Meta-Blog

SEARCH QandO

Email:
Jon Henke
Bruce "McQ" McQuain
Dale Franks
Bryan Pick
Billy Hollis
Lance Paddock
MichaelW

BLOGROLL QandO

 
 
Recent Posts
The Ayers Resurrection Tour
Special Friends Get Special Breaks
One Hour
The Hope and Change Express - stalled in the slow lane
Michael Steele New RNC Chairman
Things that make you go "hmmmm"...
Oh yeah, that "rule of law" thing ...
Putting Dollar Signs in Front Of The AGW Hoax
Moving toward a 60 vote majority?
Do As I Say ....
 
 
QandO Newsroom

Newsroom Home Page

US News

US National News
Politics
Business
Science
Technology
Health
Entertainment
Sports
Opinion/Editorial

International News

Top World New
Iraq News
Mideast Conflict

Blogging

Blogpulse Daily Highlights
Daypop Top 40 Links

Regional

Regional News

Publications

News Publications

 
More on the Fair Tax
Posted by: Dale Franks on Tuesday, August 30, 2005

I'm increasingly confused about some of the claims made by the Fair Tax advocates. Let's take a look at the wage/price claims again. Again, the talking points at the Fair Tax web site explicitly say that the Fair Tax is a system that:
* allows you to keep 100% of your paycheck, pension, and Social Security payments.
* Dramatically reduces the cost of goods and services by 20% to 30%.
First, let's look carefully at the second statement. Presumably, we are supposed to take that to mean that retail prices would drop by up to 30%, and the increase in retail prices via the Fair Tax would make the general price level come out even. They buttress this from some non-refereed work of Harvard's Dale Jorgenson.

But Dr. Jorgenson wasn't talking about consumer prices. He was referring to producer prices. As Dr. Jorgenson himself says,
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.
That puts an entirely different light on the matter, and is a lot different than what the Fair Tax talking points say.

In effect, Dr. Jorgenson predicts a rise in consumer prices, and real wages for workers to remain steady. And that's not a controversial position. As the Kansas City Fed's economist Alan Garner puts it:
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 that the after-tax consumer price level would be constant while wages decrease. Most discussions of transitional tax-reform issues assume the first case. 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 not 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 economists, 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.
What Fair Tax people are promising is a free lunch. They promise that a) tax revenues will be neutral, b) prices will fall, and c) wages will rise.

How, one wonders, can this be?

One wonders a lot of things. Try as I might, I can't find Dr. Jorgenson's original testimony from which both FairTax.org and Neal Boortz's book makes the claims about rising wages and reduced prices. I do note, however, that FairTax.org implies that consumer prices will fall by 20%-30%, and Neal Boortz specifically writes in the book:
Now, to further your education on embedded taxes, here's a chart prepared by Jorgenson that shows just how much prices for certain consumer goods might be expected to decrease once the embedded taxes are removed!

As you can see from the chart, embedded taxes—and the consequent price reduction after those taxes are removed—vary from about 15 percent for leather goods to about 26 percent for services, including government services.
But Dr. Jorgensen says he wasn't referring to consumer prices, but, again, to producer prices. And a 30% drop in producer prices does not translate automatically to a 30% drop in consumer prices.

And, again, one wonders how that 30% drop in producer prices is even being calculated. As I wrote previously, if you count the employer's portion od SocSec and corporate taxes, you get about a 10% bite. So where's the extra 10%-20% in the tax bite coming from? And please, don't try to explain that it comes from hiring tax attorneys and accountants. Here's a clue: You don't pay accountants and lawyers more than you would pay the government in taxes. You only hire those professionals if the end result of their work is that the cost of their services + taxes is less that you'd pay in taxes without their services. If you're paying more for accountants + taxes than you'd pay in taxes without accountants, then you're a moron.

I'm thinking, and will continue to think unless I can be directed to the actual data—not the bald, unsupported assertions in Neal Boortz's book—that the only way you can get to a 20%-30% tax cost in producer prices is if you are including the employee's tax withholding as well. And, if so, then you don't get to keep your 30% producer price reduction if the money that's currently going towards FITW goes instead to the employee. And, Dr. Jorgenson's comments about wages remaining at real current levels incline me to believe that he is, in fact, incorporating the employee's tax bit into his calculation of producer prices. But, even if he isn't, his position is that consumer prices will rise due to the tax, even though producer prices will fall. Further, his position is that real wages will remain stable, meaning that employees will not get their big 20% raise due to the elimination of withholding.

