[Your Nightmare]

Let's look at the two quotes:

"The first is the major capital gain that the federal government stands to accrue if, as seems likely, the Federal Reserve fully accommodates the introduction of the FairTax and permits consumer prices to rise by roughly 30%."

"We assume that the monetary authorities do not accommodate the adoption of the FairTax, which is to say that they restrain the growth of the money supply sufficiently to prevent market prices from rising. As mentioned, this is merely a simplifying assumption."

So he thinks it's likely that the Fed would accomodate a price increase but assumes they won't for the model to make things simpler.

[Always Right]

So he thinks it's likely that the Fed would accomodate a price increase but assumes they won't for the model to make things simpler.

I can just imagine how this would work in real life. Basically it would seem the fed would have to choke the economy so that gross wages are forced to fall by the amount of income tax. Does anyone realize how painful that would be? Jorgenson assumed the same thing that wages just magically fall. We don't want to 'complicate' the analysis. A 20-25% rise in consumer prices is just a minor thing that 'complicates' models. Neither Jorgenson or Kotlikoff discussed what that impact would be from the perspective of someone with accumulated assets. Kotlikoff pointed out it would be a positive thing from debt holders viewpoints like the government, so it is more than fair to say it would be a negative thing from the wealth holder viewpoint.

[Bigun]

So he thinks it's likely that the Fed would accomodate a price increase but assumes they won't for the model to make things simpler.

I have no problem with that given that "We could just as well have allowed for monetary accommodation, so that there would be no fall in producer prices under the FairTax. Doing so, however, would merely have made the algebra more complicated without changing the results." but I suppose you do.