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
Any tax they pay when they spend money is a personal purchase that has nothing to do with the business.Really? You said yourself they "assign themselves a salary". From what source would they get that "assigned salary" to make their personal purchases including the 30% tax if not from their business?
The Fair Tax shifts some of that burden off of the most productive people,What do you know about productive people?...Just wondering?
and makes the folks who pay nothing start helping out. Even those folks will benefit, as the rebate check for basic necessities up to the poverty line will help them.You don't see any contradiction there?
Yep, it's one big jumble of scrambled brains. Have your read the letter at the top of this thread which I wrote about a week ago? In that letter there are a number of quotes from the book where Boortz/Linder state that this is basically a free lunch plan for the poor and middle class. There cannot be full take-home pay and all prices remain the same on average-- it is impossible. I asked Jorgenson himself and he agreed that he assumed take home pay would remain constant and the employer would retain what is now being paid in taxes. If course the reason I asked him the question is because that is the only way that the FairTax math can work out.
you and pigdog are in a contest to see who is the last to acknowledge this point.
Note that none of us are saying that there is any way in hell that the employers will actually BE ABLE TO DO THIS, we are jsut saying that the FairTax math assumes that they will somehow get the $20 an hour electrician to accept $15 an hour that he is currently taking home, and trust us the prices won't go up. (except foreign goods that'll go up 30% and partially foreign goods like gas that'll go up 10-20%)
Dear Always Right,
You're probably right.
I was looking through the financial statements of Fortune 500 companies last week, and after looking at about 60, the only company showing more than 10% of revenue paid in federal corporate income taxes was Microsoft, coming in at a cool 11%.
Most companies are under 5%, and most of those are even lower.
Not a few companies pay ridiculously small percentages of revenues in federal income taxes, including Boeing, at around 0.3%, Ingram Micro, I think around 0.2%, and Tech Data, I think around 0.1%.
When corporate pre-tax profits typically average around 6%, what would you expect?
Of course, that may account for why corporate income taxes comprise only about 1.5% of GDP.
Do ya think??
;-)
sitetest
At this point, Robbie, that's merely still your assumption ... your opinion ... of the point you're asking to be acknowledged. I wouldn't be so quick to judge that if I were you.
As time goes on, we'll see.
You say the 23% can go to two places at the same time (wages AND prices)I say it can't (wages OR prices).
The economist responsible for that number, Dr. Dale Jorgenson, apparently agrees with me.
When a person leaves the shop and stops at the store to buy a loaf of bread on the way home, that loaf of bread has nothing to do with his business.
I suppose I should suspect such an answer from you....You obviously never had anything to do with a business.
One of the main increases in revenue will be seen as a result of the currently "untaxed", namely illegal aliens, drug and arms dealers, cash under the table earners,etc., finally paying their share. Also, having done payroll for years, I can tell you that you can look at the amount withheld from your check for Soc Sec and see how much your employer will be saving, as that is the amount they must match, as well as 2.5% for Medicare.
So, as I see it, the reason it is called the Fair Tax is because, well, it's FAIR! I get really tired of standing in line at the grocery store behind Mr. Local Drug Dealer and his current honey paying for t-bones with an ebt card when even the infant is wearing high dollar sneaks and driving off in a Lexus SUV. Let him and everyone else pay his taxes in a more equitable manner.
The point for illegal activity has no validity. Under the fair tax, if I provide a legal service to a customer, I collect $130 and send $30 to the government and pocket $100. If a prostitute provides a service and collects $130, she is going to pocket the $130 and not submit the tax. These illegal activities are still cheating the system the exact same way they are today. No difference. Sure when they spend the money legally, taxes get paid. But that is what happens today. When a prostitute goes out to buy a car today, she pays all the embedded taxes in the car. Unless the fair tax is going to somehow get the prostitute to submit the sales tax on the money she collects, this claim that the fair tax captures the illegal economy is a bogus one.
Dear Always Right,
"When a prostitute goes out to buy a car today, she pays all the embedded taxes in the car."
More importantly, she will have been paid her money with after-tax dollars.
As Dimples has pointed out, we've just moved the tollbooth where the tax gets collected.
When it comes to issues related to the underground economy, under the existing system, money is taxed prior to leaving the above ground economy. Under the NRST, it would be taxed as it left the underground economy.
So, currently, the prostitute is paid with after-tax dollars, the nanny who is paid under the table is paid with after-tax dollars (often in a very high tax bracket, as well), the fellow who cuts the grass, does the gardening, the maid, all with after-tax dollars. Even though all these folks then don't pay income tax themselves.
