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
Phone: 770-232-3005
Fax: 770-232-2909
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 “Let’s 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. Jorgenson’s study: “If you’re looking for scholarly support for the proposition that prices will fall once the embedded taxes are removed, we can check back with [Jorgenson’s] “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, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social security taxes, or Medicare taxes and you’ll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.”
Dr. Jorgenson’s 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 else—will 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 Jorgenson’s 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 “Here’s 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. Jorgenson’s 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.
Rob
Dr. Jorgenson responded:
From: Dale Jorgenson [mailto:djorgenson@harvard.edu]
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?
August 24
Dear Rob,
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]
Best,
Dale
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:
Dr. Jorgenson,
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?
Regards,
Rob xxx
Dr Jorgenson responded:
August 24
Dear Rob,
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.
Best,
Dale
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.
Sincerely,
Rob xxx
xxxxxxx
And yet, you still managed to be completely wrong. How did you manage that? Were you not following the thread?
Watch what happens as more people do business out of their homes.
Not as big as ending the tax advantage of leftist foundations making "contributions" to lawyers who sue to control the price of resources using environmental law.
It's been a few years, but when I went to the publick library to look at the income tax title of the U.S. code of law; I found that the Tax code books were larger than all the other U.S. codes put together! Larger than the Law on Customs, Maritime, Judicial etc,
It is a swollen monster that needs to be beheaded!
The economic boom from the fair tax would not really come from taxes that Americans pay. As demonstrated, that would be basically a wash. The boom comes from imports. The US imports a huge amount. As the system is today, the import competes price wise with the domestic product which has the embedded taxes. When the import item is sold, that embedded tax equivalent is shipped out of the country as an added bonus to the overseas producer. With the Fair tax the imported product must compete with the domestic product at a price that does not include embedded taxes and the importer losses the bonus while still incurring the added costs of transportation and handling.
The net effect would be to spur domestic production of goods and services. Since we realistically would still import heavily, stopping the flow of embedded tax equivalent out of the country would be like "tax gravy" to the federal government. Just look at our current trade imbalance and picture 22% of that flowing into the Federal government. Goodbye budget deficits. I was a flat tax man until I carefully examined the system and came to this realization. This aspect of the Fair tax must be hammered home to people because it has such a potential impact on our domestic economy and is the real way to protect jobs in America.
Maybe not, but imagine if your local minister could FREELY talk about your political candidates!
I CAN see what a positive impact it would have on those liberal tax exempt foundations influence on litigation. Thanks.
How can you guys always twists your gross errors and exaggerations into us being wrong?????? I was not wrong. There is no legal mechanism to get wages to come down to keep take home pay constant. Since wages will remain where they are, prices of goods will have to reflect the additional $1.3 Trillion that is now being pocketed by workers. End prices to consumers will have to go up around 15%. Rents and other contractual obligations, will immediately go up 30%. You can talk about the dynamic forces that may eventually bring wages down and prices down, but that will take years. In the meantime, our economy will be in chaos.
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
Dear yoswif,
"I believe labor contracts are for gross pay, not after tax income. By what mechanism does the Fair Tax eliminate every labor contract in the country?"
Excellent question.
However, we now know that the underlying basis for the assertion that general price levels will fall 20+% is a result from reducing gross wages to net wages, and doing away with personal income and payroll taxes (and passing the savings on to the consumer).
I guess this makes the whole issue of the NSRT a lot more theoretical and involved (at least in the implementation). To accomplish what Dr. Jorgenson suggests would take a lot of highly-technical, hard-bargained legislation to override labor contracts, to accomplish this result.
However the means of achieving the result, though, the relevant point is that Dr. Jorgenson believes that bringing down general price levels would be by lowering workers' gross pay (which would also be their net pay under the NSRT) to their current net pay, after-tax, under the existing system.
sitetest
Hogwash. You completely ignored what RobFromGa and Jorgenson said, and posted the exact opposite as being what they "proved". For what it is worth, I agree that Jorgenson's model is flawed in that there are legal issues involved (which I even said in the post you replied to!) but the discussion is on Jorgenson's model, complete with the assumptions that went into it.
As far as whether Rob's analysis is even correct is still open for debate -- if this were an article for publication, it would have been grossly irresponsible to not have even attempted to get a rebuttal before publishing.
Dear skr,
"What's to keep this 23% tax from increasing the minute we switch to the national sales tax?"
The goodness and decency of our politicians.
By the way, if you look at the National Retail SALES Tax from the perspective of a SALES tax, it's actually about a 30% exclusive tax on all new goods and all services. So, you buy a cigar that the business wants a buck for, you pay a buck thirty. Thirty cents goes to Uncle.
Thirty cents is also 23% of the overall cost to you, the consumer, of a buck thirty.
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.
I'm not sure Jorgenson is actually advocating doing that in the first place. The tax savings has to be applied somewhere (either all for the employer, all to the employee, or some mix), and I think Jorgenson chose this method in order to simplify his model. The net effects should be the same regardless -- purchasing power should be roughly equivalent since the same amount of taxes are taken out of the economy.
Personally, I think it would be better than that, because there's additional overhead and wasted effort and money that goes into tax compliance and avoidance that could be freed up for productive use and/or cost savings.
Ignored what they said???? I have embraced it. It is exactly what I have been saying for 6 years and being called a liar and disrupter for. If take the employee pockets all his taxes prices can not go down 20%.
No suprise to me ... I I raised that very question on this thread four years ago:I went back and read that thread a few months ago. You should be commended for your reasoned argument that was rejected out-of-hand by the FairTax proponents. You had this nailed years ago.
Like I said, I don't know about this particuar plan. If they are saying that the business owner gets a windfall of 20% because he doesn't have to withold taxes, then that is just silly. However, there certainly WOULD BE savings if we went to a tax system where I am not forced to be the collection agent for the fed, as a small business owner.
Well that is what fair taxers have been saying for years and that is what Boortz book claims. And you must remember, the 7.5% payroll tax is just on wages, not on gross sales. The savings businesses will see will be under 10%.
Income tax is in the embedded tax, too. Did your numbers include inocome tax?
Dear Always Right,
"That is what the analysis says, but there is no way to make that happen."
Yes, that's true.
I'm just trying to explain Dr. Jorgenson's theory.
If there were a way to achieve a steady state with an NSRT without trashing the economy during a transition, it would be a far more interesting proposal.
I'm still very leery about taxing away 20% of GDP through consumption taxes, as I think the direct effect on consumption will be highly negative.
However, we could at least debate stuff worth debating if some of the NSRTers around here would give up the idea that price savings of 20+% are going to magically appear out of the sky from "cascaded" corporate income taxes (LOL), rather than the source the actual theoretician cites: Loss of that part of gross wage to the worker that currently comprises payroll and personal income taxes.
sitetest
There in lies the rub. Fair Taxers have been maintaining that workers could keep the whole paycheck AND prices would come down 20%. Since income tax workers paid was in fact part of the 20% of embedded taxes, that claim has been exposed as fales.
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