Dear Originalist,
"There is no reason to believe that employers would decrease anyones pay."
Well, sorta. Dr. Jorgenson said, in his e-mail to RobFromGa:
"I am saying that the worker would continue to receive the after-tax amount of $800."
Dr. Jorgenson is saying that the reduction in the general price level will occur because employees will continue to get their net pay (not their gross pay), and thus will not suffer a decline in take-home pay.
However, after the NSRT goes into effect, their pre-NSRT pre-tax gross wages will be reduced to their pre-NSRT after-tax net wages. Thus, no less money goes home with the worker, but the worker does not receive in his paycheck the amounts formerly paid for his side of payroll taxes, the employer's side of payroll taxes, or his personal income taxes.
The businesses will then be able to reduce prices by the amount that was being paid by and on behalf of wage earners: payroll taxes (both sides) and personal income taxes.
So, prices fall because businesses reduce prices by the amount of these taxes, and workers keep their same AFTER TAX pay, not their gross PRE TAX pay.
However, then the 30% NSRT is applied to the economy, and workers are about back to where they were (at least on average - however, I have to think about the implications of folks paying significantly different rates of effective taxes).
The real upshot of this is that all the talk about reducing price levels in the economy by 20% or more is NOT coming through "cascaded" corporate business taxes, etc. The savings, at least according to Dr. Jorgenson, come primarily from reducing the gross pay of workers so that their gross pay will be equal to their old after-tax net pay.
sitetest
That is what the analysis says, but there is no way to make that happen. What realistically will happen is prices to the consumer will have to go up significantly. To make the fair tax work and not create economic havok, wages would have to adjust, but I don't see how that can be done legally and practically.