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
Were you lying then or are you lying now?
Seeing as I have not lied in either case, you are out of line.
And what is "non-tax data" that you refer to? From your post 477:
He doesn't mention business tax related cost factors, only tax per-se...
I attempted to simplify your terminology to "non-tax cost data." Said another way, it was my attempt to coin a term for all the costs related to tax but are not actual tax that you keep referring to.
And you're right, there's no bargin to be made, we aparently already agree. What puzzled me was your insistance on continuing to discuss Jorgenson's treatement of these costs as if to say "though I can't find them, they've got to be there somewhere! When I said they were not in the model, you challenged my assertion as though such a suggestion flies in the face of reality, even though you agree with me!
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.
OK. So, pick a term we can all use to mean the same thing: everthing you want to include that is currently left out. Everything: The cost of printer ink that prints tax forms, the envelopes used to contact the tax attorney, the disk drives that hold employee withholding data, everything.
How big is it? $250 Billion? $650 Billion? $3 Trillion? $10 Trillion??? just what percent of the GDP are you claiming is eaten up by {term to be inserted here} costs anyway?
How much of that goes away and how quickly does all that cost go away?
Fully unrolled, these costs are all either Labor costs or capital costs. What is the split?
Perhaps you be willing to start another thread to discuss this? This thread has lost a bit of steam.
How big is it? $250 Billion? $650 Billion? $3 Trillion? $10 Trillion??? just what percent of the GDP are you claiming is eaten up by {term to be inserted here} costs anyway?
I'll accept James L. Payne's factor as representative of the total tax related overhead costs on top of revenues paid to government:
Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By James L. Payne, Reason Magazine February '94When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue. Although future studies may come up with slightly different numbers, there is no doubt that the overhead costs of taxation are substantial. This means that every act of self-subsidy entails a significant waste. When the government takes a dollar from Peter to give it back to him later, there is a huge loss attached to the transaction.
Unfortunately, the bad news doesn't end there. Peter is never going to see this dollar, even if it is destined for him, because of the waste in the system for disbursing subsidies."
Plunder Patrol
by Robert W. Lee, New American April 18 '94Counting the Cost
"Tax analyst James Payne pinpoints more than 30 separate burdens which the current tax system imposes on individuals, businesses, and society as a whole, including the costs of compliance and enforcement."
"When the visible and hidden costs associated with tax collection (the vast majority of which have been piled without remuneration onto the private sector) are totaled up, Payne estimates that it costs 65 cents to collect every $1.00 in taxes. For fiscal 1992, that expense would be more than $622 billion, making tax collection the most expensive of all government programs (more than double the defense budget and nearly five times the expenditures on Medicare). "
How much of that goes away
A recent paper I ran across suggests the costs associated with retail sales taxes to be one fifth those associated with the income/payroll tax system.[CATO -- Options for Taxreform PA536 (2005)]
and how quickly does all that cost go away?
How fast can busnesses change how they utilize their resources for productive use instead of in sterile tax avoidence/minimization schemes. How fast does it take businesses to quit doing things they no longer need to do? A year to two years undoing the worst of it? Your guess is a good as mine.
Perhaps you be willing to start another thread to discuss this? This thread has lost a bit of steam.
Don't see that it makes a lot of difference in terms of my essential reasons for going with an NRST, since those are primarily philosophical and not economic. That is in spite of the fact that these threads tend to bog down in economic minutia rather rapidly.
The main thing I look to clear up in this exchange is what the Jorgenson study actually implements, and how his numbers should best be interpreted in light of real world behaviour and tax overhead costs that he apparently simplifies out of his IGEM analysis.
From what I can see, any tax related cost savings would act to increase the individual's purchasing power over the findings of the Jorgenson studies and the wage thing is best interpreted from a sticky wage perspective due to contractual restrictions that prohibit much downward movement in wages in contrast to what Jorgenson allows in his implementation.
They then pay the same tax that everyone else will pay. They are not being double taxed. One person pays a tax for the purchase of their services, and then they pay tax on the purchase of other goods and services.
The customers of the business will pay the 23% on any services they purchase. The owner of the business will not pay 23% on the salary assigned to himself. On paper, you are an employee of the business. Employees' salaries will not be taxed.
The businesses will have the same profit per unit. If they fail to lower the price, then everyone else will, and it's goodbye business. It's called capitalistic competition. Perhaps you've heard of it.
The workers take home their full salary, which is of course, more than their full salary minus taxes.
The retail price of every product and service loses 23% in embedded cost and gains it back in the form of a sales tax. 23%-23% = 0. It's revenue neutral.
The 23% is currently embedded in the price of goods. It represents the tax that businesses essentially collect, and then pass on to the consumer in the form of higher prices. Once businesses are no longer charged this tax, then it is removed from the cost of the good. Therefore, the retail price charged and received by the business for each product reduces by 23%. However, the 23% is added back at the register through a sales tax. Therefore 23% -23% = 0. The price stays the same. The tax is just now collected in a different way, while eliminating the IRS.
Taxes they pay on gross revenues, and payroll taxes are gone.
You say that like it is a good thing.
Embedded taxes represent all taxes, including those paid by employees, according to the man who did your research. The only way to remove these costs is for employees to take pay cuts.
You fail to comprehend what Dr. Jorgenson's explaination means. It means you can't take your full salary and have prices fall significantly.
If business maintain their same profits and their costs only go down 6-7%, prices ain't falling 23 percent.
No way. Employers wouldn't cut their employees' pay to their current after-tax levels in such a way; that's utter nonsense.
Who is James Payne and what hole did he pull these numbers out of? This guy just spits out numbers without any backing. At least the $250 Billion number had some research behind it, and even that most of that number is not applicable to costs to businesses. Some random quote from a guy back in 1994.
It is nonsense, but that is the assumption when fair taxers say prices will fall 23 percent. That is the way the fair tax researchers came up with the numbers. And now fair taxers knowingly and willfully misrespresent the research.
------------------------------------
In a perfect world, maybe.
This is part of The Plan. Make the new tax plan very confusing, gain confidence from your constituents that you know what is going on and that it's good for them, then screw them to the wall on more taxes.
Congress should just make social security an optional "benefit" for everyone and I'll be happy beyond belief. In fact, I'll abandon all my future claims to SS if I could get out now and forever.
Sorry for this late response. Let me try to rephrase my point.
I believe the payroll tax is paid entirely by the employer, not witheld from my paycheck. Is that not the case? Ancient Geezer has already said the fair tax plan eliminates the payroll tax.
Shalom.
How will the businesses have the same profit per unit?
Look, cut 20% off the average young family's income. They are heavily leveraged for the house, vehicles, and student loans. Those debts are not magically going to drop by 20%.
What you will cut is their disposable income.
When that goes, it won't matter that your chain stores cut prices 5 or 10%, because the money that was left over from the fixed costs won't be there. When the stores cut prices, the tax will eat up the difference for the buyer. If the store cuts its price 20%, and the tax is 22%, you pay 102% of what you pay now--only you pay it out of 80% of your current income, after the mortgage, student loan payment, and vehicle loan payment, etc.
Actually, I don't care so much, my house is nearly paid for and when a pile of people go teats up, I'll be standing in the back at the auction waiting for some really good deals.
Recievership. Perhaps you've heard of that. Maybe you have heard of Depression (not the kind you medicate away, either).
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.