-tax dividends and interest to investors. However, taxes paid at the retail level would include the Fair Tax.
Best,
Dale
So, Dr. Jorgenson, whose report you are relying on to support your calculation of embedded taxes, is stating that in making those embedded tax calculations he was not assuming that the worker would keep his current after-tax amount, NOT that the worker would keep all of his current gross pay-check. By reducing the gross pay of the worker to the current after-tax amount, the producers would see a cost reduction that would allow them to reduce selling prices. There would be no increase in take-home pay.
I think you need to carefully review the misrepresentations in your book and offer a retraction and modify subsequent printings to remove these errors. You have spent a large amount of time on this plan, and it is still a viable option for debate even without the bug windfall pay raise for everyone. I would enjoy the opportunity to discuss this with you further if you have questions.
Sincerely,
Rob xxx
xxxxxxx
Exempt exports, make American goods cheaper around the world..
All I have seen people do is quibble about how much people will make or how much things will cost, neither of these live in a vacuum. Lets talk about whats important...
Sorry, the correct number is 6.2% Social Security and 1.45% Medicare that are NOT part of your gross salary. THis is the employee match. There is an identical amount that is deducted from your gross. But you know what if I only take home 60% of my salary (lets say its 50,000) or 30,000... and someone comes along and says well drop your salay to 40,000$ but youll take home 35,000$ am I the worker really suffering?
I guess it depends what happens to the prices of goods, and the amount of taxes that you are charged on them, when your income makes that transition. If your take-home went from $30,000 to $35,000 and prices+taxes are 20% higher, then you've lost. If prices+taxes went up only 10% or stayed the same, then you've won.
But your hypothetical is not what the calculations are based on. In your example, your salary will drop to the $30,000 you are taking home now. I am not saying they have any way to make that salary reduction happen, but they planned on it happening to make the FairTax promise of "retail prices staying about the same" possible.
Dear N3WBI3,
The NSRT is designed to be revenue neutral. Thus the overall effect, at least initially, is that folks will have the same purchasing power as before.
My own thinking is that some folks will come out a little ahead, and some a little behind, some folks will be big winners, some big losers. But for there to be revenue neutrality, it's got to even out across the board.
The proponents of the NSRT assert that there would be significant growth due to changing to the NSRT.
Maybe.
But the whole point of what RobFromGa did was to ascertain from the man who developed the economic model on which the NSRT is based whether folks would enjoy an immediate increase in purchasing power. The answer is, no, on average, people would not.
sitetest
I just don't appreciate the overselling of the concept without discussing all the positives and negatives first. Banning the IRS only to have the same people hired by the States with the Feds breathing down their necks isn't what I would call federalism. The States would have every reason to under tax their own people, so the enforcement pressure would have to be enormous.
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.
Brilliant, no why hasn't any one been able to do that in the last 92 years the income tax system has been in place?
Bush touts relief as tax day looms
Another 3.9 million Americans will have their income tax liability completely eliminated, officials said.
That's 3.9 million Americans more added to the spending constituency of 70% of the public clamoring for more from government, figuring someone else to foots the bill.
The Honorable James DeMint (R-SC)
United States House of Representatives
APRIL 5, 2001
- "There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government.
It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
--- Walter Williams
if you ask a Canadian how much they like the GST, it's best to don a riot helmet first.
Strange how a visible tax that everyone knowingly participates in paying does that to an electorate isn't it?
- It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. ... Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country.
You must also consider how would this affect people who have already "worked" all their lives and exchanged their work for money that they have in bank. Or people who are on a fixed income. They limit the possible choices you can make with respect to inflation or deflation of the dollar.
The purchasing power of a dollar in the bank cannot change on the day the FairTax is introduced unless you plan to also introduce NewDollars at some exchange rate to "Old" Dollars.
Dear Carry_Okie,
I don't disagree with you.
My two main problems with the NSRT are:
1. I am adamantly opposed to it without guaranteed repeal of the 16th amendment.
2. I think that a 30% sales tax will overburden consumption.
Thus, without a constitutional amendment that repeals the 16th amendment (and the repealing amendment could give a few years to allow for a transition), or some clause in the NSRT legislation that delays its implementation until the ratification of a repeal amendment, the NSRT should be a dead letter.
And, without cutting government spending FIRST, the NSRT could seriously suppress consumption. We often call the results of that a "recession."
I'm also not crazy about the "prebate," as it makes everyone a direct client of the state, everyone gets a green weenie once a month (perjorative term for a paycheck drawn by federal workers on the US Treasury).
But otherwise, I'm open to the idea in concept.
sitetest
Thanks for the bump. I'm not really sure what you saw in that post to get all excited about though.
Have you heard anything back from the FairTax people?
Watch it, or you don't get invited to any more SQuirreL conventions. We all have "closed" minds.
And I must do this why? You seem to be perfectly ok blowing off how it might affect me. People sure dont seem to care the SS will be gone by the time I am ready to collect it despite the fact I pay into it.
The purchasing power of a dollar in the bank cannot change on the day the FairTax is introduced unless you plan to also introduce NewDollars at some exchange rate to "Old" Dollars.
Of course it can the purchasing price of a dollar is the amount you can buy with it. If prices went down tomorrow then purchasing power of a dollar would go up. Im not trying to say fairtax would make the prices go down but your assertion that "The purchasing power of a dollar in the bank cannot change on the day the FairTax is introduced" Is flatly incorrect..
Dear N3WBI3,
"People sure dont seem to care the SS will be gone by the time I am ready to collect it despite the fact I pay into it."
Then fix Social Security.
This does nothing to defuse that time bomb, nor the other one, Medicare.
sitetest
I guess it depends what happens to the prices of goods, and the amount of taxes that you are charged on them
Indicating that the purchasing power of my dollar can go down because of NSRT but later you say
The purchasing power of a dollar in the bank cannot change on the day the FairTax is introduced unless you plan to also introduce NewDollars at some exchange rate to "Old" Dollars.
so which is it?
Assuming that the price to produce goods drop because the salary you must pay employees drops (from 50,000 to 35,000) in my example. An tax of 20% on goods *after that cost reduction is in place* Im still going to come out slightly ahead.
There won't be a correction for a second edition. You don't realize that Neal Boortz was/is in this only to promote himself to make money and promote his show and ability to accumulate wealth as he's learned to do quite ably under the present taxation system. I'd like to add that I honestly think that John Linder truly believes everything he is promoting; I don't think Boortz gives a crap one way or the other--he makes money either way.
Some of you may say that "Neal has already said he'd give the proceeds to charity and he's not in it to make money." I'd like to 'revise and extend' that to what he's really said. He is going to give the proceeds to his WIFE's foundation, (which will allow him/them to funnel the money BACK to them via all the normal perk loopholes of foundations/corporations, etc. owned/chaired by individuals)..this, under the CURRENT tax system, of course. I've listened to him since he first brought his shake oil show to town, and quite frankly, he was more truthful in the beginning --he's just learned that it's easier to get a bigger audience when you're not so openly bigoted.
Dear N3WBI3,
"To me its more a principle thing... Do we want to tax production or consumption? thats really what this is about, Am I to be punished for working harder and making more money? or should my monetary contribution to society be with what I spend, not with what I make?"
That sounds almost like a moral principle.
To me, there is nothing inherently immoral in an income tax.
I DO think that it's immoral that government at all levels exceeds 1/3 of our economy.
But as I've said before, to me, re-distributing how you collect it is nothing more than playing musical chairs, or rearranging the chairs on the deck of the Titanic.
That this would be passed into law and take effect without the repeal of the 16th amendment is highly repugnant.
sitetest
I was trying to CONFIRM, not UNDERSTAND. Lemme see if I can explain it to you......
If I said "I think rwrcpal is an a$$wipe" it would be a statement I probably believed is true, based on what I know, but needing CONFIRMATION. It would not be that I needed to know what an a$$wipe IS, as you have already demonstrated the concept so that my cognitive categories are full.
On the other hand, if I am genuinely confused, I might ask "what is an a$$wipe?" Then someone could point to one of your posts, and I could be satisfied that I have an idea of what the word means.
Sorry for not being clear in my question. I hope that clears up matters.
There isn't a more important aspect to taxation than this. Taxing the fruits of my labors prevents me from creating wealth. Taxing my wealth gives me a choice of when where and how to pay my taxes.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.