JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)

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

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.

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 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:

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.

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?

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]

I wanted to be perfectly clear what he was saying, so I asked him to clarify his email:

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?

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.

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.

I believe labor contracts are for gross pay, not after tax income. By what mechanism does the Fair Tax eliminate every labor contract in the country?

but gross pay is not gross outlay to an employer. Anyone who has ever met a payroll knows this. Gross outlay in terms of moneys paid out is at least 5% higher than gross pay.

I don't know what I think about "fair tax," with my exposure limited to one talk by Boortz on the way home from work one night -I have not read the book. However, the cost to employers is HIGHER than the gross pay..., just to get that point straight.

Our first editions might be a collector's item when they make the necessary revisions to the FairTax Book.

If they make the necessary revisions, there won't be a FairTax Book. ;-)

[Most of the benefits discussed in the book are predicated on the erroneous price drop assumption.]

It also wouldn't help us be more competitive with foreigners. Ridiculous claim.

Read #19 again, it was a response to someone elses comment that they would be fine with a NRST plan that essentially didn't remove embedded tax costs from domestic businesses. Under that scenario, the relative cost advantage given to domestic goods would no longer exist.

Under the plan the way that Dr. Jorgenson understood it, the domestic business was reducing its costs, and was gaining an advantage over the foreign business.

I didn't say that I "didn't give a crap what we replace it with"--I said that I'm for total reform and that the NRST represents a breath of fresh air.

Sounds like you are awfully thin-skinned. If you took even half of the name-calling that we get for daring to question whether there might be oh a trillion or a trillion and a half missing from the FairTax plan as described by the FairTax book, we are jumped on.

Your argument does fall into the "Anything but the IRS" way of thinking, and you are for a plan with now-obvious major problems, yet you still say you are for the NRST.

Well, you say you're not here to see this response anyway.

I commend your initiative and investigation on this issue. Good work, I have sent your information on to AFFT requesting their response as well. It can only be to the good to correct errors and misinterpretations and get discourse onto a clear basis.

Thank you. I will be interested in their response.

Ok keep living in your fantasy world. While the Fair Tax Book remains number 1 on the Best Sellers. You can smug all you want, and so will I because I know my side is gaining ground. If you are so right, then why don't you call Neal's talk show?

Here's an idea! Boortz can have Jorgenson on his show and read passages from his #1 book and ask Dr. Jorgenson, "Now that it's printed and #1, is that correct?"

We now know the answer would be "No."

HERE IS AN OPEN CALL TO HAVE BOORTZ GET JORGENSON ON HIS SHOW!

Maybe somebody will even consider prying loose the resources to produce current and uptodate studies incorporating current tax law and economic conditions as they exist today, instead of having to struggle with ambiguous 5-10yr old studies base on out of date tax laws and rates.

I haven't been mentioning this issue that you now bring up very much, but there has been a lot of change in the past ten plus years both in the tax code and our global trade picture. I agree that the numbers all need to be redone in order to move forward.

ELL LOW AND BEHOLD THAT IS NOT EVEN THE DOCTORS E-MAIL ADDRESS. DR. DALE JORGENSON'S E-MAIL ADDRESS IS

Hint: Most professionals I know have several different email addresses, since often every group, department, and affiliation will have their own email address domain, and hand out userids to their various members.

This gross vs. net pay "savings" doesn't make sense to me either..
Granted, I'm no mathematician but if what I am reading is an accurate description, I see it like this:
The Employer no longer has to pay matching taxes on withholding etc...
The Empoyee, no longer has taxes withheld, but doesn't recieve them either..
The Employer recieves a "Double Bonus" due to Both Reduced Costs..

The Employee's withheld taxes are not the Employer's, they are the Employee's..
They are merely withheld by the employer as required by Federal / State Laws..
Part of those funds (presently withheld) are "owed" to the government agencies as "taxes"..
If those taxes are no longer extant, then they should go to the Employees, not the Employers..
It was the Employee's money in the first place..

The Employer still benefits from not having to pay matching funds into withholding..
That is all the savings they are due..

I see no rationale for expecting Employees to end up with only the Net pay after taxes, if no taxes are being withheld..
They shoud be recieving their full paycheck, the Gross Pay..

I would agree that "something" is being misrepresented here..
I'm just not sure what..

The fallacy in this argument lies in this statement. Businesses pay an additional tax over and above what you as a worker pay on your money. There is no reason to believe that employers would decrease anyones pay.

I think you misunderstood the context. He was talking about no tax savings from elimination of employee's tax. Since employee tax accounts for over $1.3 Trillion of the $1.9 Trillion of taxes collected, without businesses being able to realize that $1.3 Trillion worth of savings, prices can not come down significantly to cover the new sales tax.

Look at what I founf buried in Nealz Nuze this morning at boortz.com, Boortz writing:

You know what the FairTax plan is. Let me tell you what it is not. The FairTax is not a "something for nothing" tax scheme. We aren't promising you extra dollars in your pocket or a new car in your driveway. The promise is simple. Your earnings will remain essentially the same, and you will spend essentially the same amount for your consumer goods and services. You won't pay taxes on your investment earnings, nor will you pay taxes when you give money away as a gift. Your heirs won't pay taxes when you go tango uniform and they inherit the wealth you've worked so hard to acquire. You won't fall victim to the Alternative Minimum Tax or an IRS audit. You will be compensated at the beginning of every month for the FairTax you would be expected to pay during that month on the basic necessities of life, as set by the poverty level for your sized household. As they say, "there ain't no such thing as a free lunch," and that applies to the FairTax, unless you want to consider treating April 15th as just another Spring day as something you get for free.

Sounds like furious backpedaling to me.--RobFromGa

but gross pay is not gross outlay to an employer.

That is not the point. The point is how does the employer realize the $1.3 Trillion worth savings from the taxes the employee now pays. Without the employer seeing those savings, the employer can not significantly reduce his prices.

Yes it does add up. You have to remember the stupid people did exactly the same thing years ago with the Social Security tax. The tax withholding was out of hand and visible to the voting public so they "hid" 1/2 of it by reducing the actual witholding from the paycheck and forced the employeer to pay the other half. The stupid "sheeple" had been sedated even though they didn't realize that the money the employer was forced to pay was in fact, money directly out of their pockets.

The only fair tax is a tax on retail sales with no exceptions to the tax. Other than that, it can be manipulated by politicos and will quickly become the exact copy of our IRS fiasco we now have.

As I say at the end of the letter, this plan is still worth debating without the windfall pay increase for every wage earner. And there won't be any income or payroll taxes taken out of the new lower salary. And efficiences can cause the amount to rise back up later to everyone's benefit.

I'll be watching this thread closely. Like I said recently, (I think it was to you), the idea that someone comes out ahead after the FairTax is passed isn't really appealing to me. It would be nice, but that's not what I'm looking for.

Transparency in the tax rate, and the perceived pain of the tax burden on each person, is worth more than money. These results will lead to a foundational shift in the minds of the dependency class for the good of America- and it will undo decades of creeping Communist advances.

That's why I favor the FairTax, and I think we agree on this. But yes, it needs to be tested and prodded at every point. No surprises!

And that is how the fairtax should be sold, on its merits, not on some fairytale.

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