Under the NRST, all these people will be paid with untaxed dollars, in untaxed sales of services. But when they go to make purchases in the above ground economy, their transactions will be taxed.
Assuming that they make significant amounts of purchases in the above ground economy.
sitetest
When a person leaves the shop and stops at the store to buy a loaf of bread on the way home, that loaf of bread has nothing to do with his business.Nothing other than there had to be enough money from the business so the business owner could "assign himself" enough money for the bread AND THE TAX....Or maybe he's living off the "prebate" welfare check.
Sorry Dimp - it's you who have marginalized yourself WAY to the left by trying to pretend that the present illegal economy gets only after-tax money.
As has been pointed out, that's clearly not the case and continuing to insist that is so merely makes you look even more foolish.
And it's not the drug dealer who steals the money, but many of his curtomers since many drug purchases are made with stolen money.
In fact quite a few taxpayers in the 15% and under tax bracket (and some "taxpayers" who pay not tax at all) DO hire illegals for various tasks . I personally know many where I work that fit that 15% and under category and pay with after-tax dollars (and in some cases, untaxed dollars) for help from the illegal economy. Perhaps the neato little dream world you live in doesn't allow that to happen, but it goes on a lot in the real world.
You obviously have no idea how large the illegal economy is or - apparently - why it is called that. There are a lot of those in the building/contracting trades (probably including some on this thread) as well as others who deal in cash payments to workers and thereby participate in the illegal economy. I doubt they'll jump right up on this thread, though, and say "... yeah, I do that ...".
Most of the estimates I've seen of the illegal economy place it at $1 Trillion or more - much of it untaxed despite your polite little Happy-Faced Liberal notion of having only after-tax dollars involved. That's patently ludicrous.
Your good buddy Dimples doesn't understand what the illegal economy is all about and by slavishly aping him it's apparent you don't either.
See #592. But - (yawn) - I'd be glad to look at your proof that the illegal economy gets only (or even largely) after-tax dollars and only (or mainly) from those in "high tax brackets".
That certainly does not have the ring of reality or even anything but desperation on the part of the SQL squad. I've no doubt that most recognize that for the unreality it represents (as well as the desperation).
That is personal spending. It cannot be figured into business matters. It isn't a tax on the business.
There are a lot of those in the building/contracting trades... as well as others who deal in cash payments to workers and thereby participate in the illegal economyIt's not just the contractor's cash payment to workers. Don't forget the contractor. I always ask anyone doing work on my home what the cash price is versus his quote. I always get a favorable discount for cash payment. Hmmm, wonder why?
If a prostitute provides a service and collects $130, she is going to pocket the $130 and not submit the tax.I doubt a prostitute includes, in the price of "services", what is owed in income tax. Prostitutes don't pay income tax now on profits and charging a sales tax is laughable. This is truly a case where competition would rule.
Not that it makes a big difference in terms of whether prices will drop, but your assumption on the nanny is premature. I see less incentive to be illegal.
It would depend on the relative rewards vs. penalty. A nanny today generally works under the fiction that they are an independent contractor. As such, to be legal they would have to report their income and pay self-employment taxes of 15.3%, plus income taxes, plus FUTA, etc. They get the benefit of getting credits within the SS system. That is a poor reward compared to the taxes owed.
Under the FairTax, they must be registered with SS and report their wages to get credits in the SS system -- but they do not have as high a penalty in taxes owed.
Supposing a nanny is working for $2000/mo, she would owe $306 self-employment tax and $200 income tax. She takes home $1494. Or she keeps off the books and takes home $2000. It cost the household she works for $3000 income to pay her $2000. Legal, govt gets $1506 taxes. Illegal, govt gets $1000 taxes -- but also has no future SS obligation to her. It costs her $506 buying power to be legal.
Under the FairTax, she charges $2400/mo gross, of which $552 is FairTax and she takes home $1848 and gets the prebate of $190 for a total $2038. Or she keeps off the books and takes home all $2400 with no prebate. Either way, it only cost the household $2400 income. So the household is $600 ahead. Legal, govt gets $1159. Illegal, govt gets $690. Her buying power is 77% of what she spends, so legal is $1569 and illegal $1848.
Under the FairTax it costs her $279 to gain the benefit of credits in the SS system and the psychological benefit of being completely legal. Under the current system, it would have cost her $506 for those benefits. The household is ahead $600 under the FairTax compared to the current system. Even if she insisted on charging more so her net buying power was the same as illegal, the household is still ahead $321.
That seems like it would offer less incentive to be illegal than under the current system. Am I missing something ?
"Am I missing something ?"
Not that I can see ... and that looks like a very good analysis of the particular situation.
Thanks for the input.
Probably because he plans to send it in later - and just "forgets":-)
The discount must be to trigger his non-memory I guess.
Interesting bit of correspondence, Rob. It isn't quite as lucid as I would prefer, but it certainly seems that Jorgenson is not claiming price reductions simultaneously with full take-home pay.
Does FairTax.org or Linder and Boortz actually attribute these simultaneous claims to Jorgenson ? I know Jorgenson is one of the economists sited for the price decrease. I don't recall FairTax.org citing him for maintaining full wages at the same time.
I realized long ago that price reductions required that businesses pass-thru their savings in taxs to their customers. What is not obvious was always that this meant small-business owners could not reap the "raise" that employees would reap. But now you make a convincing case that employees would not reap the "raise" either.
I am not convinced Jorgenson is right, just that he is not making the same claim FairTax.org makes. Personally, I've taken the simple approach to checking whether price reductions are a reasonable expectation without wages falling. I check the financial statement for an industry leader and see how much removing their direct taxes would save them. Then I eliminate some employees that might be doing nothing but tax-related tasks. Then I apply that same savings percentage to their non-payroll operating expenses -- on the assumption that their suppliers will have similar savings.
I generally can come close to the 20% level of price reduction. So I am surprised Jorgenson's model required wages to fall to current after-tax levels. Here is an example for Bank of America, if you are interested:
This financial statement from Bank of America is a good place to start, because the cost of money affects all other businesses.
View: Annual Data | Quarterly Data All numbers in thousands
PERIOD ENDING 31-Dec-04 31-Dec-03 31-Dec-02
Total Revenue 63,324,000 49,006,000 46,012,000
Cost of Revenue 6,275,000 4,908,000 5,434,000
Gross Profit 57,049,000 44,098,000 40,578,000
Operating Expenses
Research Development - - -
Selling General and Administrative 25,745,000 19,910,000 18,218,000
Non Recurring 618,000 - (630,000)
Others 3,433,000 3,056,000 4,195,000
Total Operating Expenses - - -
Operating Income or Loss 27,253,000 21,132,000 18,795,000
Income from Continuing Operations
Total Other Income/Expenses Net 2,123,000 - -
Earnings Before Interest And Taxes 29,376,000 21,132,000 18,795,000
Interest Expense 8,155,000 5,271,000 5,804,000
Income Before Tax 21,221,000 15,861,000 12,991,000
Income Tax Expense 7,078,000 5,051,000 3,742,000
Minority Interest - - -
Net Income From Continuing Ops 14,143,000 10,810,000 9,249,000
Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income 14,143,000 10,810,000 9,249,000
You can see from the top and bottom line that BofA had revenue of $63B and net profit of $14B, after paying $7B in income taxes. $8B was interest on money they borrowed and then re-lent.
Not shown here, but found from the BofA website is that they employ 175K full-time equivalent employees. I can’t find any figures on wages, but if we guess at the average for the financial sector, we could use $60K per employee. That means $11B in wages which means $800M in payroll taxes.
So, if there was no income tax and employer side to the payroll taxes, what would happen to BofA costs ? That means saving $7B income taxes + $800M payoll taxes out of $49B in total costs. That would mean 12% of their revenue (what they charge customers) is taxes passed along. But ... remember the $8B in interest ? If we suppose that has taxes built in by their lender at a similar level, that would reduce their cost of borrowing by $1B. So their costs would really be $9B less than they are under the business tax scheme. That is over 14% of their revenue that is taxes passed along.
Also, BofA has over 5,000 branches. The interest component of the leases on those properties includes similar taxes that the lessor is passing along to BofA. Same for all their other operating expenses. So figure 14% of the $20B non-employee operating expenses means saving another $1.4B giving us a total of $10.4B in savings. That is 16.5% of revenue. And how many of those 175K employees do you suppose are dedicated to calculating and attempting to comply with the income taxes they must pay ? So that would be additional reduction in operating expense. Eliminate the employees and costs for tracking and reporting billions of 1099’s and other tax-related compliance costs, and we have additional savings. Getting to the 20% neighborhood shouldn’t be difficult at all.
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