Skip to comments.JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
Posted on 08/24/2005 9:40:44 PM PDT by RobFromGa
August 24, 2005
U.S. Representative John Linder
1026 Longworth House Office Building
Washington, DC 20515
Copy: Neal Boortz, WSB Radio,
Dr. Dale Jorgenson, Harvard University
Dear Representative Linder:
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 Lets 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. Jorgensons study: If youre looking for scholarly support for the proposition that prices will fall once the embedded taxes are removed, we can check back with [Jorgensons] 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, youll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social security taxes, or Medicare taxes and youll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.
Dr. Jorgensons 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 elsewill 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 Jorgensons 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.
On page 85 you make it clear the worker will get the pay raise.
And then on page 111, you tie it all together with a Quick Review in which you erroneously assert that Heres what happens when we pass and implement the FairTax plan:
We start collecting 100 percent of our earnings on our paycheck.
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. Jorgensons 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:
At 09:29 AM 8/24/2005 -0400, you wrote:
Dear Dr. Jorgenson,
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.
Dr. Jorgenson responded:
From: Dale Jorgenson [mailto:email@example.com]
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:
At 06:41 PM 8/24/2005 -0400, you wrote:
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?
Dr Jorgenson responded:
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.
We have a massive black market now. We always will- it will just shift.
By the way, in the State of Florida, where we are funded 100% by sales tax, I can tell you confidently that the Dept. of Revenue is nothing like the IRS in terms of intrusiveness. Their tactic is to audit sales receipts, but that's nothing compared to the info needed to determine income.
excellent work, Rob. The books should be removed from the shelves due to this HUGE error.
Thank you for a decent, civil reply.
The only thing I have ever been looking for from FairTax proponents is an honest discussion.
You are so focused on the specific numbers that you seem to have missed a vital point in Dr. Jorgenson's first response to you:
Your analysis of employee income, producer costs, and consumer prices is based on a static view of the world that does not take into account the dynamic impacts of the changes to the tax system. Without taking those effects into account, your numbers aren't going to make sense no matter how you apply your assumptions.
I'm not sure what they should do at this point, but I plan to call Mr. Linder today.
you miss the point, I am not debating whether the actual FairTax is a good or a bad thing for the econoy and for Americans in the long term through economic growth.
I am attempting to expose a $1.3 Trillion misrepresentation in the way the plan is sold in The FairTax Book, and this is being accomplished. Once the dust settles on this correction, we can debate away on the relative merits of the actual plan.
But the fair tax assertion that prices immediately come down 20% can no longer be made.
As far as this specific issue, and whether or not it is a misrepresentation, I will reserve judgement until I hear either a rebuttal or an admission from the FairTax folks -- it is possible that something is being missed.
My interest in the FairTax has never been the economics anyway (though the discussion threads always seem to get dragged that way). Let me repeat something I posted on a different thread:
Most of the recent discussions and arguments about the FairTax here on FR have been of the economics variety, and have basically boiled down to "how many angels can dance on the head of a pin" arguments. Nobody really knows what the impact will be due to the dynamic effects of changes to the tax code (even tax cuts under the current system are hard to predict the effects of accurately), though guesses can be made by using certain assumptions -- and its these assumptions that appear to be the main point of contention in the arguments.
While it may be worthwhile to have these discussions, in my opinion, they miss the most important point of all with regards to the FairTax.
Imagine having no IRS to pour over your financial records.
Imagine not having to report your personal finances (income and certain expenditures) to the federal government.
Imagine not having to make investment decisions based on what will or won't subject you to additional taxes.
Imagine a tax system in which your total liability is simple, straightfoward, and doesn't require an accountant or computer software to calculate (especially when different accountants come up with different answers).
Imagine a tax system that doesn't play games with whether or not you're rich or poor, black or white, male or female, or any other social or economic factor.
That is the freedom that the NRST/FairTax will bring. That is the major reason why all of the other schemes advocated (flat tax, transaction taxes, etc.) are unacceptable.
Another BIG advantage is that Ministers can preach for or against candidates or any social issues without loseing their tax exempt status (there being no taxes).
Obviously, politicians won't stop spending more and more money so the pressure has to come from outside. I want people to explicitly pay ALL their taxes, not have them hidden in a receipt or be funny money at pay time. I want people to deposit their FULL salary into their bank account and then have to write checks to the IRS quarterly to pay taxes. No withholding, etc.
Only if you subscribe to a static model of the economy.
That's basically my reason for supporting the FairTax too.
Oh, and by the way, you have it completely backwards -- if Rob's analysis is correct, Jorgenson still maintains that the prices will drop by 20% or so, but that employees would not receive their currently withheld income and payroll taxes.
Of course, that would violate a large body of contract law, but that's probably because Jorgenson just makes an assumption to make modelling the changes easier, not that this will necessarily be the case in practice.
What's to stop the politicians from placing "special" taxes on expensive items, like a luxury tax? For example, a car that's over $20,000 has a luxury tax of 100%.
What stops them now? The last time they did something that stupid, they practically destroyed the yacht-building industry in this country.
No kidding, we have only been debating this point for 6 years
I'm oughta here bump
Your forgetting (for some reason) the 1/4 - 1/5 of the current (untaxed) economy that avoids paying social security, Medicare, and income tax entirely.
But anytime ANY of these people makes a purchase after the Fair Tax begins, that exchange is taxed.
Now ole Rob claims that almost all of the current "underground" (untaxed) purchases (he makes a incorrect assumption that the underground econmy is only drug dealers and prostitues!) are used goods and from pawn shops that would not be taxed, but that is wrong.
I never made that assertion, and haven't made a single reference to undergroung purchases, nor am I commenting on the potential black market that would result from a 30% tax on every retail sale.
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