Skip to comments.OPEN LETTER TO BOORTZ/LINDER (FairTax)
Posted on 08/22/2005 6:53:28 PM PDT by RobFromGa
August 22, 2005
U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Dear Representative Linder:
I have met you before and briefly discussed your FairTax proposal years ago in downtown Norcross at a street festival. I also campaigned for you in my neighborhood when you were running against Bob Barr.
I have read your book, and I have spent quite a bit of time researching the FairTax. As a small businessman who lives in Norcross, naturally I am interested in anything that will reduce taxes and assist our economy, so the idea of a FairTax sounds good. But reading your book, the bill itself, studying the fairtax.org website, and reading the House Ways and Means Committee testimony of Dr. Jorgenson back in 1995 and 1996 as well as your most recent testimony, I am disturbed by the way the FairTax plan is being presented.
I don't think you fully understand the "embedded taxes" concept-- you are double counting this money by both giving wage earners their full 100% paycheck and still expecting their employer to be able to reduce their prices by about 23% on average.
Let's look at a wage earner-- call him George-- that grosses $1000 per week under our current system. You claim that, under FairTax, George will keep all his income (the full $1000) plus everything he buys at retail will cost about the same as George pays now. This is implausible.
Businesses will not be able to pay 100% of their paychecks to their employees, because they need these "embedded tax" savings to be able to lower their selling prices.
Let's look at George's purchasing power, now and under FairTax:
George currently gets $1000 a week from which his employer withholds $200 in FICA and fed taxes and $50 in state taxes, leaving George with $750 to spend. Right now, let's say loaves of bread are $1. Today, George can buy 750 loaves of bread for $1.00 each with his take-home pay.
Under the FairTax, you claim George will get his whole check, which is the same $1000 less George's $50 state taxes, for a take-home of $950. If your FairTax logic is correct, the price of the bread will quickly drop to about $0.77 (when Bob's Bakery gets rid of his "embedded taxes") and when they add the 30% FairTax at the register the final price will still be $1.00. George can now buy 950 loaves of bread with his $950 take-home.
You have increased George's purchasing power by 200 loaves of bread which is a 26.7% increase in his purchasing power. And you claim that FairTax will do this on average for every wage earner in America.
This is dishonest to make everyone think they will get a 25%+ increase in purchasing power. ("Get a 25% pay raise, and prices stay the same")
It is obviously illogical that every wage earner in America, with no change in productivity can increase purchasing power by even ten percent, let alone 25%.
The fallacy in your understanding of the "embedded taxes" is that Bob's Bakery cannot give his employees their full paycheck AND still reduce his costs by $0.23 per loaf of bread as you claim. He can do one or the other, but not both.
The baker could reduce his price by about 25%, but only if he keeps his bakery employee taxes that are currently withheld and going to the government. If he gives these "embedded taxes" to his employee, then his overall labor costs haven't gone down and he has no saving to pass along in his prices. His only big difference is he writes a check to his employee for $950 instead of two checks- one to his employee for $750 and one to the IRS for $200.
If our baker instead kept the taxes, his labor cost would now be $800, and the baker could now maybe drop his price to around $0.77 per loaf as you expect. George would still have his same $750 take-home income and he would still be able to buy 750 loaves of bread for $1 each ($0.77 cents price plus $0.23 taxes). George's purchasing power would still be 750 loaves of bread as it is now.
I think this is the honest way to look at the FairTax plan, but this is not what you are claiming.
The only other alternative is that George gets his full $950 and the price of bread drops to say $0.90 to reflect Bob's Bakery's savings on the employer portion of FICA (7.65%) for his labor costs and a few percentage savings for IRS compliance costs. When sold, the $0.90 loaves of bread will get $0.27 FairTax added for a total selling price of $1.17. Under this scenario, George has $950 take-home, which allows him to purchase 811 loaves of bread, a slight increase in purchasing power which is mainly due to the elimination of the employer portion of the FICA. (assuming Bob's Bakery kept that employers half of FICA which is really his employees money but that is another discussion)
But this second "inflationary" scenario would put retired persons, or anyone with accumulated wealth or any person on a fixed income at a relative disadvantage to wage earners because things would cost more in absolute dollars. So, this scenario won't work in practice.
Please think about what you are promising here when you say that people will get their whole pay checks and at the same time all prices will be about the same. It cannot happen-- there is no 22-25% "embedded tax" savings once you give wage earners their entire paycheck.
I sent this tonight to Linder and Boortz.
I do think, however...that the economic boom that would result WOULD increase purchasing power...
That might be so, but it is not what they are counting on right out of the blocks for revenue neutrality.
