Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
self | August 25, 2005 | RobFromGa

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


TOPICS: Government; Your Opinion/Questions
KEYWORDS: boortz; embedded; embeddedtax; fairtax; hr25; jorgenson; liar; linder; nrst; retraction; robpropaganda; scam; taxes; taxfraud; taxreform
Navigation: use the links below to view more comments.
first previous 1-20 ... 361-380381-400401-420 ... 701-713 next last
To: Sprite518
All you do is hurl insults.
The cowardice act of being labeled a troll behind my back on several occasions isn't hurling insults? Which one of us was told to knock off the insults by the Mods here?...
You can't even make one valid point on why you love the current income tax so much.
With the exception for your obsession with me, the subject isn't about me or what I love...

Once again you're the fool in this picture.

381 posted on 08/26/2005 7:25:27 AM PDT by lewislynn (Status quo today is the result of eliminating the previous status quo. Be careful what you wish for)
[ Post Reply | Private Reply | To 360 | View Replies]

To: sitetest

Personally, I've never bought the "underground economy" argument for the reasons you point out. The only thing I will say is that under an NRST, "undocumented workers" (i.e., illegal immigrants) will pay the full NRST rate on their purchases as everyone else, but will not be eligible for the FCA. This means that the illegals' effective tax rate equals their marginal tax rate, whereas the typical legal resident or citizen's effective tax rate is significantly lower than the marginal rate due to the FCA.


382 posted on 08/26/2005 7:38:06 AM PDT by kevkrom (WARNING: If you're not sure whether or not it's sarcasm, it probably is.)
[ Post Reply | Private Reply | To 380 | View Replies]

To: kevkrom

Dear kevkrom,

"Personally, I've never bought the 'underground economy' argument for the reasons you point out."

Well if you and I are right, then that doesn't bode well for the NRST, in that my understanding is the 30% rate is kept that low in part by assuming that the great majority of the underground economy will get sucked into the tax system.

As it is, the 30% sales tax rate looks to me like a significant burden on consumption (and the general rule of thumb is if you tax something heavily, you get less of it, and less consumption usually translates to "recession"). As well, included with state sales taxes (my own state of Maryland charges 5% - so that's a total rate of 35%), the taxation rates look to me to be so high, even at the current proposed levels, that they are virtual invitations to avoidance and evasion.

But if we're not capturing nearly all the underground economy, then the rate will have to exceed even 30%.

Think of the Laffer Curve, and consider that it might also describe consumption tax rates and levels of consumption tax revenues. I suspect we're already into the right side of the Laffer Curve, as it might apply to consumption. A higher rate takes us further down the road of the right side of the curve.


sitetest


383 posted on 08/26/2005 7:56:54 AM PDT by sitetest (If Roe is not overturned, no unborn child will ever be protected in law.)
[ Post Reply | Private Reply | To 382 | View Replies]

To: Your Nightmare
Why are the retail organizations lining up against a NRST?
I don't know. You'd think they'd love the idea of 30% price increases at the register, having to file a report and remit their tax collections once every month, once a week in some cases VS "the current intrusive system" of quarterly.
384 posted on 08/26/2005 8:03:31 AM PDT by lewislynn (Status quo today is the result of eliminating the previous status quo. Be careful what you wish for)
[ Post Reply | Private Reply | To 376 | View Replies]

To: kevkrom
undocumented workers" (i.e., illegal immigrants) will pay the full NRST rate on their purchases as everyone else, but will not be eligible for the FCA.
Wooo, eligibility, that'll stop'em.

They aren't "eligible" to be in the country working either, did that stop them? Not being eligible and not receiving are'nt the same.

385 posted on 08/26/2005 8:14:04 AM PDT by lewislynn (Status quo today is the result of eliminating the previous status quo. Be careful what you wish for)
[ Post Reply | Private Reply | To 382 | View Replies]

To: Bigun
LOL! Why am I NOT surprised??? Discredited by whom? The Patrice Lamumba school of economics perhaps! LOL!
By the IRS, the GAO, and a host of other independent economists. The IRS has contracted IBM to develop a realistic model of compliance burdens based on updated understandings and using modern technology. (BTW, regardless of what y'all would like people to believe, I don't make this stuff up.)


TAX ADMINISTRATION: IRS Is Working Improve of Compliance Burden - GAO, May 2000

Appendix I: Limitations of the Arthur D. Little Model

IRS and Other Reviewers Have Identified a Number of Limitations

To measure the paperwork dimension of compliance burden, IRS sponsored a study in 1984 that has been the basis of its burden estimation methodology since that time. Arthur D. Little, Inc. (ADL), an IRS contractor, released the results of the paperwork burden study in 1988. Since then, IRS and other reviewers of ADL's paperwork burden estimation model have criticized it for number of reasons.1 The reported limitations of the model and its estimates can be categorized into four areas:

  1. the age of the underlying survey data,
  2. the exclusion of certain components of burden,
  3. the model's simplistic treatment of the determinants of burden, and
  4. the questionable statistical validity and poor documentation of the estimates.

