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
I hope you enjoy it half as much when the FairTax become the tax law, my man.
Chicken Little has entered the building (along with Elvis).
Perhaps you could show us the wording in the bill that you claim allows the federal government (or state for that matter) to "suspect" you as a valid reason for audit.
Be sure to post it here.
Actually, lewis posted a plan to me once, but it "tragically" is just pie in the sky- no serious action or advocacy, of course.
Yep, that seems to be pretty much the mechanism.
The SQL crowd will not admit it (actually cannot as it destroys their position) so they'll now attack you personally.
And even that is only the beginning.
Try and get your hands on a copy of James L. Payne's great book entitled Costly Returns - The Burdens of The U.S. Tax System
"Try and get your hands on a copy of James L. Payne's great book entitled Costly Returns - The Burdens of The U.S. Tax System"
Thanks,
I just Ordered off of Amazon.com used books. $5.00 total.
I'm looking forward to reading it.
WRONG louey. I have stated in numerous threads and even TO YOU in a mannerly way that the only savings would be from 10 to 18%. Pigdog disagrees with that. Fine. We all agree that using a consumption tax is the BEST way for this country to go. You haven't shown any alternative so we have to assume your preference is the IRS as it is now. As a matter of fact, I haven't ever seen you state that you are against the current tax policy. Are you? If you ignore me I will assume you are an IRS agent who carries a loaded gun to point at my head to either get my money or send me to jail.
The Boortz/Linder book clearly sells the plan as being one where all wage earners would realize an immediate gain in purchasing power. This is an impossible "free lunch" plan when it is described that way. Dr. Jongenson confirmed that he was NOT modelling a "free lunch" plan.
Perhaps the misrepresentation is inadvertent and caused by ignorance, I do not know. I do not allege malice. But now that they have been made aware of the error, they must take some action to correct the wrong explanations that they have given in their book.
As I have said many times, my interest in this is to discuss the FairTax plan honestly as it was intended to be implemented and then decide whether it is a good approach or not.
You, pigdog, appear to still cling to your dreams of the "free lunch". Face the facts, pigdog, without the worker payroll and income taxes reduced from a businesses costs, there is nothing else to get an immediate reduction of more than about ten percent-- tops. And it could be as low as 7-8% savings.
There are millions of people in that situation. We don't really know. Imagine the life insurance industry: it is all predicated (as far as sales to big ticket clients) on the fact that the cash value build up is tax deferrred. And when you start taking money out it is a LOAN so the IRS doesn't tax it. So individuals must no longer pay those huge life insurance premiums to protect their estates.
groanup,
Pigdog's cascading chart is malarkey. I do not see where it is possible to achieve more than ten percent savings on domestic items. The bulk of this ten percent is by saving the employer FICA match, which as late as yesterday a number of Fairtaxers were saying was the property of the wage earner too.
I see 6-10%, you see 10-18% cost reductions. So, we are in agreement if the actual number is ten percent. At ten percent, my original bakery example in the BOORTZ/LINDER open letter stands, and the $1.00 loaf drops to $0.90 and then the 30% tax makes the price of bread $1.17.
This will not ever pass because every dollar already accumulated would have its purchasing power destroyed by about 17%. So, the way Dr. Jorgenson understood it is the only viable alternative to discuss: people will receive on average their current take-home pay, and the business will "see" a reduction of perhaps 23% in costs allowing the bread price to drop to $0.77, which will still be $1.00 when the 30% tax is added.
In this manner, everyone is approximately the same as they are now. This is the way I always understood the FairTax and that is why I took offense when Boortz and Linder printed a book with a fairytale scenario.
I am not sure that a consuption tax is the best way to go when it is in the range of 30%, but at least we can debate it. For the record, I think evasion will be the biggest issue to overcome in collecting a 30% tax, especially on services which are often performed person-to-person.
The missing chunk of money you are trying to find has been identified-- it is the payroll and income taxes. You should not expect to find 18% in addition to income and payroll taxes because they are probably about 15% of overall costs right there so all you need are 8% more and you are at the needed 23% savings that the FairTaxers have been estimating are embedded in the cost of goods.
The reason it is unlikely is that all of the money that the FairTax models plan to collect have been identified. The largest chunk by far is the income and payroll taxes. Now that we actually know that these were intended to be retained by the business in order to reduce prices, we know where the FairTax model expected the money to come from.
I am not one to believe that compliance costs will go down much for most companies since almost all the accounting needs to be done to run the business, and for public corps in order to meet SEC regulations.
There is hardly any corporate tax to be wrung out.
Jsut to clarify mys response, when I said "This will not ever pass because every dollar already accumulated would have its purchasing power destroyed by about 17%", I am referring to a version of the Fairtax where it is somehow mandated that wage earners get to keep their entire pay check. THis would be inflationary and that is what I am saying sill not ever pass.
the enforcement requirements in a nation that can't seem to stem the flow of illegal drugs scare me.
And the enforcement requirements of the current income/payroll tax system that can't seem to extract a penny of income or payroll tax from that illegal drug traffic doesn't?
At the least, under a ubiquitous retail sales tax, income from illegal trade or the underground economy expended on consumer products from legitimate retailers get fully taxed.
. California already exempts many goods from its sales tax and the machinations around what is "food," for example, and what isn't are amazing.
Realize the National Retail Sales Tax implemented under the FairTax legislation does not exempt products or services. Instead it provides a sales tax rebate mechanism paid to all legal residents equally to provide for payment of the sales tax on expenditures at the HHS poverty level defined for size of household. This avoids the necessity and problems of making such definitions and specific exceptions as you mention which obviously are the source of much manipulation and political wrangling in the state sales taxes.
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.
When you clean the slate it becomes more difficult to favor a specific group without raising the hackles of everyone else. Especially where everyone is treated precisely the same to begin with and there are no exceptions to the tax. Touching one point visibly affects everyone, making machinations much more dangerous for politicians to engage in.
Of course we have a perfect example in what doesn't work to control such machinations that you speak of in the current income/payroll tax system repealed under the implementation of the FairTax (H.R.25):
| "As a matter of fact, what the income tax does — and this is the debate that I think we always try to get into in order to let you and him fight, see — and the people of this country are led down a path where the actual control of their resources, which in the end is the control over their will, is handed off to the government." . . . "The government then manipulates that will in order to destroy the freedom of our electoral system through the income tax structure, and we call the resulting slavery a free system." "In point of fact, it is not as the founders understood, and the only way to restore real freedom is to give people back control over the income that they earn so that they won‘t, at the voting booth and in other phony issues, be subject to that manipulation." |
Rob,
Lets take another look at your bakery.
Level 1 is the farmer who grows the grain
Level 2 is the mill
Level 3 is the warehouse
Level 4 is the shipping company
Level 5 is the baker who sell to a retail customer
Another example.
Level 1 is the steel mill
Level 2 is the steel warehouse
Level 3 is the manufacturer
Level 4 is the manufacturer's rep
Level 5 is the production plant
Level 6 is the assembly plant
Level 7 is the retail sale of product
If you don't see how the tax that is imposed on level 1 is compounded each time the next level adds their profit margin, then I don't know how to help you.
Does the manufacturer's rep back calculate how much tax was paid by the manufacturer before calculating his selling price? No, he just adds 10-30% profit on top of the cost to him by the manufacture, and I guarantee that the manufacture passes along the taxes that he paid.
At least I did something to design a system whereby much of that need will be eliminated.
Interesting, now where is it implemented and providing this reduction in government you speak of?
Or at the least what legislation in Congress is even proposing to use your brainchild?
What's your contribution?
At present advocacy and support of an actual implementation of a replacement tax system that breaks the income tax paradigm, introduced into both the House and Senate of the United States:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Try and get your hands on a copy of James L. Payne's great book entitled Costly Returns - The Burdens of The U.S. Tax SystemCostly Returns! That book is a joke. The Arthur D. Little compliance study Payne based his conclusions on is from the early 80s and has be soundly discredited. The simplistic model ADL used to determine compliance time was flawed even when it was current.
If the taxes aren't removed at each level, as the FairTax Plan is described by Boortz/Linder, they continue to be in the prices at each level and there is no savings to be gained. The only way to stop it is to take the taxes out of the cost by reducing the worker gross pay.
I would be perfectly happy for you to stop trying to "help me". I understand how pricing works.
I also believe that people are spending millions of dollars on oil and gas investments simply because they have a tax liability: (http://www.petd.com/). These investments are nothing but tax avoidance. What could the 60 million of their last deal have done if it wasn't invested for tax reasons?
You have done us a service by finding out about the flaw in the FairTax book. What have you done to eradicate the tax code and fund the gov't fairly?
Rob, WTF are we doing here? This is a Republic. If we want the tax code changed, we change it; PERIOD!!! So what we are doing on Free Republic is what our congressmen SHOULD be doing, debating the merits. I'll tell you one thing about Boortz that is significant, he is right about us, we are perfectly happy to crucify all of the other congressmen that vote their own pork but are not willing to realize that we are VERY guilty of the very same thing. We keep electing our congresscritters because it is always THE OTHER congressman who screws up.
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