So, once again, I'd really like to see Dr. Jorgenson's original work, to analyze it for myself. I want to see the data, not the scrubbed presentation that The Fair Tax Book presents as the results.
 
TrackBacks
Return to Main Blog Page
 
 

Previous Comments to this Post 

Comments
Dale,

I wonder if you are sincerely trying to find answers or trying for obfuscation.

I notice your "example" in a previous article was for the Mining industry. Was that industry chosen by random chance ? Or because you were looking for an industry that was at the root of the supply chain ? Or because you know thier numbers are a fiction ? You concluded a 10% cost reduction was all that could be expected. Riddle me this: How does a mining company reduce the income tax it owes ?

I’ve given a concrete example of a specific corporation in the Banking industry. I used Bank of Americas’s actual financial statements to show where 14% of cost reduction can be found WITHOUT even considering reductions in costs from their suppliers and WITHOUT the cost reductions of reducing employees whose only function is to babysit the income tax system. WITH those savings, I easily showed over 16%.

I also used Steverino’s restaurant example and showed how his own numbers indicate a potential price reduction over 20%, while simultaneously creating a 25% net increase in the owner’s spendable income.

So, again ... why exactly did you choose the Mining industry ? If you really want honest answers, pick an industry at random and one that is not in distress. That means skipping recent years for automotive, telecom and airline industries. Pick healthy industries, like banking, oil & gas, drug manufacturers, semiconductors, etc. Then look at the financial statements of the market leaders. If you are really looking for assurance that the 20%-30% figure is reasonable, you’ll find it. If you are simply looking for negative evidence, you’ll be disappointed.


 
Written By: Kirk
URL: http://
How can this be?
One way, I suppose, is tha the economy will take off.
Worked for Reagan...
 
Written By: Bithead
URL: http://bitheads.blogspot.com
I also used Steverino’s restaurant example and showed how his own numbers indicate a potential price reduction over 20%, while simultaneously creating a 25% net increase in the owner’s spendable income.
Kirk, your logic and your numbers there are inaccurate.

1. My spendable income would NOT increase by 25%. Your own figures said that I would have to reduce my prices by the amount I pay in taxes. Therefore, I’d have NO increase in net income (while seeing the price of the goods I buy as a consumer rise by 23%). If I, as an employer, must cut my profits by 25% while seeing my employees get a 25% raise AND seeing my cost-of-living go up, there is absolutely no incentive for me to buy into this plan.

2. My hard costs would NOT decrease by 5% as you alleged. My base rent is written into the lease for 10 years. Even when the options on the lease are renewed, by base rent can NEVER decrease, and will always increase by a minimum each year. (This isn’t a sucker deal, it’s pretty much standard in retail space leases: the landlord builds into the lease a pay raise each year.) Further, the only taxes that are passed through to me on an adjustable basis are property taxes, which are not Federal taxes, and would not be reduced in any way under FairTax.

3. The profits from my business that are passed through to me are not subject to Social Security or Medicare, as an employer or an employee. I’ve got an S Corporation: those profits are passed through to me as non-wage income. So your figures in what I’d save in taxes are all wrong. (Even if all my profites were subject to Social Security and Medicare, Social Security has a cap on it, which reduces its effective percentage of my gross earnings.)

4. The only point you made that was correct was tips being subject to taxes. But that’s piddling. We’re taking 6% of 20% of my sales (assuming my customers are good tippers), which is only 1.2% of total sales.

 
Written By: Steverino
URL: http://steverino.journalspace.com/
In only takes a little deeper looking to find what you seek or email fair tax and though they are busy wait for an answer.

I humbly suggest you start with the 32 page rebuttal to William Gale in the rebuttal section of www.fairtax.org. Than maybe you could read through the Research secton of the same site or read all the Rebuttals to see footnoted the research or testimanoy of people like Dr. Jorgensen or other nationally known economists.

In this article, you ignore an article which is also noted and linked on the same web site where 75 Economists sent an open letter to Congress and the President in support of the Fair Tax.

This is from my post to TPMCAFE on the same subject.

Comes from the Rebuttal section to old article by GAle which he has resubmitted recently on the web. The Rebuttal still applies and the calcualtions including Jorgensen’s are consistant for a retail Price drop.

The queston is; Are their embedded taxes in the price of Goods and Services? If eliminated is it sound to assume prices will drop?

If WalMart and Target can be in price wars and Auto makers can compete for ower "Employee pricing" this summer than competition shuld certainly lower prices after the Fair Tax is enacted. Don’t forget the PREBATE as well which offsets the Sales tax and makes the Fair Tax progressive.

Other economists estimate 22 to 25%. Several have studied it and they include Harvard, Boston U, MIT and Stanford Economists.

Gale’s estimate is wildly inconsistent with those of many respected researchers. For example, Dale Jorgenson (Harvard) has found that the FairTax plan is revenue neutral at 22.9 percent Jim Poterba (MIT) has found that the FairTax plan is revenue neutral at 23.1 percenLaurence Kotlikoff (Boston University) found that the revenue neutral tax rate was 24 percent. Researchers at Stanford, the Heritage Foundation, Fiscal Associates and the Cato Institute have reached similar conclusions (22.3 percent to 24 percent).

From the old Gale Rebuttal at Rebuttal section of www.fairtax.org



Are there embedded taxes in what we buy- YES do economists agree it is in the 20% range _ yes.

Please do some more reading before you - continue your objections.

The Fair Tax Legislative package has been around for years and we have heard uninformed critcs before and honestly their questions have been asked and answered with economic fact before.

Read the Rebuttal section in its entirity and I think you will get the economic education and foundation that you are lacking on this issue.

There is an introductory level of knowledge and a way to present this information than there is a deeper level which sites like yours I expect to be able to handle and present.

Unfortunately, you haven’t studied enough to comment informatively at this level.

Though you took a side turn on Dr. Jorgensen’s comments, you failed to include the body of other economists and the 75 who wrote their letter.

Jorgensen’s original work and others from Boston U, Stanford, Cato Institute, Stanford have also done calculations and simulations that confirm the Price drop conclusion.

Laurence Kotlikoff continues to write on the subject as well as others in academic research.

Laurence J. Kotlikoff, April, 15, 1993, Cato Institute Policy Analysis; The Economic Impact of Fundamental Tax Reform,

Dale W. Jorgenson, Testimony before the House Ways and Means Committee, June 6, 1995; The Economic Impact of the National Retail Sales Tax, Dale W. Jorgenson, Harvard University, November, 1996;

Replacing the U.S. Federal Tax System with a Retail Sales Tax: Macroeconomic and Distributional Impacts, Laurence J. Kotlikoff, December, 1996.


Examining a Change to a National Retail Sales Tax Regime: Impact on Households, Joseph Kahn and Associates, Stanford University.

Also My blog on the Economist Letter.

http://fairtaxreform.blogspot.com/2005/04/geter-done-economists-nationwide.html


 
Written By: Merrill Bender
URL: http://fairtaxreform.blogspot.com/
Unfortunately, you haven’t studied enough to comment informatively at this level.
Then address the specific question. You are good at proclaiming others uneducated, but poor at explaining any answers.
 
Written By: JWG
URL: http://
Steverino,

1) Your figures showed that you were retaining 25% of Sales as your own wages/profits. Assuming your total revenue was $1M, your personal income would have been $250K, right ? Your after -income and -payroll tax spendable income would then be what ? 70% of that ? Or $175K ? My figures for your cost reductions were 29% of revenue and I suggested you reduce prices by only 23% and keep 6% for yourself—$60K. That leaves you with $235K, doesn’t it ? That is more than a 25% increase in spendable income—it is actually 35%. If you want to talk buying power, then assuming even 15% embedded tax costs in what you purchased before, your $175K used to buy you 85% of $175K = $149K buying power. Even assuming zero retail price drop, your $235K new spendable income will buy you 77% buying power which is $181K. So your buying power has increased from $149K to $181K, or ($32K + $2K prebate)/$149K = 23% improvement in your buying power. And that was assuming no price drop in what you purchase at retail and that all your spending is on retail items.

1a) Nobody said anything about cutting your actual after-tax profits. Nobody said anything about giving your employees a 25% raise. The employee "raise" is in their after-tax income. It is nothing that comes out of the employer’s pocket.

2) Leases can be renegotiated. With such a large change in cost structure, the lessor cannot just absorb the extra profit. Not if he wants new tenants and not if he doesn’t want to have his existing tenants breaking their leases, declaring bankruptcy, etc. Leases are renegotiated all the time. (And looking at the economy as a whole, each year 10% of restaurants near the end of their leases—assuming 10yr leases are the norm. And from the time the FairTax passess until it goes into effect, all those businesses will have probably two years warning to do that renogiating.) And your other hard costs were utilities, advertising, insurance, etc. There are no long-term commitments on those that would prevent free-market pressure from lowering their prices as their costs drop. I stand by the 5% of revenue price drop for hard costs.

3) I’m not familiar with the differences between an S-Corp and a Sole-Proprietorship. I had assumed the difference was mainly one of liability, and the taxes were the same. My error. So the entire 25% (my example $250K) profit is all regular income ? Is it at corporate rate of 35% tax or personal rate on the graduated scale ? Splitting the difference, call it 30%, $75K income taxes. So this is a 7.5% of revenue drop instead of the 9% I used—if you are really correct and there is no FICA tax on any of that $250K.

4) I didn’t approach it from the tips=20% of Sales POV. I used what servers I know tell me—that 2/3 of their income is tips—and your figure of 20% for labor. But I agree that these numbers do not jibe. I don’t know where you get your "6% of" because last I checked FICA was 7.65% and I think tips are subject to all of it aren’t they ? You had also mentioned unemployment and disability insurance, so I assumed that applied to tips as well. Even so, my tripling of your figure seems high. Limiting it just to employer-side FICA that you would no longer have to pay, let’s call it 7.65% of 20% tips on revenue + 20% labor. That is only 3% of revenue rather than the 6% I used. BTW, did this 3% (plus the disability and unemployement we are now ignoring) come out of your 25% profit or was it included in your total of labor=20% ?

The adjustments leave us with 3% (FICA) + 7.5% (PIT) + 9% (supplies) + 5% (hard costs) = 24.5% cost reduction. Now you don’t get to give yourself that 35% raise in spendable income anymore. Too bad. Reducing your prices by 23% leaves you with only $15K extra spendable in your pocket. A piddling 9% raise for yourself. Your buying power is now 77% of $192K (FairTax)= $148K vs. 85% (I’m being generous) of $175K (current system) = $149K.

Yep, you lose $1K if retail prices do not drop at all. Seems unlikely since we’ve agreed there will be at least SOME price drop—and your own restaurant has little trouble dropping prices by at least 20%. Using a 15% price drop for what you purchase, your buying power increases to $174K—a 20% improvement in your buying power over the current system.




 
Written By: Kirk
URL: http://
Was that industry chosen by random chance ?
Nope. It was chosen because the FairTax web site uses it. Maybe you should contact them and ask them why they prominently feature it.
 
Written By: Dale Franks
URL: http://www.qando.net
The Fair Tax Legislative package has been around for years and we have heard uninformed critcs before and honestly their questions have been asked and answered with economic fact before.

Read the Rebuttal section in its entirity and I think you will get the economic education and foundation that you are lacking on this issue.
Well, Lord knows I could use some basic education in economics. I wonder if there’s a book or something I could buy...
 
Written By: Dale Franks
URL: http://www.qando.net
Dale, don’t you realize that if you disagree with their statements, it must be because you’re either a partisan hack or too stupid to understand? Just shut up and believe them...they’ve got experts on their side (and we dumb folk know that them there experts is never wrong ’bout nothin’).
 
Written By: JWG
URL: http://www.qando.net
To the people that are against the fair tax. The 20 to 30% drop in price of products come from the taxes that are embedded in the price of products coming from the bottom of the supply chain, all the way to the retail outlet. You don’t realize that Companies do not pay for their taxes. That cost is added into the price of the product in question, so the company can turn a profit. That percentage would be reflected in the price, unless you were just willing to gouge people, and that would drive your profit down, because you wouldn’t maintain your customer base. They would simply go to someone else. Also realize that wholesale products would not taxed. There would be a small if any increase in your profit on each Item. The beauty of this plan is that people would have more money to spend. When people have more money, they spend more money. They will buy more of your product and your profits would go up. If you can’t understand that concept, I don’t know what to tell you.

