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
Individuals who own a business can assign themselves a salary. That salary will not be subject to a 23% tax. Plus, even if they just took their gross income,and lived off of that without assigning themselves a salary, the purchaser of the services would pay the 23% tax, not the provider of the service.
Well put. Forgive my cliche abuse but so many here argue about trees and forget the forest
Rob, when are you going to stop calling it a pay raise? The employers are already paying the money out. They are merely withholding some and sending it to the government instead. The employers will pay the employees the exact same amount.
There is no reduction in the final price to the consumer. The retail price is reduced by about 23%, but so are the costs. That means that the seller of the product makes the same per unit profit.
To directly answer your question: IF you want prices to drop by 20%+, you MUST reduce your gross pay. If you want your full gross pay (plus the employer paid FICA taxes) you DO NOT get reduced prices as claimed by the FairTax proponents.
No, you do not have to reduce your gross pay to see a price drop if the cost drops by the same amount. Also, the Fair Tax proponents have not claimed that the final consumer price will drop. The seller's cost is reduced by 23%. The seller responds (unless he's stupid) by reducing the price by the same amount, which gives him the same per unit profit. The 23% is added onto the price for a final price that is about the same for the consumer.
The final consumer price will not change.
You're kidding right? A business has the opportunity to sell the same amount of units at a lower price while eliminating wasted time contemplating the tax implications of every decision, eliminating the accounting costs, and freeing up funds and time to improve their business and they won't do it? if they don't there is another business down the street that will, and then they're OUT of business.
Rob, I listen to Boortz and read the Nuze daily. This is consistent with what he's said from the start.
the purchaser of the services would pay the 23% tax, not the provider of the service.What happens when the provider of the service spends what money s/he assigns him/herself?...Will they have to pay tax then or will the purchaser of their service pay their sales taxes for them too?...
Forgive my cliche abuse but so many here argue about trees and forget the forestThat's for sure...
Individuals who own a business can assign themselves a salary. That salary will not be subject to a 23% tax.It is if it's a service business...
Suppose you have a service business now. You have a rate of $100.00 per hr. with an assigned salary of the $100.00 per hr. of $25.00.
Would the Fairtax be imposed on only $75.00 or would it be imposed on $100.00 "gross payment"?
Since you brought it up. After the Fairtax the $100.00 per hr rate would be taxed $23.00. So you might say well that's probably what the tax is "under the current system"...Maybe so if it was all income but it isn't. Also the $25.00 per hr salary you assigned yourself hasn't been taxed yet under the Fairtax. So your total tax liability on your $100.00 WAS $23.00 but after the Fairtax it would be 23% of the gross $100.00 ($23.00), then it would be another 23% of your assigned $25.00 ($5.75) when you spend it making the total liability not 23% but 28.75% and the more money you "assign yourself" the higher the tax rate....
Not only that, but if you don't charge the tax on the current service rate you'll either come up short on overhead and other business expenses or you'll come up short for your "assigned salary".....
Get it?
You're kidding, right? A business has an opportunity to trim staff no longer needed, increase profit margin, improve its P/E ratio, make its stock prices go up, and you think it is just going to give all that away?
A few businesses might let some of that go in the more competitive discount and retail sectors, but do not expect to see them rush out to dump their bottom line in the consumers' laps.
As for another business down the street, some streets are a lot shorter than you seem to think, especially in smaller towns, and more specialized business sectors.
When Walmart drove Kmart out of our town, we no longer had to watch for falling prices.
But from all accounts, wages will drop far quicker than prices.
Fixed costs will remain the same, your mortgage amount, student loans, your car loan, are not going to drop 20% just because your wages did.
New rules make it much harder to declare bankruptcy.
With so many "mining" their equity, it wouldn't take much of a bubble deflation to put them upside down in their mortgages, with less ability to pay them off. Things could spiral pretty quickly from there. More income (percentage wise) spent on mortgages and car loans means less disposable income to spend on anything else.
You are talking about deflating an entire economy.
Think about that. Think also, what that would do to GDP and our trade deficits.
OK. How about your own reposting of his responses to RobFromGA?:
"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."One would think the by now, with all the in-depth searching I'm sure you've done, you'd have turned up SOMETHING ... that is, unless there isn't anything there to find. Don't you get it? He didn't model your favorite part of the debate. You'll have to find another source.
Of course, you could, like RobFromGA, simply ask Dr. Jorgenson directly.
