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
To educate you on the Fair TaxFor example: Does the book say anything about how bureaucrats at Social Security would "determine" the sales tax rates every year?
Does the book mention anything about how the tax isn't imposed on price but "gross payment"?
Does the book say anything about a 30% sales(?) tax on the wages salaries and benefits of "any (all) government" employees?
Does the book describe how some interest earned and or paid is taxed and that the rate to be taxed is determined every month by the Secretary?
I didn't think so.
Does the book say that everyone would get 100% of their paychecks without deductions and retail prices would be about the same?...Did robfromga prove that's a lie.
I thought so.
Thanks for exposing the scam that I already knew that it was.
That is where the pipe dream has been exposed.
What savings will WalMart and Target pass on?
The 10-20% difference from your current gross income and your current net.
The price will be lower, but you will not make your current Gross, just your current NET (after withholding--this is where the savings are coming from--except the matching SSI). You will have to replace that SSI with your own savings, but from your reduced (by approx 20% wages), and will have to pay taxes on every dime you spend after the poverty level. You will have to do more with less.
Despite the incredible mess we have now, my business expenses are just that--expenses: non taxable.
I pay the state/local sales taxes and all the hidden taxes, and the taxes on the hidden taxes when they are rung up as part of the price.
I do not expect all the excise taxes, etc. to go away, the "fair tax", though, will tax whatever I pay at a new, higher rate--only now business expenses will not be deductible.
Stop and think. A business uses independant owner/operators to haul their frieght. Only the owner/operators can no longer write off the truck, fuel, etc. They are instead paying the new fair tax on every dime of business expenditure. They pass the cost INCREASE on to the businesses they do business with. In the meantime, you are working for wages, and buying goods from that business. Only the wages you work for are at 80% of what they used to be, you still are paying the fair tax on your purchases, while the increase in cost is being passed on to you. You are getting it from both ends.
In the meantime, it is harder than it used to be to declare bankruptcy.
The amount of your mortgage will not go down, you will still owe the same amount.
Other bills in your life will be fixed costs in a deflating economy.
The student loans will not get smaller, except as you pay them off.
The vehicle loan will not shrink, but the chances of trading down to get out from under it will diminish somewhat as used vehicles--yes even yours, go up in price because they are immune to the tax. To trade down, even up, will mean a serious hit in the age and quality of your vehicle.
If you are well set up and living modestly, you will not end up in the street. Otherwise, you are on the road to the poorhouse.
Businesses will not be so quick to replace vehicle fleets, computer equipment, and other infrastructure, just because in 5 cycles they will have paid for a sixth--in taxes, whereas now, it pays to take the write-off to increase productivity.
Once that stone hits the economic pond, the ripple will travel far.
Can you say Depression?
If you couldn't tell, I am far from sold on this plan.
I may not be a PhD in economics, but my grandfather taught me this much: If it looks too good to be true, then it probably is.
...and he raised four children through the Depression.
I am in pretty good shape, myself, my total debt is less than many pay for a single vehicle. It is my grandchildren I worry about.
The current code could be grossly simplified, if it would just be done.
To wit:
pigdog has chosen a taxable profit margin of 33%, since this variable has a first order effect on the outcome, and is a geometric factor, the outcome inflates rather quickly to an extraordinarily large level.
I believe that groanup pointed out later in post #340 that taxable profit is about 3% of revenue (an interchangable term with price) not 33% as offered by pigdog.
I'll leave the fancy chart making to others, but at the more accurate taxable profit margin of 3%, and a tax rate of 34.4%, $1.00 flowed through 6 levels of production that simply extract a profit and have no additional costs becomes $1.27. That represents an accumulated profit of $0.20 on the original $1.00, and an accumulated tax of $0.07.
The total tax burden to the consumer is a much more reasonable 5.4% of the price (not the whopping 23% offered by pigdog ... does that number look familiar?). Of course, eliminating that 5.4% of price by eliminating the profit tax an replacing it with a 23% inclusive sales tax make the price $1.55 (vs $1.27 ... but to point this out would be to ignore many facets of the model which have been simplified away ... and we wouldn't want to do that, now would we?)
As with all these discussions, accurate repsentation of the situation depend on accurate choices of examples and inputs.
But the increase in personal freedom and privacy would be well worth it...
A more controllable way to decipher these accumulated tax costs is to reverse the model offered by pigdog (as my original treatment of this topic did.) By starting with consumer price and recursively extracting tax costs from any number of levels of production upstream, the model quickly approaches a finite limit of the true embedded tax (ie, the model converges) rather than exploding ad-infinitum depending on the inputs and number of levels you choose (ie, the model diverges.)
This top down approach will never give such untennable answers as "the tax accumulated after the nth level of production exceeds the total of all Federal tax receipts..." as pigdog's method can. And it doesn't require you to know the number of level of production ... by choosing a suitably large number, the top down model converges.
LOL! Why am I NOT surprised???
Discredited by whom? The Patrice Lamumba school of economics perhaps! LOL!
I never pinged you to this, not sure if you saw it.