Underlying Data Are Outdated

Several reviewers of the ADL model, including IRS, have criticized the age of the burden model's survey data. They have observed that the survey data reflect 1983 information and lack relevance to today's tax environment because of the many significant changes in tax law and tax preparation technologies that have taken place since then.

Reviewers have also expressed concern over the accuracy of the burden estimates taxpayers provided when they were surveyed. To obtain the information about burden, ADL used two collection methods—a mail and a diary study. The burden estimates yielded by the two methods varied significantly. On average, diary respondents' estimated burden, by return, was 8.32 hours, while mail survey respondents' estimated burden was 14.82 hours—78 percent higher. ADL could not determine which estimate was more accurate, so it decided to use the average of the two estimates.2

Certain Components of Burden Are Excluded

Past reviewers have noted that the definition of burden used in the ADL model excludes important components of burden. The ADL model does includes the time costs (burden hours) imposed by information collections but excludes costs associated with tax planning and postfiling activities, such as preparing for an audit. It also excludes most monetary expenses. For example, paid preparer fees are converted into an equivalent time amount, but expenditures on books, software, and delivery services are excluded.

The Determinants of Burden Are Simplistically Incorporated

The ADL model has been criticized for the simplistic nature of the equations it uses to represent the relationship between burden and its determinants. In its report, ADL acknowledged the simplicity of its equations but explained that IRS decided it would be operationally infeasible to use more detailed and precise models.

One past reviewer noted that the only determinants of burden used in the final model were measures of return size (numbers of forms and attachments), form size (number of words or number of line items), the number of references to the tax code in forms and instructions, and the number of line items requiring records.3 As a consequence, many important determinants were omitted from the model. For example, the model does not allow for alternative filing methods, such as electronic filing software programs, and it also does not differentiate levels of burden between simple and complex types of forms. The model does not differentiate burden between simple and complex line items on a form, and it does not separate burden within the form and identify parts of the form that represent the greatest burden. In some cases the model erroneously estimates the impact of efforts to simplify forms, instructions, or procedures. For instance, if new lines are added to a form's worksheet to simplify computations, the ADL model reports an increase in burden.

The Statistical Validity of the Model Has Been Questioned

Reviewers have also called into question the statistical validity of the model. IRS indicates that errors were made in the sample weighting techniques. In addition, the model's methodology was poorly documented. IRS noted that the ADL burden estimates are inconsistent because they yield results that assign unrealistically high levels of burden to certain forms (e.g., Form 4789, Currency Transaction Report, and Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business). At the same time, IRS noted that the ADL burden estimates for many other forms did not include the amount of time taken to mail them, even though those forms had to be mailed to IRS. Researchers have also questioned the validity of the business burden estimates because the ADL model yields an estimate of burden greater than that found in the survey data on which the model is based.

  1. IRS, "Report of the Taxpayer Burden Study Group: Roadmap for a New Measure and Pilot Study for Individual Non-Business Taxpayers," Request for Proposal (Aug. 19, 1998); Henry Beale, Report on Arthur D. Little Taxpayer Compliance Burden Model, untitled draft report submitted to the Analysis and Studies Division, IRS (1996); Marsha Blumenthal, Burden Reduction Research and Analysis, Report submitted to the Analysis and Studies Division, IRS (May 1996); PricewaterhouseCoopers, Compliance Burden Literature Review, draft report submitted to IRS (June 16, 1999).

  2. ADL made this correction by multiplying the burden estimates that would have been obtained if it had relied exclusively on the mail survey results by 0.78. The corrected estimate equals the average of the two estimates that would have been obtained by using the diary results and the mail survey results separately.

  3. Beale, Report on Arthur D. Little Taxpayer Compliance Burden Model.

386 posted on 08/26/2005 8:15:24 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 367 | View Replies]

To: kevkrom
The only thing I will say is that under an NRST, "undocumented workers" (i.e., illegal immigrants) will pay the full NRST rate on their purchases as everyone else, but will not be eligible for the FCA. This means that the illegals' effective tax rate equals their marginal tax rate, whereas the typical legal resident or citizen's effective tax rate is significantly lower than the marginal rate due to the FCA.
An honest question. What do you think would happen if a plan like Bush's "guest workers" idea were implemented? Would they get the FCA?
387 posted on 08/26/2005 8:22:18 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 382 | View Replies]

To: Gvl_M3

The SQL squad as typified by Robby, s-test, and Nightie actually CANNOT admit that there is any such thing as embedded taxes in prices (or that it amounts to more than a "hill of beans" in their latest attempts). It destroys their arguments.

Instead they call any such illustrations "malarkey", "idiocy", etc. and try to marginalize the effect by claiming using various questionable means that any such figure is trivial in amount - when it clearly is not.

Glad to see you grasp the mechanism.