I'm happy to admit that the FairTax has the potential to improve economic efficiency; I've never said it wouldn't. More to the point, I have explicitly, and repeatedly agreed that there are costs to be saved and passed on in some form (growth, wages, prices, etc.) In fact, my investigation of the topic several year ago allowed for a net savings of about 10% (including the highest number for "compliance costs" that I could get any of you to throw out there.) Unfortunately, all that does is gin up the ire of those who insist that not only do they get a 20% reduction in prices, but the also get a 20% increase in take home pay AND the non-tax savings to business will yield untold (literally) riches to the common man! all because Dr. Jorgenson said so!
But, as you have found, if there is any rigorous analysis of such savings they aren't in the oft-cited works of Dr. Jorgenson.
How about this: I'll stop saying that non-tax cost data is not in there if you'll stop claiming it is. After all, you're assuming it's in there somewhere DESPITE not finding any hint of it; I'm assuming it's NOT in there BECAUSE there his no hint of it.
Think about that. Think also, what that would do to GDP and our trade deficits.
The same report that indicates individuals will get what they do today as net income after income/payroll taxes would retain the the same purchasing power showing producer price falls 22% making the change in consumer price paid including the 23% NRST, the same as is paid today for given basket of goods and sevices.
There is no additional taxation, it is just collected on one point in the economy (at retail purchase) instead of from both business and individual income as it is under the current system.
The consequence is that businesses become more productive and competitive on internation trade, as well as within our own domestic economy, expanding both trade and GDP output.
| THE ECONOMIC IMPACT OF THE NATIONAL RETAIL SALES TAX ByDale W.Jorgenson May 18, 1997 Final Report to Americans For Fair Taxation INTRODUCTION AND SUMMARY The purpose of this report is to analyze the economic impact of substituting the National Retail Sales Tax (NRST)for individual and corporate income taxes,the Medicare,Social Security, and FUTA payroll taxes,and the estate and gift taxes.1 I consider a revenue neutral substitution-one that leaves the government deficit unchanged. Finally,I focus on the impact of this fundamental tax reform on economic growth over the next quarter century. I have summarized my conclusions in a series of charts: 1.The revenue neutral substitution of the NRST for existing taxes would have an immediate and powerful impact of the level of economic activity.The first chart gives a projection of GDP under current tax law. The second chart shows that GDP would increase by almost 10.5 percent in the first year.This increase would gradually decline to a little under 5.4 percent over the next twenty-five years. 2.Taxation of consumption would induce a radical shift in the composition of economic activity-away from consumption toward investment. The third chart shows that real investment would initially leap by a staggering 76.4 percent and then gradually fall to about 15 percent higher than under existing taxes. The third chart reveals that real consumption would initially decline by 9.1 percent. However,consumption would overtake the level under existing taxes within five years and grow rapidly under the NRST. 3.Holding net foreign investment constant,the fourth chart shows that exports would jump by 26.4 percent under the NRST, while imports would rise only modestly. This is the consequence of excluding exports from the tax base while including imports. The initial export boom would gradually subside, but exports would ultimately remain more than 13.3 percent above the level under the current tax system, while imports would fall a modest 0.9 percent below this level. |
Do workers take home more pay AND get constant after-tax prices?
That question, after all central point of contention of this thread.
OK. How about your own reposting of his responses to RobFromGA?:
"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."
Going to a consumption tax reduces the tax wedge on upstream businesesses, as producer price falls quantity of goods sold as exports increase resulting in reduction of deadweight losses.
Those deadweight loss reductions are a factor of change in supply demand equilibrium, not tax related overhead. The economic efficiency gains in production arise from the fact that upstream businesses no longer pay income/payroll taxes per-se. Tax related overhead is a separate issue from these deadweight factors.
Under the Fair Tax, the employer pays you $50,000 a year, but instead of sending part of it to the government, he pays it all to you.
So from where does the cost savings come that allows the business to reduce his prices by the amount of the tax?
So, perhaps you could illustrate, which line item components of cost of some sample business are reduced?
I must say, you are a master at completely evading conversation and debate.
I say: "The weather sure is nice!"
You say: "Spoons don't fit in the lock very well."
I say: "Hmmm, maybe you need a different tool to open that lock."
You say: "I do not! Green cows work just fine!"
If your goal is frustration through obfuscation, you're pretty good. If you goal is common ground and understanding, you'll need to work a lot harder.
OK. How about your own reposting of his responses to RobFromGA?:
"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."