The NRST bill will also provide a credit to the retail business for compliance costs equal to a percentage of the taxes collected. Try getting that from the IRS... ;)
I'd respectfully disagree. An income tax of any form gives the government first claim on your production, whereas a pure consumption tax allows the individual much more control over when and how much he is taxed. Read some of Alan Keyes' old articles and speeches -- he makes the point better than I can.
As to spending being the problem... as long as the true burden of taxes are hidden from the individual, they can easily be led to beleive that that burden is someone else's problem (usually "the rich" or "corporations"). When the true cost of government is printed on every receipt for every item they buy, that's when people are going to notice and demand something be done about it.
Is 23% of every dollar you spend too high? Absolutely. But the rate is what the rate is because of what government is doing right now. When every single American has a vested interest in seeing that rate come down, then that will be the pressure needed to cut government. Fiscal conservatives (if there are any left in government) can tell the voters that if we cut program X, then we can cut the sales tax by Y%; I suppose the coverse would be true, too, that people can be told if they want to add or expand program X, it would cost them Y% more.
Oh, man- I can't believe you said that!
Look at my home page and say it again! And y'know, I may just post that quote right there next to Hillary's if you stand by your position.
So your "#1 on New York times"[sic] "read the Fairtax book" mantra is as articulate as you've been so far.Why am I not surprised that this man:
has become the guru of the FairTax?
Thanks for the bump. I'm not really sure what you saw in that post to get all excited about though.
What bump? The Bingo response was to NBW3IB's #279, insight as to the core of the issues here.
Have you heard anything back from the FairTax people?
I'm sure mine is just another out of thousands of queries flooding into AFFT's minor staff, I don't expect anything soon.
While yours is the burning issue for this thead and to you, for AFFT I doubt it has any more importance or priority than all the other questions fired at them as a consequence of the Boortz book and all the press.
I'm sure mine is just another out of thousands of queries flooding into AFFT's minor staff, I don't expect anything soon.LOL!
While yours is the burning issue for this thead and to you, for AFFT I doubt it has any more importance or priority than all the other questions fired at them as a consequence of the Boortz book and all the press.
If this book was full of BS like you and your cohorts claim, then don't you think the Dr from Harvard would voice in concern in the public. Especially, after the book has been Number 1 on the New York Times best seller since its first came on the list?????I believe the Dr. has been out of the country. He's on leave from Harvard.
Maybe not.And let's not forget the Retail Industry Leaders Association.
"RILA urges members of Congress to oppose national retail sales tax legislation, and asks that they not cosponsor the Linder/Chambliss legislation. Any tax reform legislation considered by Congress this session should be developed with the full input of RILA member companies."
That's funny, because it sounds to me like what he's said all along. That's what I've always heard about the Fair Tax plan.
This is oxymoronic. There's already a tax on marijuana, how well do they do at collecting that?
Today, they collect zilch.
Under a National Retail Sales Tax, the income from the marijuana spent on consumption will be taxed when said marijuana dealer goes byes that fancy new car with his ill gotten loot.
are already any number of taxes due from the underground economy that don't go collected. What makes you think that the same people won't buy off the black market?
What makes you think they don't already. The point being when ever they purchase anything from a legitimate source the will be taxed where today that income goes completely untaxed.
Fully taxed? This country already has markets in illegal drugs, illegal labor, illegal cars and parts, illegal booze, illegal cigarettes... With an NRST and open borders for goods due to CAFTA, that market will explode.
The FairTax NRST provide a rather interesting reason to control them borders better it seems to me. Government always responds to threats to its revenue.
H.R.25Fair Tax Act of 2005 (Introduced in House) Section 101(c) Coordination With Import Duties- The tax imposed by this section is in addition to any import duties imposed by chapter 4 of title 19, United States Code. The Secretary shall provide by regulation that, to the maximum extent practicable, the tax imposed by this section on imported taxable property and services is collected and administered in conjunction with any applicable import duties imposed by the United States. |
Under CAFTA no import duties, however that is no barrier whatsoever to collecting a retail sales tax that is collected the same on consumer products. Anything carried in for use in the US, is taxed identically to domestic products sold in the US for use in the US.
Looks to me 23% revenues on product entery into the US is one big incentive to government for tightening up borders.
The only reason those goods are sold illegally is that the amount of the tax makes it worth the risk of getting caught.
This is different how from the current tax system with marginal tax rate breaking 40% to encourage the same trade. Don't see much in the way of addition to what is already being done in the 25% of GDP underground economy now days.
Given the byzantine tax code we have, you are asserting that Congress won't insert line items into budget bills altering sales taxes for specific goods before the ink on the NRST is dry? What planet are you living on?
Those are called excises today, and make up less than 5% of revenues for a reason. The electorate hates hates them.
"More difficult" will likely last about 45 minutes. Until you've seen the machinations of the California State Board of Equalization over sales tax minutae (an Orwellian name if there ever was one), you can't tell me that Congress will leave this alone. No way.
Lets see, you start out with a tax system that taxes everything equally to establish the lowest possible rate with the largest possible taxbase.
Any attempt to remove some specific item from taxation narrows that base, they either must raise the tax rate on everything else, and the ire of the entire electorate. Or it just becomes a tax cut.
Where's the problem? Remember specific excises don't fly today, there is even less reason for them to fly under a retail sales tax system in the eyes of the electorate that controls who stays in Congress.
But until we can get spending down to about 10% of sales,
Spending ain't coming down any as long as most of the electorate figures they are getting a cheap ride for their government bennies.
I promise you, the size of black market you'll see will be mind boggling,
We are already in that condition with a 25% of GDP undergound because of an unenforcible income tax system.
the number of exemptions for specific uses and products will be daunting,
Tax cuts are fine by me. Just how are they going to go about making all the exemptions without cutting spending?
and the mechanics of enforcement will make the WOD look like a garden party.
With all the exemptions you forsee what is left to enforce?
As if we didn't already have a monster at the door we are try to get rid of:
man's business; the eye of the federal inspector will be in every man's counting house....The law will of necessity have inquisical features, it will provide penalties, it will create complicated machinery. Under it men will be hauled into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of federal inspectors, spies, and detectives will descend upon the state."
-- Virginian House Speaker Richard E. Byrd, 1910, predicting the consequences of an income tax.
The burden of calculating tax collections on thousands of goods at a myriad of rates under various conditions will fall heavily upon all but the largest of retailers, who, I am certain, love this proposal.
What small retailers? They will all be in your black market.
However, Since less than 20% of retail dollar flow through the small businesses that would be an improvement over the current evasion losses under today's income/payroll tax system. Same folks that are busy evading income and payroll taxes today, you can figure will continue to try doing so under any tax system including an NRST. The key is whether or not the situation is worse than today.
I submit it will be better, not worse:
refer: ==> Tax Evasion: The Underground Economy
When the advocates of NRST start to deal honestly with the public, I'll pay more attention to what they have to say.
You might try abit less hyperbole for size. It might fit better.
A more controllable way to decipher these accumulated tax costs is to reverse the model offered by pigdog (as my original treatment of this topic did.)I notice you use the term "accumulated tax costs." Pigdog claims these are "cascading" taxes. What's your opinion on that?
Dear Carry_Okie,
"This is oxymoronic. There's already a tax on marijuana, how well do they do at collecting that? There are already any number of taxes due from the underground economy that don't go collected. What makes you think that the same people won't buy off the black market?"
Well, the NSRTers will argue that, hey, at least when the drug dealer goes and spends his ill-gotten gains, he'll have to pay the NSRT. Well, to some degree, that's true, but it leaves out a critical part of the transaction chain.
I don't know about the buying and selling of illegal drugs, so I'm going to translate this to a part of the underground economy with which I'm familiar.
I have friends who hire folks off the books to do stuff like clean the house, be a nanny to their kids, or do landscaping for their homes. Let's take the case of the nanny.
We have some friends who have a nanny for their children, a woman whom they pay $10 per hour. They pay no payroll taxes, withhold no income taxes.
Under the new system, this woman will still get her $10 per hour, but NOW SHE'LL HAVE TO PAY THE NSRT ON HER PURCHASES! It's a MIRACLE! We've closed down the underground economy!
Well, no, not quite. Under the new law, Little Miss Nanny should be charging the 30% NSRT on her services to my friends, taking here income, and then spending it personally and paying the NSRT on her purchases. Thus, we're missing half the taxation that should be going on, here.
"Oh! But we're only missing HALF the taxation," say the NSRTers.
Yeah, I think that's true. I agree with that analysis.
"Under the old law, we were missing ALL the taxation," they say.
No, that part isn't true.
Under the new regime, my friends will be paying for this woman's services with untaxed dollars, and will not be paying any sales tax on those services.
But currently, under the new law, my friends are paying for the services with AFTER TAX dollars, not untaxed dollars, and thus, even though this woman is paying no income taxes, TAXES WERE COLLECTED ON THE MONEY BEING USED TO PAY HER.
In the current situation, half the tax transactions that should be occuring ARE occuring, just as it will be under the new law.
As well, because this woman, even on a full-time bases, is in the very lowest tax bracket, and my friends, God bless them, are in the very highest tax bracket, because it is their side of the transactions that are taxed, and their rate is higher, the "half" of the taxes that are paid are considerably greater than the "half" that are unpaid.
However, under the NSRT, the half that is unpaid would be at least as large as the half that is paid.
All that's being done with the NRST is we're moving the point of taxation from the "front" of their money - when they receive their income, to the "back" of money - when they spend their income. In this example, NRSTers miss that the folks with the nanny are paying their taxes at the "front" of their money, on their income, even though the nanny's "front" of her money goes untaxed.
Under the NSRT, the "back" of the family's money will go untaxed, but the "back" of the nanny's money will now be taxed.
Looks like a roughly even swap to me.
Dimples, I'm pinging you because: you're a lot more knowledgeable about how to apply statistical analysis to these questions, so if I'm making an error, you can perhaps point it out to me; I think you may know much better the appropriate terminology to better express what I'm saying, and may choose to do so.
sitetest
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