Any system which would make it nobody's damned business what anybody else earns works for me.
The "Fair Tax" stuff will kill us small businesses who provide services. I am sure my clients will love to pay %20-30 taxes on what ever I produce.
To keep things at the same rate, I must drop my rate. I seriously doubt any business which will drop their rates just because "taxes" are not there.
Is there currently a tax on services?
The Kool-Aid drinkers are going to pile on any moment now...
I don't think Linder or Boortz will get it. They will still be convinced that employee taxes are not 'embedded taxes'. But it will be interesting how they respond.
You mean you currently aren't paying 23% of your gross in taxes and compliance costs?
Aren't "embedded taxes" going to vary greatly depending on product?
I don't think you fully understand the concept "embedded taxes".
Bob's Bakery will no longer have to pay either the employer portion or the employee portion of payroll taxes. The employee taxes, which are withheld from George's wages, are not an expense to Bob anyway. Bob pays George the same amount of money whether he withholds taxes or doesn't. George pays the tax, not Bob.
You forget that Bob the Baker pays income tax on his profit from sales. Businessess pay no taxes under the Fairtax. That is his main source of savings that he would be able to pass on to his customers. If Bob is feeling greedy and doesn't lower his prices, competiton from Jack's Bakery, who has the same tax savings and has lowered his prices, will force Bob to do the same or go out of business. That is unless Bob has really great cinnamon rolls.
Please tell me what would cause this "economic boom" to take place....
I just got finished reading "Flat Tax Revolution" by Steve Forbes. I have to say after reading that book I'm convinced more than ever that the Flat Tax is the way to go.
I still want to read the FairTax book to get a balanced perspective, but I'm a bit worried that the FairTax as I understand it may compel purchasers to buy used products whenever possible -- much like those who bought used cars and boats when the luxury tax was enacted -- and really hurt the new construction market.
The tax on services will mean that many things will get even more expensive, like college education. Moreover, even things the U.S. Government buys, like office supplies and fighter jets will have that extra overhead attached.
If you can find a copy (I got mine at my local Costco) I highly recommend reading "Flat Tax Revolution".
The fact that former Soviet satellite countries are implementing it and watching their productivity go through the roof seems to indicate that this is the way we should seriously consider.
Only a handfull of people would lower their prices.....It has nothing to do with GREED.....you work for money and would take more if offered, then you are "greedy" also...Why is it just the business owner who is greedy? If you are not greedy, then cut your own pay by 25 % tomorrow and have it sent to the needy......
If there were a Fair Tax, everyone would be waiting around for everyone else to lower their prices first and no one would ever do it...No one would cut their own salary, so businesses would not cut their prices..
Besides: The Gov-ment always wants more and the locals would raise their taxes to get any real savings if there were any..
"You forget that Bob the Baker pays income tax on his profit from sales"
Bob the baker is probably a sole proprietor or his business is a partnership, or an LLC, or a Subchapter S corporation, in which case, Bob pays personal income and payroll (although they're called self-employment) taxes on his income, which is the profit that he takes from his bakery. But in these cases, Bob pays no corporate income taxes. At all. Only Chapter C corporations pay corporate income tax, and most small businesses (in fact, most businesses) do not choose this form. In fact, in 2000, of 27 million business entities that filed a business tax return, only 2.2 million were C corporations. The rest owed no business income tax.
So, he is in the same position as any other wage earner - he pays personal income taxes, but not any kind of business income tax. He fills out a 1040 for his personal income taxes, like anyone else.
If Bob doesn't get to keep his personal income taxes, like everyone else does, then that puts Bob at a disadvantage to everyone else.
That probably isn't good for encouraging the formation and maintenance of small businesses.
Any system that has to be sold using lies and misrepresentations doesn't work for me.
The Status Quo Lover crowd will tell you that only C-corporations pay taxes and that those are "minor" and that no other business can have cascading tax costs.
Obviously, none of that is correct, but they'll keep right on insisting it is so (and citing their own businesses, conveniently, as "proof").
The cascading effect of embedded tax costs continues as even a simple example has shown and the build-up effect mounts up rapidly. None of these guys can admit that this occurs as it destroys their argument.
Also note that in his letter to Linder the poster fails to figure in the effects of the prebate which ALSO helps the wage-earners ... and all others. All-in-all a very poorly-reasoned letter and I would be surprised if they even bothered to answer the allegations he makes, many of which are grossly in error.
>If there were a Fair Tax, everyone would be waiting around for everyone else to lower their prices first and no one would ever do it...No one would cut their own salary, so businesses would not cut their prices.. <
Then explain Walmarts sucess and why video rental costs are about 25% of the price they were 5 years ago with less competitors.Come back after you take high school economics.