The production gains Jorgenson mentioned in reply to RobFromGa, arise from reduction of deadweight losses (a result of shift in supply-demand equilibrium) by removing tax from manufacturing and other upstream businesses from retail, and through increased capital investment resulting in increased producivity that is encouraged by being taxfree in a consumption taxed economy both effects of which are clearly implemented in the model.
In fact, my investigation of the topic several year ago allowed for a net savings of about 10% (including the highest number for "compliance costs" that I could get any of you to throw out there.)
I would tend to agree, except "compliance costs" are only the accounting cost factors and but a portion of the total tax related overhead costs associated with the current system. "Compliance cost" does not address the costs associated with planning, implementation of tax avoidence/minimization activities, audit/litigation costs arising from controversies with the IRS nor fees,penalties, or interests associated with such when business loses the argument. There is much not accounted for in what is termed "compliance costs" alone.
How about this: I'll stop saying that non-tax cost data is not in there if you'll stop claiming it is.
Since I'm saying that tax related overhead cost data is not implemented in the Jorgenson IGEM simulation, I don't see that you are making any bargain there. And what is "non-tax data" that you refer to?
After all, you're assuming it's in there somewhere DESPITE not finding any hint of it;
Haven't I stated that Jorgenson did NOT include any effect for reduction in tax related overhead costs? I find it is not there, I can find no business cost submodule introduced whatsoever anywhere in the IGEM implementation. I don't assum it's in there, for it is not in there!
I'm assuming it's NOT in there BECAUSE there his no hint of it.
Agreed the model doesn't implement businesss tax related overhead costs at all as far as I can see.
As there are obviously many simplifying assumptions in the model, the treatment of wages being one deviation from real world, where obviously contracts prevent the fall of wages as the model implementation allows, there is nothing that can be assumed out a simplification of the model.
The real world has obvious tax related cost burdening business. An IGEM not implementing such for simplification reasons does not make the real world go away. Evaluating a simulation output one takes real world factors into account adjusting for the simplifications, or at the least recognizing how real world behaviours and factors not included in a model implementation would modify the results.
The same report that indicates individuals will get what they do today as net income after income/payroll taxes would retain the the same purchasing power showing producer price falls 22% making the change in consumer price paid including the 23% NRST, the same as is paid today for given basket of goods and sevices.But you said "Sorry, doesn't fly at all"...
Why did you leave paragraph 5 of the report out of your post?
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.AG:AG:
The business no longer paying tax on wages (i.e. employer excise on wages paid) does not imply lower wages anymore than an employee no longer having 7.65% FICA wages and Income tax withholding from his gross. Contracted gross wage remains constant with no withholding that is an increase in takehome pay for the worker, the business realizes the advantage of no longer paying or accounting for its 7.65% excise on wages paid that is a reduction in levy on the business.robfromga:And do you dispute that the only way the producer is going to recognize a cost savings is if he doesn't give his workers 100% of the same gross pay he is now giving?
Yes I do dispute that, as the real savings to the business arises our of reduction in overhead costs associated with repeal of the tax system with its imposed requirements on business and removal of need for business to implement evermore creative (and costly) ways of tax avoidence.robfromga:
So, this means that Jorgenson's model was based on the wage earners NOT getting their entire 100% current paycheck, but instead they would be getting 100% of a new gross paycheck, about the same as what they are now getting after payroll and income taxes.AG:
Sorry, doesn't fly at all in the face of high production growth, increasing GDP economy projected under the study.robfromga:You really should read the study in whole, rather than looking to warp statement of results to backfit into your predisposed personal opinions....HMMM!
Nothing in Jorgenson's report done for AFFT or the earlier one, to be found on the net done for others investigating the potential of the Armey Flat Tax indicates decrease in contracted wages for workers. Quite the contrary, as both reports indicate very high GDP growth and increased production which pressures wage upward, not downward.
FairTaxers are misrepresnting this study to sell their plan.AG:
Looks more to me like an income tax apologist warping the interpretation of a single conclusory statement our of a much broader study indicating conditions just the opposite of what the studies actually present.HMMM!
Were you lying then or are you lying now?
Why did you leave paragraph 5 of the report out of your post?
Because it was posted in 475.
The point addressed to Smokin' Joe, in the excerpt taken from 475, was in anwer his query as to what would happen to GDP and balance of trade, in veiw of the producer price reduction scenario presented by Jorgenson.
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