JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)

It is not unusual for email systems to allow multiple versions of email addresses. Doesn't look bogus to me.

Dear kevkrom,

You may be right about Dr. Jorgenson's intentions. It's tough to get inside folks' heads.

However, I'm inclined to think he chose this model for a different reason. I haven't had time to work it all out in my head, but my initial intuition tells me that doing it Dr. Jorgenson's way might be better vis-a-vis imports and exports.

I gotta think about it more.

"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."

Well, I've owned my own businesses for 20 years, and my own personal experience is that this would save me little, if anything. I'm sure it would save some people more, but my own experience with other business owners is that they wouldn't save much, either.

And Dr. Jorgenson clearly views the price level reductions being fueled primarily by saved payroll and income taxes that are not passed back to the worker.

sitetest

that claim has been exposed as fales

Allegedly exposed as false. It's a bit premature to be celebrating since we haven't seen the AFFT rebuttal yet.

You are certainly correct that the employer's total cost of an employee is greater than the employee's gross pay. And all of the employer's portion of payroll taxes would be repealed by the Fair Tax Act.

Thanks so much for your time spent on this. While the fair tax has good points, it needs critical study and dissection (as you demonstrate) to see if it is indeed worthwhile.

I am saying that the worker would continue to receive the after-tax amount of $800.

?????????? Just how does this happen? Under the current system, assuming no state or local witholding of any type, two employees each have a gross salary of $1000 per period. One has a wife and three kids, claims M-5 on his W-4 and has a "take-home" of $800 after Income & FICA. The other is single, claims S-1 on his W-4, and has a take home of $750.

Are you saying that with the Fair Tax, they keep getting 800 and 750 respectively? Who makes that call?

I think everyone is arguing over two different things.

This is a simplified model. But, by looking at the total dollars involved, it works exactly as Linder/Boorts have claimed. From my understanding of the book, they have always said it is the payroll tax, corp. income tax, and cost of complying with the current system that will cause prices to drop.

1st is the embedded payroll and corporate income tax ($0.8 Trillion last year from www.irs.gov).

2nd is the business cost of complying with the current tax system ($0.2-0.5 Trillion from several different papers).

If you add those numbers together, you get $1.0-1.3 Trillion. If we assume that comes out of the total retail sales ($3.9 T from www.census.gov), then that is right around 25-33%. Tack on the Fair Tax, and the numbers will be the same. This doesn’t even get into the cascading of the taxes and costs.

Heck, if you take $3.9T and multiply by the 23% inclusive Fair Tax number, you get $0.9T. That is almost equal to the $0.89T payroll and corp tax alone.

The "FairTax" crowd is deluding none save themselves.

All I know, is that from listening to Mr. Boortz on the radio, I don't trust him a bit...

Are you saying that with the Fair Tax, they keep getting 800 and 750 respectively? Who makes that call?

No one is making the call. It was just the analysis which supports the reduction of prices by 20% assumed the savings from employee taxes would be passed to the business. There is no mechanism to have it done. The way the law is, take home pay would go up but end prices to the consumer would have to go up accordingly.

An explanation of the assumptions made by Dr. Jorgenson and misrepresented by Boortz

dimples was correct in post #27. Economist assume that there will be one of two outcome with the transition to a sales tax. They are:

Assumption 1: That nominal (pre-income tax) wages will stay the same (i.e., take-home pay increases) and consumer prices increase by the amount of the sales tax. In short, that take-home pay and consumer prices increase.
Assumption 2: That nominal wages will decrease by the amount of payroll and income tax the worker was previously paying (i.e., take-home pay stays the same) and consumer prices stay the same even with the sales tax. In short, that take-home pay and consumer prices stay the same.

In his study, Dr. Jorgenson made Assumption 2 - that take-home pay and consumer prices stay the same. This is not wrong, it is just one of the possible outcomes. What was wrong was how this was presented by Boortz and the FairTax supporters. They took the assumption that take-home pay would increase (from Assumption 1) and paired it with the assumption that consumer prices will stay the same (from Assumption 2). They mixed the best of both worlds and came up with a windfall, that take-home pay would increase while consumer prices stayed the same, that could not possibly happen. Much of the proported benefits of the FairTax come from this erroneous assumption made by Boortz and the FairTax supporters.

While Dr. Jorgenson's use of Assumption 2 was not wrong, most economists believe that, because wages are difficult to lower (economists call this "sticky wages"), Assumption 1 is the most likely outcome from a transition to a sales tax.

Below is a complilation of quotes from various economists (including, ironically, the authors of the FairTax bill) that explain these assumptions in greater detail:

Consumption Taxes: Macroeconomic Effects and Policy Issues

by C. Alan Garner
Federal Reserve Bank of Kansas City
in Economic Review - Second Quarter 2005
Wages and prices. Replacing the income tax with a flat tax poses smaller challenges for wage and price adjustment than either a national sales tax or a VAT. Because the structure of the flat tax is similar to the current income tax, large adjustments in consumer prices or wages would probably not be necessary After-tax and before-tax wages would be similar before and after the tax reform, and nominal prices would be roughly unchanged (Zodrow 2002).
A national sales tax or a VAT, in contrast, would require the average price of consumer goods and services to rise relative to production costs and wages.¹⁵ A national retail sales tax is the simplest case to understand because the tax is imposed entirely at the retail level. Consumers would pay a substantially higher price for goods and services after adding in sales taxes at a rate that could easily be 30 percent or higher. Because wages are a large fraction of production costs, the price paid by consumers would increase relative to the wage rate received by workers. However, in the case of a revenue-neutral tax reform, the decline in the income-related taxes paid by households would offset the rise in consumption taxes, leaving households with the means to purchase the higher-priced goods and services. Under a VAT, consumer prices would increase relative to wages because of taxes imposed at various stages in the production process rather than just the final retail sale.
An important question from the standpoint of short-run macroeconomic adjustment is how the increase in consumer prices relative to wages occurs. One possibility is that the after-tax consumer price level would rise by the full amount of the consumption tax while wages remain constant. Another possibility is the after-tax consumer price level would be constant while wages decrease. Most discussions of transitional tax-reform issues assume the first case.¹⁶ When a VAT has been introduced abroad, authorities typically permitted an upward adjustment in the after-tax consumer price level, although efforts were generally undertaken to ensure that this one-time adjustment did nor become a sustained inflationary process (Tait).
Alternatively, the necessary increase in consumer prices relative to wages could be accomplished by holding the price level constant and reducing the wage level. Many economist, however, believe that wages are "sticky" in the downward direction. Workers are reluctant to take a wage cut, and efforts to reduce the wage rate might cause many workers to leave their jobs. The result could be a large temporary increase in the unemployment rate and lower levels of spending and output. Gravelle cites simulations with large-scale econometric models that do not assume the economy always operates at full employment. In three of the four simulations cited, real output decreased initially in response to fundamental tax reform. Although other economists have criticized such models and might not accept their conclusions, the simulations emphasize the need for further research on the short-run employment and output effects of fundamental tax reform.
Moreover, replacing all federal income taxes with a national sales tax or VAT would require much larger price and wage adjustments than other countries experienced when adopting VATs. Foreign VAT rates have typically been no more than 10 percent because the countries kept other revenue sources, such as an income tax. In most cases, the country also eliminated other consumption-type taxes, which offset some of the upward price-level pressures. Thus, the price adjustments required by fundamental U.S. tax reform would be outside the range of historical experience.

This discussion focuses on fundamental tax reform in which a national sales tax or VAT replaces all federal income and payroll taxes. The adjustment issues would be smaller if a low consumption-tax rate were enacted to replace a small part of the current tax system or to supplement existing revenue sources.
The increase in consumer prices could account for part of the decline in the real value of existing assets during the transition to a consumption tax. Nominal assets such as bonds and bank accounts would lose real value as the price level rose. With no increase in consumer prices, the decline in the real value of existing assets would occur through other channels. For example, the decrease in wealth would fall on equity owners as corporations lost expected depreciation allowances and the prices of tax-free investment goods declined relative to taxable consumer goods and services (Zodrow 2002). In practice, the increase in the price of consumer goods and services relative to wages could occur through a combination of consumer price increases and nominal wage decreases.

Statement of Laurence J. Kotlikoff,

Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research
Testimony Before the House Committee on Ways and Means - Hearing on Fundamental Tax Reform
April 11, 2000
This sentence and the one preceding it assume the price level will rise with the adoption of the Fair Tax. If the Federal Reserve used its monetary policy to maintain the consumer price level, the adoption of the Fair Tax would entail a decline in the level of producer prices and, thus, the nominal wages and capital income received by productive factors.

Response to William Gale

by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998
Federal income and payroll taxes either are or are not incorporated into the prices of goods and services. If they are embedded in prices, their removal will reduce prices. If they are not, then their removal will not reduce prices but instead returns to labor and capital will go up. If returns to labor go up, people will see their after-tax wages increase and asset values will increase since the present discounted value of the new, higher returns will be higher.
The replacement sales tax could be incident on the factors of production or it could be incident on consumers through higher prices. It cannot be both. If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation

by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779
Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.

The Price Level

Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.
A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.
Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.
Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.
Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.

Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.¹⁶ Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.

Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.

Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.

Transition Costs and Macroeconomic Adjustments

One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.⁵ While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.
Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT
Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.
These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).⁶ Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.

See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.

Prices.

Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.

Transitional Issues in Tax Reform

Price Level Effects
Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.
In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.
Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.
The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.
Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level ;and no change in payments to workers in nominal terms."
Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.
Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.

Monetary Implications of Tax Reforms

Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.
And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.
But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.

Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.

The Price Level

When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.
One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.
Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.

re:We aren't promising you extra dollars in your pocket or a new car in your driveway. The promise is simple. Your earnings will remain essentially the same, and you will spend essentially the same amount for your consumer goods and services.

Sounds like furious backpedaling to me.--RobFromGa

No, it's simply a reaffirmation of the consistently stated position of Boortz and Linder that the Fair Tax plan was designed to be as "revenue neutral" as possible. Your correspondence with Dr. Jorgenson has confirmed this, and you should be commended for that effort.