388 posted on 08/26/2005 9:02:27 AM PDT by pigdog
[ Post Reply | Private Reply | To 336 | View Replies]

To: Your Nightmare

So, let's see Nightie ... readers are only allowed to consider the sources YOU put forth???

Why is that?


389 posted on 08/26/2005 9:04:47 AM PDT by pigdog
[ Post Reply | Private Reply | To 338 | View Replies]

To: Your Nightmare
By the IRS, the GAO, and a host of other independent economists.

LOL! You really are a whole Laural and Hardy cartoon all by yourself aren't you!

The entrenched bureaucrats at IRS and GAO along with the William Gale types at Brookings, the VERY same people the writer is critical of BTW, have debunked it and YOU buy that hook, line, and sinker!

Keep it up my friend! It's a laugh a minute!

390 posted on 08/26/2005 9:06:39 AM PDT by Bigun (IRS sucks @getridof it.com)
[ Post Reply | Private Reply | To 386 | View Replies]

To: Your Nightmare

BTW: There is no longer any doubt, in my mind at least, that YOU are employed by the IRS!


391 posted on 08/26/2005 9:09:35 AM PDT by Bigun (IRS sucks @getridof it.com)
[ Post Reply | Private Reply | To 386 | View Replies]

To: xzins

That's quite a good observation that some of the Status Quo folks on the thread certainly miss.

Quite right.


392 posted on 08/26/2005 9:10:31 AM PDT by pigdog
[ Post Reply | Private Reply | To 348 | View Replies]

To: Bigun
By the IRS, the GAO, and a host of other independent economists.

LOL! You really are a whole Laural and Hardy cartoon all by yourself aren't you!
LOL! The study Payne based his conclusions was contracted by the IRS! So the IRS is good when you need them and bad when you don't.

Why don't you look at the methods used in the ADL study and judge for yourself? They really are laughably simplistic.
393 posted on 08/26/2005 9:10:46 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 390 | View Replies]

To: Bigun
By the IRS, the GAO, and a host of other independent economists.

LOL! You really are a whole Laural and Hardy cartoon all by yourself aren't you!
LOL! The study Payne based his conclusions was contracted by the IRS! So the IRS is good when you need them and bad when you don't.

Why don't you look at the methods used in the ADL study and judge for yourself? They really are laughably simplistic.
394 posted on 08/26/2005 9:10:49 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 390 | View Replies]

To: Bigun
BTW: There is no longer any doubt, in my mind at least, that YOU are employed by the IRS!
You are, as usual, wrong.
395 posted on 08/26/2005 9:16:30 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 391 | View Replies]

To: Your Nightmare
The study Payne based his conclusions was contracted by the IRS!

You REALLY are of the deep end aren't you? What the hell difference does it make who paid for the study. All that matters is that when the study reaches a conclusion they don't like they try to KILL the messenger! Entirely typical of an entrenched bureaucracy!

So the IRS is good when you need them and bad when you don't.

Don't put words in my mouth! I have NEVER said that and NEVER will!

396 posted on 08/26/2005 9:17:14 AM PDT by Bigun (IRS sucks @getridof it.com)
[ Post Reply | Private Reply | To 393 | View Replies]

To: pigdog; Bigun
You two squirming has given me a chuckle this morning. Thanks!
397 posted on 08/26/2005 9:17:46 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 392 | View Replies]

To: Bigun
You REALLY are of the deep end aren't you? What the hell difference does it make who paid for the study. All that matters is that when the study reaches a conclusion they don't like they try to KILL the messenger!
Kill the messenger? They used the study for a decade!


Don't put words in my mouth! I have NEVER said that and NEVER will!
I didn't put words in your mouth. It was my observation.


[BTW, I sense desperation in your posts lately. I'm worried about you. How are you going to feel when the other FairTax myths are busted?]
398 posted on 08/26/2005 9:22:12 AM PDT by Your Nightmare
[ Post Reply | Private Reply | To 396 | View Replies]

To: Your Nightmare

Not to worry, Nightie. We're the ones with the successful and beneficial tax plan called the FairTax, remember???

And, let's see - you (and the combined "weight of knowledge" of the Squirrels) have ... drum roll!!! - The Nightmare Tax!!

I greatly prefer the FairTax.

And, hey, YOU were the guy bitching like crazy just recently about someone offering HIS interpretations as a bad thing to do .... but when YOU do it, it's wonderful???


399 posted on 08/26/2005 9:47:32 AM PDT by pigdog
[ Post Reply | Private Reply | To 397 | View Replies]

To: chronic_loser

Thanks for the insult.


400 posted on 08/26/2005 9:56:18 AM PDT by rwrcpa1 (April 15. Let's make it just another day.)
[ Post Reply | Private Reply | To 299 | View Replies]


Navigation: use the links below to view more comments.
first previous 1-20 ... 361-380381-400401-420 ... 701-713 next last

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.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson