JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)

self | August 25, 2005 | RobFromGa

[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

[N3WBI3]

That sounds almost like a moral principle.

But its not, I don't think taxes are immoral but I do think some are better in principle than others, and I think taxing consumption rather tan production is one such choice.

I DO think that it's immoral that government at all levels exceeds 1/3 of our economy.

Common ground is nice..

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.

I can agree to that, I don't think the NSRT and the amount the government spends (except on the IRS) are connected. I do think that when a tax hike on a national sales tax is proposed dems wont be able to play the 'we only want to tax the rich' card...

That this would be passed into law and take effect without the repeal of the 16th amendment is highly repugnant.

That sounds like a moral principle..

[Carry_Okie]

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?

At least I did something to design a system whereby much of that need will be eliminated. What's your contribution?

As I said, I have no problem with an NRST in principle, but the enforcement requirements in a nation that can't seem to stem the flow of illegal drugs scare me. California already exempts many goods from its sales tax and the machinations around what is "food," for example, and what isn't are amazing. What makes anybody here think that a sales tax will be any less subject to patronage, complex tweaks, byzantine accounting, and outright corruption when the difference is an automatic 25-35% advantage for your product (when state sales taxes are factored in) I don't know.

[Carry_Okie]

And, without cutting government spending FIRST, the NSRT could seriously suppress consumption. We often call the results of that a "recession."

As the experience in Australia and Canada with GST confirm.

[sitetest]

Dear N3WBI3,

"I do think some are better in principle than others, and I think taxing consumption rather tan production is one such choice...."

Well, I'm not sure. As well, at current levels of taxation, I think both are harmful.

"I do think that when a tax hike on a national sales tax is proposed dems wont be able to play the 'we only want to tax the rich' card..."

Oh, heck, that'll be easy to do for them.

"We want to only increase the NSRT on DECADENT LUXURY CARS costing OVER $50,000. We want to only increase the NSRT on MASSIVE LUXURY MANSIONS that cost over $500,000!"

Or, "We're going to raise the rate on cars, boats, and houses, but LOWER IT on FOOD and RENT!! To help the POOR!"

Or, "We're going to raise the rate on tuxedos, but lower it on Stride-Rites. It's fer the CHILRUN."

Gee, I could sit here all day and crank these out. After eight years of Mr. Clinton, it's just too easy.

Remember that it was a REPUBLICAN president who introduced a federal excise tax on luxury cars and boats.

Also remember, 20% of the American economy is a lot of money. Just because we change the method of collecting it doesn't mean that the flies and ants and wasps and other critters aren't going to stop coming to get their bit of the honey. The lobbyists will not stop coming to Washington. And there are plenty of stupid congresscritters, much more than a simple majority, who will vote to tinker with this.

And I suspect there are plenty of stupid citizens, more than enough to get the critters re-elected, who will believe, "It's fer the CHILRUN!"

"That sounds like a moral principle.."

Almost.

"We KNOW we got rid of the income tax and said we'd pass a repeal amendment when we put in the NSRT. But the budget deficit is up to $750 billion!! And we REALLY NEED to double education spending for our little ones!!

"So, it REALLY IS AN EMERGENCY, and WE REALLY DO HAVE TO REINSTATE THE INCOME TAX. But I PROMISE YOU, as sure as my name is Congressperson Ima Critter, we will ONLY TAX THE RICH!! And only A LITTLE BIT!!"


sitetest

[sitetest]

Dear Carry_Okie,

"What makes anybody here think that a sales tax will be any less subject to patronage, complex tweaks, byzantine accounting, and outright corruption when the difference is an automatic 25-35% advantage for your product (when state sales taxes are factored in) I don't know."

Gee, whiz, Carry, didn't you read the bill???

The NRST legislation also repeals HUMAN NATURE!!!


sitetest

[lewislynn]

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.

Not sales tax. Period.

Not a VAT either.

Don't take my word for it...Here's from the Fairtax bill (HR25)

`SEC. 101. IMPOSITION OF SALES TAX.

`(a) In General- There is hereby imposed a tax on the use or consumption in the United States of taxable property or services.

`(b) Rate-

`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.

[samm1148]

You know the problem isn't taxes it is spending. The state and federal governments are out of control. Besides the Social Security crisis no one talks about the continued rise of Federal and State taxes. At some point x after 2020 people won't be able to pay the combined Social Security/Federal-State income taxes.

But the rise is fueled by uncontrolled spending. Spending by the Federal and State governments should be frozen where they are now.

I'd rather see new admendments to the Constitution requiring 4/5's of the house and 2/3 of the Senate required to raise spending over a certain point. No "state of emergency" garbage either for lawyers to get around.

[bill1952]

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.

Which is exactly the point I am trying to make, without splitting hairs between the EU definition of value added, and our sales taxes in various locales.

Therefore I'll just write "sales tax," and we are in agreement, semantics aside..

[Principled]

...if the government is taking in a certain amount of money via the current tax system, and after the FairTax they are still taking in the same amount of money, how can everyone be paying less taxes?

More people paying.

[Principled]

There is no pay raise with the Fair Tax.

Workers get their pay free of federal withholding though. Is that an increase in pay? Not to me.

It just changes the timing of paying tax. Today, a portion of taxes are paid from your paycheck before you see it (withholding). Under the nrst, you pay your taxes later when you buy something.

[pigdog]

What it really shows is that Dr. J. assumes the workers will get only their after income tax pay. There is obviously a difference of opinion as to the matter; that is not the same thing as a misrepresentation as the Squirrels like to claim. I haven't yet decided which approach is correct but that has no effect on the benefits of the FairTax to the economy overall.

It will certainly all shake out in the end before the bill is passed - and it will be passed since there are too many benefits to the US economy for it not to pass.

Regardless of the differences on the percent of wages taken home (or not), there is still he matter of business income taxes (and no, s-test, that is not just Subchapter C-corps but all businesses). Those cascading embedded taxes are done away with by the FairTax whether you admit it or not - and they are sizeable. Are you pretending that they do not go to lowering prices?? And the taxes ARE calculated as the amount of tax paid divided by the amount of income subject to taxes just as the example (and the IRS SOI) shows (called "tax rate" in the example) and NOT as a percent of revenue.

Keep in mind the example included only business income taxes and not employees' taxes or compliance costs. So that others can see how the embedded tax mechanism works, here's the example again using the marginal tax rate of the Subchapter C corporations that s-test insists are the only business tax payers:

	LEVEL		1	2	3	4	5	6
		INPUT	$1.00	$1.44	$2.08	$3.01	$4.34	$6.27
33.00%	PROFIT MARGIN	$0.33	$0.48	$0.69	$0.99	$1.43	$2.07
34.40%	TAX RATE	$0.11	$0.16	$0.24	$0.34	$0.49	$0.71
	SELL PRICE	$1.44	$2.08	$3.01	$4.34	$6.27	$9.05
							
Accumulated tax costs	$0.11	$0.28	$0.51	$0.86	$1.35	$2.06
Tax costs as % of 	7.86%	13.31%	17.09%	19.70%	21.51%	22.77%
   sell price

And, oh, yes, s-test does not understand the mechanism and tries to make it out to be some sort of compilation of arriving as a sales price - that's not what's involved but instead is an insight into how income tax paid by business is embedded into prices and cascades being taxed again at the next level. Nightie also tries to warp this into something it is not.

What it is is a simple example that clearly illustrates the mechanism of cascading embedded tax costs - these are over and above tax on employees wages and over and above compliance costs.

[pigdog]

State sales taxes are an altogether different beast than the FairTax. the present state sales taxes are composed of huge numbers of exemptions and exceptions and are (much like the present federal income tax) the playground for rent-seekers and political mischief makers.

With the FairTax there are none of these sorts of exemptions and exceptions and only a single rate. Attempting to carve out special benefits affects all taxpayers and the law has no provisions for that. In fact it clearly states just the opposite.

If the FairTax were to pass right now he rate would be about 19% rather than 23% and if states conformed their sales taxes to the FairTax their tax base would be greatly expanded and their rate would drop from, say, 7% down to 2% or even less due to the removal of exemptions, etc. and the taxing of services (which state sales taxes do not now do).

The point of that is that the advantage would be much less than you state in your apparently automatically-assumed "corruption" which is unidentified is more like 20-21% if any at all. And keep in mind that "corruption" under the present system yields more benefit to the corruptee since the marginal rates are higher. In addition, one is more likely to be detected breaking the FairTax law that at present.

Also, the Canadian and Australian GSTs are actually VATs and not a true sales tax imposed a single time upon final consumption. A VAT is quite a different type of tax in its effects on the economy.

[Your Nightmare]

LOL! Keep spinning, pigdog. Whatever you say, the "embedded tax mechanism" for corporate income taxes could not "cascade" to a greater amount that the total corporate income taxes collected, $189.4 billion in 2004. That's only 1.74% of the FairTax base plus exports. That's not much of a price drop!

Face it, pigdog, You were wrong. Be a man and admit it.

[pigdog]

You're the one spinning, Nightie - be a man and admit it. The discussion is not and never was "corporate" tax. That's merely what you and s-test are trying to warp things into. The discussion was always about business taxes and that encompasses far more that s-tests C-corps.

The example shows how taxes become embedded into prices - whether you like it or not.

[pigdog]

You've got the picture - but understand that you're being attacked by a bunch of the Status Quo Lovers (aka SQLs or Squirrels) who have no tax plan to present and whose only interest is in trying to defeat the FairTax no matter what it might take.

Several of them have shown themselves clearly to be liberals and they don't give a damn about most of the country greatly benefitting from the FairTax.

Just ask one to present an alternate tax plan that is real ... and be careful for Nightie since he hypes a theoretical Flat Tax which is completely undefined and can be altered at the drop of a debating point. We call it the Nightmare Tax since it isn't real.

If you can get any of them to present their alternate plan, have them present the legislation that implements it.

[pigdog]

BUZZZ ... wrong, s-test. The real model to support the idea of the FairTax came from an LLM in Taxation, not Dr. Jorgenson who is an economist. The model Jorgenson uses was merely analyzing aspects - economic effects - of the FairTax.

Gee, are you REALLY trying to make us believe you don't support the FairTax? Perhaps you'd present your better tax plan so we can take a look at it? AAnd tell us how it is surpassingly better than the FairTax?

[pigdog]

The IRS is eliminated by the bill and the income tax repealed. Please read the bill:

http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

[lewislynn]

Tell it to Jorgenson he was the economist of record for the Fairtax for years...He's the one whose model you people have been misrepresenting all these years.

Your chart is a pathetic joke a normal person would be ashamed of. It's not based on any reality whatsoever...

[pigdog]

What is it s-tesst that you think all those nasty state revenooers will be chasing you around for?

Did you agree to collect and forward the sales taxes your retail customers paid and kept them instead of forwarding them as you agreed to???

That's called "theft", s-test, and I should hope they not only chase you but catch and punish you since allowing you to do that raises the tax burden on others.

[Your Nightmare]

Please keep it up, pigdog. I'm really enjoying this!