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.
The reason that they didn't address the 20-25% rises in prices is because from the outset they assumed that everyone would have their income and payroll taxes removed from the costs of the goods and services. In other words, they assumed that gross wages would drop to current takehome pay levels, and people would not see a large pay increase, they'd have about the same amount of money as now.
But then the marketing arm of the FairTax cult got moving and started promising "keep 100% of your paychecks". Once they did this, the marketing people didn't realize that prices wouldn't be able to drop and so they promised the "Prices will stay the same" as well. Even though these two things are both impossible to achieve at the same time, as the FairTax people have now fully admitted.
Under the original idea, where the cost of goods was reduced by the full amount of income and payroll taxes, there wouldn't have been large price increases necessarily, and so there wouldn't be an automatic negative effect on after-tax savings. But people's wages would have to drop to current takehome levels and they've decided that this would not be easy to sell to the average FairTaxer whom they've promised the bigger paycheck to.
If you look carefully at the Faritax site, and the latest FAQs, as well as the revised Boortz/Linder book, they are non-commital on what will happen to wages-- they are open to the idea the wages will drop to current takehome levels at the discretion of the private employers.