I suspect wages would have to drop 25% also for all the "changes" to occur. What about the min. wage? Who'll drop it?
Economies of Scale...Look it up.. Walmart buys in volume and cheap from China....
Net Flix deals in volume and everyone else is lowering their prices to compeat with the new niche video renters....There is your new competitor...Yahoo is not far behind..look for MS and Apple to do the same... (and no, I'm not a good speller)
Wal-mart is not lowering it's prices..it has always been cheap..
"So, he is in the same position as any other wage earner - he pays personal income taxes, but not any kind of business income tax. He fills out a 1040 for his personal income taxes, like anyone else. "
It doesn't matter what kind of taxes he pays now, he still pays them. He wouldn't under Fairtax.
Calling a tax a business tax, corporation tax or personal income tax doesn't change the fact that Bob is still paying taxes.
Yep, you're right, more FREE MONEY in this plan in case an increase of 25% in purchasing power isn't enough of a giveaway. There are so many problems with this pollyanna plan that I couldn't fit them all into one letter.
They probably won't respond but maybe one or both of them will think about what they are claiming and realize they need to tone back their promises.
Anyone who read the book, which I have done, knows what they claim. But that doesn't make it true.
The price of bread will be what the market can bear. If the baker can sell for $1.23, he will do it. OTOH, the competition factor will not be changed by the tax.
sorry I left you off the earlier ping. you might be interested in this.
I give up on you. If you really have read it, and studied it like you say then I believe you will never get it. What is even more perplexing is how you rather keep the current hideous 66,000 page income tax system vs. trying something different..
His employees get their whole paychecks including FICA and payroll, but the owner of the business doesn't get to keep his whole earnings and is expected to give up his income tax savings? This would not be fair and it would mean wage earners take-home income would rise significantly as related to the business owner. That doesn't sound "Fair".
Good, I'm tired of trying to explain myself to you. I take the time to lay out a fairly detailed example and all you have is exasperation and throwing "the book" at me.
What is even more perplexing is how you rather keep the current hideous 66,000 page income tax system vs. trying something different..
This is a ridiculous argument, the anything is better than what we have now argument. The present system with all of its flaws is one in which 300 million people are presently engaged in, and it has created the most prosperous and free nation in the history of the Earth. Could it be made better? of course. WOuld any possible change be better? of course not.
I hopefully won't hear from you again.
Of course that is true, but the economics for Bob's bakery and Jack's Bakery are the same, and if the price of bread with a 30% tax on it is higher than people are willing to pay, then one or both bakeries go out of business.
Is there currently a tax on services?Not where I live.
"Economies of Scale...Look it up."
Thank you. That is part of the problem here. Most Americans are illiterate when it comes to economics, even the basics.
This ignorance adds fuel to fire for politicians who want to blame Bob the Baker for making a living by taking advantage of George.
Only if people no longer need bread. They are going to have more money to spend.
If the FairTax is revenue neutral the same amount of money will flow into D.C. as before. I think it's safe to say prices will rise. OTOH, I think there will be more overall consumer spending power due to the efficieny in compliance.
Businessess pay no taxes under the FairtaxService businesses would...
No, either he is paying corporate income taxes, that is, a business tax, or he is paying personal income taxes.
Are you saying that Bob is paying no personal income taxes?
I own a Subchapter S corporation. I file a business tax return with the IRS. But I pay no taxes on my business. I file a 1040, and following the same rules as any W-2 employee, I pay personal income taxes on the earnings I derive from my business.
Do I pay corporate taxes and no personal income taxes? Or do I pay personal income taxes, and no corporate taxes? I'm only paying one. The government tells me it's personal income taxes. What do you say I'm paying?
Small businesses do not pay corporate income taxes. Period.
But you're right, Bob (or me) wouldn't pay any personal income taxes, either under the NSRT.
Just as his employee, Joe, wouldn't either. And what are you saying will happen to Joe's personal income taxes? Why, they'll be returned to Joe, right?
Because there will be an NSRT on what Joe spends his salary on. On his food, on part of the interest of his mortgage (that's right, part of the interest of your mortgage will be subject to a 30% sales tax), on his car insurance, his homeowner's insurance, and his health insurance. On his clothing, part of the interest of his car payment, on his gasoline (think! we'll all get to pay 30% more at the pump!).
So, it evens out. He gets to keep his personal income and payroll taxes, and with that, he pays the NSRT.
Okay, what about Bob? Bob makes $50K from his bakery, and pays $9K in personal income and payroll taxes. So, he takes home $41K. If he has to lower his prices by the amount of his taxes, he still takes home $41K.