I have not read the book yet. Whatever statements in it which are poorly or misleadingly phrased should be acknowledged, clarified and corrected, but your eagerness to characterise such mistakes as dishonesty or fraud is unwarranted.

You have made a valuable contribution to the discussion of this issue, and we should all use that to move the debate forward.

Dear Ditto,

I was wondering the same thing myself.

But, that's the good doctor's theory, so what can we say?

sitetest

I do not support a tax on the individual at the federal level in ANY manner, whether it be a tax, license fee, processing fee, use tax, sales tax, income tax, nor any other means of getting the individual income earner to pay for any beauracracy. If the federal government cannot support a task by tariffs on imports and business tax, then cease that task.

You may be right about Dr. Jorgenson's intentions. It's tough to get inside folks' heads.

Poor Dr. Jorgenson. I have a feeling he's going to have a very busy day! His email must be getting slammed.

Dear Your Nightmare,

"Poor Dr. Jorgenson."

I've been thinking the same thing.

Yikes.

sitetest

Ok I finally read what you wrote. LOL! Let me break it down for you since it’s obvious you went to a government school.. You Said: 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 Answer: Ok your key words, “he was NOT assuming that the worker would keep his current after-tax amount” That is not what the Doctor wrote, or well at least you posted. I have just copied and pasted what you said he wrote. The Dr wrote, “I am saying that the worker “WOULD” continue to receive the after-tax amount of $800.” This is even better! Thanks for posting this. Since the Doctor was assuming employees would still be taxed like they are today. It makes the Fair Tax (HR 25) incredible knowing that we would take home what we make before taxes. This would be a huge pay raise for everyone. And if the doctor did not factor this then our buying power should increase. Thanks for posting this  You said: 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. Answer; If a company is paying an employee $30,000 a year, and the Fair Tax bill becomes law. That company would no longer have to worry about embedded taxes. So then why do you think the company would reduce the pay of the employee? How do you come up with that conclusion? LOL! Just think about it…. the company has no tax liability therefore it has more money now that it does under our current tax system. Embedded taxes are gone! How come you think the company would have less money? You wrote “. There would be no increase in take-home pay.“ Answer: Nothing could be further from the truth. Please read HR 25, or the Fair Tax Book. The Fair Tax eliminates ALL taxes and replaces it with a consumption tax only. You also wrote earlier in the same post : “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?” Answer: You came up with the wrong conclusion. If a business no longer has any tax liability, then why would they reduce an employees pay? The company just gained a lot of money since the embedded taxes have been eliminated? You also wrote, “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. “ Answer: How in the heck do you come up with there would no cost savings? LOL! Now I see why you have all your numbers screwed up. You act as if the taxes that employee’s see they paid in their check is really being paid by the company and not the employee. LOL! No wonder why you are so confused! Now I understand Employers pay ½ of your Social Security, but companies are not paying your federal and state taxes. That is being paid by the employee. This is why we do our taxes each year. If the companies were paying our Federal and State taxes, then we would not have to fill out a 1040 every year. LOL!

By the way, did you tell Dr. Jorgensen you were going to put his response all over the internet? I think if I were him I would want to know. Just common courtesy, you know.

re:Freedom

Thank you for pointing this out once again. Considering how many of our fellow countrymen have paid for our freedom with their lives, it is astonishing how easily we as a people can rationalize and justify surrendering it for a few percentage points one way or the other.

But, by looking at the total dollars involved, it works exactly as Linder/Boorts have claimed. From my understanding of the book, they have always said it is the payroll tax, corp. income tax, and cost of complying with the current system that will cause prices to drop.

That is what Boortz claims, but that is not what the person who did the study says.

1st is the embedded payroll and corporate income tax ($0.8 Trillion last year from www.irs.gov).

Corporate income and 1/2 payroll comes up to $542 Billion according to the IRS ($194B corp. + 1/2 of $696B)

2nd is the business cost of complying with the current tax system ($0.2-0.5 Trillion from several different papers).

Of the $250 Billion of compliance costs that studies have show, about $100 Billion is costs to businesses. The other cost is time and money spent by individuals.

If you add those numbers together, you get $1.0-1.3 Trillion. If we assume that comes out of the total retail sales ($3.9 T from www.census.gov),

The tax base for the fair tax is closer to $10 Billion. Their base includes many things including a lot of government spending. You need to find nearly $2 Tillion worth of savings for prices to fall 20%. What you have is around $700 Billion.

Dear Sprite518,

You appear to be misreading the conversation between RobFromGa and Dr. Jorgenson. Here's the critical exchange:

RobFromGa asks:

"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 replies:

"I am saying that the worker would continue to receive the after-tax amount of $800."

Dr. Jorgenson is assuming that the gross pay of $1,000, pre-tax in the current system, will be reduced to a gross pay of $800 under the NSRT, but without any payroll or income taxes, the new gross pay will be equal to the old (AND new) net pay of $800.

The $200 of gross pay that the worker lost under the old system is still lost to him, but is used by the business, under Dr. Jorgenson's model, to reduce general price levels.

No free lunch.

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