JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)

self | August 25, 2005 | RobFromGa

[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

[Kellis91789]

Well ... he did suck me into arguing with him. About as useful as trying to argue with someone who insists 2 + 2 = 5.

[pigdog]

From the arithmetic standpoint Looey has "argued" almost exactly such things as the complex example you cite.

One time he defined a problem, solved it for "the numbers" and was in error by 400%. More recently he opined that 100 - 22 = (pick a number other than 78).

That's why it is frequently called "Looey 'rithmetic".

[proteusguy]

I find it fascinating that economists get so confused over simple things like take home pay. Notwithstanding possible misinterpretations of Dr. Jorgenson's testimony - it is quite clear to me that if you were hired as an employee with a gross $1000/mo salary and are paying $400/mo in withholding taxes once the FairTax act comes into effect that employee would then receive the $1000/mo salary that he contracted for in his employment agreement. The savings to the employer would be the matching Social Security withholdings (7.25% or thereabouts), the enourmous cost savings of dealing with withholding tracking, quarterly tax reporting, complex tax avoidence/differance savings/investment plans, and the resulting pass through savings in costs of upstream materials and services used in the standard operation of his business. Of course the biggest benefits of all would be the end to the terrible erosion of our capitalist free market system and the increase in personal freedom for each individual who no longer has to submit his personal financials to government bureaucrats.

[RipSawyer]

What's to stop the politicians from placing "special" taxes on expensive items, like a luxury tax? For example, a car that's over $20,000 has a luxury tax of 100%.>>>>>>>>>>>

I certainly don't favor that but are you aware of what South Carolina did many years ago? They mandated that the state sales tax applies only to the first $6000.00 of the purchase price on automobiles, boats, and airplanes etc., basically all the big ticket items. This means that a low-paid individual who rakes and scrapes to make payments on a $6000.00 used car to drive to work pays the same tax as a rich person who buys a $60,000.00 or even higher priced car. I actually saw one legislator on television explaining his vote for this measure as follows, "that is fair to everybody because everybody has to buy a new car sometime". I can never forget that utterance, it must rank up there with the stupidest things ever said by politicians.

[frdalesmith]

"Naturally, you will be mobbed and maligned by the Kool-Aid drinkers who live under the illusion that taxing items at 23+% (for starters) won't have a negative effect on purchases. And they also think it won't create a burgeoning black market."

Of course a 23% tax will have a negative effect on purchases. However, more income will have a positive effect on purchases. If prices do not fall beyond the embedded costs for corporate taxes and compliance costs, employees will bring home their current gross pay.

A black market already exists, one of income. Under the FairTax, a black market for income becomes unimportant. The black market for purchases would become important. However, the black market for purchases would be easier to police since there are fewer retailers than employers.


"They'd just as soon want you to forget that the "fair tax" notion has been run before and consistently discovered to be an abysmal failure. But they're willing to risk tanking the U.S. economy for a regressive tax scheme. What cretins..."

Chile currently has a consumption tax and its economy is very good. Argue all you what about the regressivity of the FairTax. But you'd be wasting your time because the FairTax is progressive. Regressive means that the tax rate decreases as the tax base increases. Under the FairTax, the tax rate for someone spending at the poverty level (let's assume $10,000) is 0% since the prebate returns all taxes paid. Someone spending $20,000 would only pay an effective rate of 11.5% ($2,300 divided by $20,000). Someone spending $30,000 would only pay an effective rate of 15.3% ($4,600 divided by $30,000). Someone spending $100,000 would pay an effective rate of 20.7% ($20,700 divided by $100,000). From this, it is obvious that the effective tax rate goes up as spending goes up. Therefore the tax cannot be regressive.

[frdalesmith]

"Unless you're poor, or a business that isn't retail or doesn't perform a service...."

I believe the quote was referring to PEOPLE realizing what government costs. Even the poor, if they spend money, will receive a receipt that will have the amount of the FairTax clearly visible.


"Doesn't everyone have w2's, check stubs, tax returns, 1099's etc.? What would a government check for everyone every month and a worthless receipt thrown away in the bag you carried it home in prove?"

Yes they do. How many people ever really look at the tax burden each and every time they receive a paycheck? Most people are only concerned with their take-home pay. In fact, many people don't even consider the money withheld from their gross pay as THEIR money. IMO, many more people will check the amount of tax on each receipt that the receive. They will be much more informed about the true cost of their government.

The prebate isn't meant to prove anything. Its purpose is to make the tax PROGRESSIVE. The receipt will probably prove nothing, for those who don't bother to look at it. When someone looks at the pay stub, they are seeing their tax burden, what, once or twice a month? When they look at a receipt, they are being reminded of their tax burden every time they purchase a taxable item.

[lewislynn]

How many people ever really look at the tax burden each and every time they receive a paycheck?

I don't know but sometime somewhere they'll see a tax return or a 1099, or a W2 and I'll bet it's a lot more than the ones who look at the tax somewhere on a receipt at the bottom of a bag. And I'll bet more people can tell you what they paid in income taxes than they can sales taxes.

Then again, if you're implying the Fairtax would be so exorbitant that it couldn't be overlooked, then that defies everything the Fairtax claims it would be...

IOW, the Fairtax claim is everyone gets a government check...every month, takehome pay increases, and prices remain about the same. And you think that will somehow wake up the ones who never look at a paycheck stub?