But now, he doesn't have what Joe has - his personal income taxes. So, how does he pay the NSRT on his mortgage, his car payment, his food, his clothing, his car insurance, his life insurance, his homeowners insurance, his health insurance, his gasoline, etc.?
That's why it's called his PERSONAL income tax, and not a busines or a corporate income tax. For Bob not to lose out, he must be treated the way any wage earner is treated.
Otherwise, Bob will say, gee, I can't afford to both stay in business and pay this new NSRT. I had to cut my prices by the amount of my personal income taxes, so I'm screwed. Bob will say, I'll fire Joe. I'm a better baker than Joe, and we'll both apply at Really Big Baking company, and since I'm the better baker, and I have some business management experience, I'll get the job, and Joe won't.
Only, woodbeez, that won't happen. Because Bob's not going to lower his prices by the amount of his tax savings.
Here's why: His little bakery did $500,000 last year. He made $50,000, which is a pretty good profit on $500,000 in revenues. He paid $9,000 in taxes. That's 1.8% of his bakery's revenues. Less than 2%. If his bread, cookies and cakes are good, no one is going to bark at not seeing his $9.99 box of cookies decline 1.8% to $9.81.
No, he's going to keep the money, because he needs the whole $9,000 a whole lot more than any of his customers need 18 cents.
And thus, you're not going to squeeze the personal income taxes paid by business owners out of the value chain.
Now, go take a look at the taxes paid by big business. The IRS says that in 2003, they paid 1.3% of GDP in corporate income taxes. That means, the "embedded tax" in $1.00 of GDP is about a penny and half.
That will go away. We will see those costs go away, certainly. Whether they result in marginally lower prices, or whether large companies take this opportunity to expand their profit margins after decades of contraction, I don't know. But it's less than 2%.
If you want to see what corporations really make, and actually pay in income taxes, go look at their financial statements. Wal-Mart paid about 1.6% of its revenues in federal corporate income taxes last year. Sears paid less than 0.5% of its revenues in federal corporate income taxes last year. TechData, a leading distributor/wholesaler of electronics, paid about 0.1% of its $19 billion in revenues last year in federal corporate income taxes. Boeing, a massive manufacturer, with $52 billion in revenues, paid about $140 million in all corporate income taxes last year, both state and federal. That's less than 0.3% of revenues.
There isn't a lot of corporate income taxes to squeeze out of the value chain. There's a little, but it doesn't add up to much.
If you don't believe me, do the research yourself.
Then explain Walmarts sucess and why video rental costs are about 25% of the price they were 5 years ago with less competitors.Where can you rent a video for $0.50?
"His employees get their whole paychecks including FICA and payroll, but the owner of the business doesn't get to keep his whole earnings and is expected to give up his income tax savings?"
You didn't read the book or do much research. The owner of the business DOES get to keep everything he makes.
I suspect wages would have to drop 25% also for all the "changes" to occur.Ding-ding-ding-ding-ding....We have a winner!
I agree with you. Who says businesses will drop their prices? When the euro was introduced, there was inflation across a wide spectrum because storeowners knew they could get away with it in the currency change.
Rob two things are obvious. 1) you did not read the book!It's just a friggin book. It isn't an instruction manual or a bible.
Well the book makes it very simple to understand.. That is what makes me highly suspicious of Rob. He loves to punish the current tax code that punishes success, and rewards failure...
You didn't read the book or do much research. The owner of the business DOES get to keep everything he makes.Then where do the 20% price reductions come from?
He loves to punish the current tax code that punishes success, and rewards failure...LOL!..Right, there's absoluteley no chance to be successful without big government fixing itself...< /sarcasm >
Your problem with success is you, not "the present system".
So I am at point where well I guess its beyound his comprehension.I see it just the opposite.
"What do you say I'm paying?"
How can I be clearer. You are paying income taxes, whatever they are called. If you aren't paying taxes on the income you receive, in whatever form you receive it, you are cheating the government.
"So, it evens out. He gets to keep his personal income and payroll taxes, and with that, he pays the NSRT."
George knows exactly what he pays (and has control over what taxes he pays) under a NST. Sounds like a good trade.
"Okay, what about Bob? Bob makes $50K from his bakery, and pays $9K in personal income and payroll taxes. So, he takes home $41K. If he has to lower his prices by the amount of his taxes, he still takes home $41K"
No he doesn't because he IS NOT paying personal income and payroll taxes on his business. He makes $50,000 not $41,000. There will be NO income tax or payroll tax.
The rest of your argument is based on these incorrect assumptions