[Toddsterpatriot]

Chile currently has a consumption tax and its economy is very good.

Are you sure about that?

Chile

Click on each topic for more information :

TAXES - ACCOUNTING

 

Corporate tax

Tax rate for resident companies	The corporation income tax legislation provides 2 types of taxes. The First Category Tax is levied on income derived from commercial, industrial and agricultural activities, mining, fishing; investment and real estate. The tax rate is 17%. The Second Category Tax refers to incomes arising from wages, salaries, overtime payments, bonuses, fees, gratuities, profit sharing and any other form of remuneration. It is a progressive rate which highest rate is 40% applicable on monthly basis.
Tax rate on long-term capital gains	Capital gains are included in gross income subject to First Category tax with certain exceptions.
System governing groups of companies and dividends paid by subsidiaries to their parent companies	The amounts distributed or remitted to non-resident or non-domiciled shareholders are subject to a 35% additional tax with a credit of the current rate of the First Category Tax.
Tax rate on branches	Branches are subjected to a tax at the rate of 35%,

Income tax

Fiscal year

The fiscal year begins on January 1-st and ends on December 31 of the same year.

Income tax rate

The rate is progressive from 0% to 40%.
The rate depends on monthly units of levy (the value of a unit in CLP is revalued each month):

Lower than 13,5 units	0%
13,5-30 units	5%
30-50 units	10%
50-70 units	15%
70-90 units	25%
90-120 units	32%
120-150 units	37%
Beyond 150 units	40%

Tax deductions or other allowances

Tax credit of 10% and other fixed deductions are allowed.

 

VAT rates

Standard rates	19%
Reduced rates	Are exempted of VAT exports, certain financial services, insurance, news services, technical services, consultancy and transport.

 

Other important taxes

Name of tax	Rate
Municipal tax	0,25% to 0,50% (of assets)
Other taxes	Inheritance or gift tax, mining tax, property tax, sales tax on luxury goods, stamp duty

 

 

Accounting

Introduction
Chilean financial accounting is tax returns orientated.

General accounting principles
- stocks: they are calculated with the " First in - First out " method.
- fixed assets: buildings, shares and bonds bought by the company.
- capitalization interests : interests incurred on fixed assets (shares and bonds).
- depreciations : there are several calculating methods for depreciations.
- investments and long-term fundings.
- research and development costs : they must be registered and paid off over a period of more than 6 years.
- interests for bills relative to accounts receivable and payable.
- provisions for redundancy payment.
- long term contracts.
- extraordinary costs : they appear in the profit and loss account.

Obligations and publications
Companies have to produce their their annual financial statement to the shareholders.
The account books must be published in Spanish and use the Chilean currency as reference.

Certification and auditing
External audits are compulsory for companies with capital and foreign investors with repatriated profits.

Professionals and representative organizations
The main representative body is the association of the Chilean bookkeepers: "the Association of Accountant in Chile".

FITA-Chile

[dculling]

If you go to the link below it will take you to a Google preview book where on page Dale Jorgenson explains the household income variables for his econometric model. Quote: Finally, the income of the household sector is the sum of incomes from the supply of capital and labor services, interest payments from governments and the rest of the world, all net taxes, and transfers from the government. I read "all net taxes" as "take home 100% of your pay." I'll have to email Jorgenson I guess before I accuse anyone of purposefully spreading misinformation. http://books.google.com/books?id=SHZF-VNri5YC&pg=PA56&lpg=PA56&dq=%22House+Committee+on+Ways+and+Means%22+Jorgenson&source=web&ots=n6L27ffnsc&sig=LeVwQtq0x3mnfuqGukbHfU5ynV0#PPA62,M1

[e_castillo]

Thanks for saying this. Some wierd math going around here.
Saying that Employers would not let workers keep the taxes which are no longer being paid to Ucle Sam is really beyond normal thinking. This is theory and nothing else.

I think the main thing People should remember is that a plan is far different than an actual law.

[dculling]

Here’s a better link. The first one had all the search terms in it lol.

http://books.google.com/books?id=SHZF-VNri5YC&printsec=frontcover#PPA62,M1

[MortonMark]

No, no increase in take home pay is possible, for the fairtax math to work. But thats the Catch 22.

If people increase their take home pay — then its not the Fairtax plan. Its some other go-round. Fairtax plan is for workers do voluntarily give up 30% of their pay, and then pay the high sales taxes with what they have left.

Thats the only way prices will go down. So —prices won’t go down. People won’t give up big chunk of their gross pay for that deal.

Fairtax MATH depend on all the workers donating their money to the employer. Whatever money workers USED to pay in taxes, they have to pay to the employer for the math to work. Otherwise, the math doesnt work.

This whole idea of lowering prices is a figment — its not even in HR25. It has nothing to do with HR 25. Employers could do this now — or later. Workers could do this now — or later. Nothing to do with HR 25. Its blowing smoke

[RobFromGa]

Hi Dimples, I had a reason to see some of my FairTax threads from 2005 and you were involved in the same fight in a big way. What a hoax, 15+ years later, I appreciate working together.

I need to get on FR more, I just saw some of your latest Wall Street posts and I really love the intelligent discussions. Off to buy some GameStop...

Your FRiend, Rob