You are against the fair tax and that is that. No matter what we say, or how much research there is, you will still be against the fair tax. We on the other side of the debate know that this plan is much better than the current system on many levels. If that is the only flaw you can find in the fair tax system you are seriously desturbed to think that the confusing, unfair, and socially devistating system we have now is better.
How much money do you have in investments that would be taxed all to hell if you cashed them in right now. Under the fair tax the only thing that is taxed is retail items. If you take 20% off the price of those items and add 23% back to it, the new price comes out to 98.4% of the origional price. How is that not a good thing?
 
Written By: Brian Triplett
URL: http://
Dale’s point:
But Dr. Jorgensen says he wasn’t referring to consumer prices, but, again, to producer prices. And a 30% drop in producer prices does not translate automatically to a 30% drop in consumer prices. And, again, one wonders how that 30% drop in producer prices is even being calculated.
Brian responds:
No matter what we say, or how much research there is, you will still be against the fair tax.
Uh, Brian...where’s the research supporting the claims that prices will drop 20-30%? That’s what Dale looked for and asked about. Care to point out the research, or are you just a groupie who believes everything FairTax claims?
 
Written By: JWG
URL: http://
JWG,

The 20-30% drop comes from the beginning of manufacturing all the way to the retail level.

In the book it cites one perfect example of this. When the airline tax was dropped temporarily a few companies tried to maintain the prices so as to make the extra money. Soon enough one company wanted a bigger share and lowered prices. In order to compete the others did as well and a price war ensued.

When the tax was re-applied the fares went right back up again. And this is an industry with a history of financial problems.
 
Written By: Biff
URL: http://
I’ve been reading alot about how the fairtax will hurt the poor,but can some one tell me how this can be?? The poor will get a pay raise on day one, as I recall Dems have been crying for a raise to the mimn. wage for ever,well there it is.On top of that most of the poor that I know are on some sort of welfare:sec8 housing,food stamps wic,ect. They get to keep all that PLUS THEY GET THE PRE-BATE
 
Written By: steven lamka
URL: http://www.elanocorp.com
The 20-30% drop comes from the beginning of manufacturing all the way to the retail level.
We know the claim. Where are the studies that demonstrate the full 20-30%?
 
Written By: JWG
URL: http://
We know the claim. Where are the studies that demonstrate the full 20-30%?
I located a general equilibrium model study by Jorgenson in 1996 for Alliance to Save Energy, revised in 1999 using Google that implements an NRST replacing income taxes only, (without repeal of SS/Medicare that comes with the the FairTax legislation.)

http://post.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Results begin on PDF page 23 for those not fond of wading through model descriptions.

It looks to be a somewhat simplified model, in that it only takes into account the repeal of income tax replacing it with an national retail sales tax without accounting for reduction on tax related overhead costs on businesses or other factors that would occur in the real world.

However it does demonstrate the potential for the consumer’s purchasing power to increase somewhat with just the repeal of the income tax system per-se, replacing revenues one for one with a retail sales tax.

Of interest, the study compares the results for Armey/Shelby Flat Tax, and an NRST implemented as an equivalent to it in relation to the current income tax system calculating rates for a revenue neutral tax implementation.

The study clearly demonstrates the potential for a 20% drop in prices producers receive (total payment less sales taxes) in the 1st year, increasing to 30% by the 25 year.

It also shows the total price consumer’s pay (with the tax included) to fall 3% in the first year and fall up to 10% by the 25th year after implementation.

All the above with only the income taxes replaced, and no consideration of the reduction in business overhead costs that would go with any real world repeal of income taxes, not to mention that it does not implement effects that repeal of the employer’s side of SS/Medicare taxes would have in further reducing producer, and hence consumer prices.

By the way, the price a producer receives, as viewed in an an equilibrium solution of supply and demand, is what is left from the amount a consumer pays with the taxes collected with the payment for products removed.

A good description of how the amount a consumer pays for products relates to the price a producer receives in the standard equilibrium solution of economics can be found here:

http://info.wlu.ca/~wwwsbe/faculty/rwigle/ec238/ref/pe-algebra.pdf

 
Written By: JD
URL: http://
Fair Tax? Are you nuts? In simple language, H.R. 25 is a wealth based tax, meaning: the most productive members of society shoulder the burden of the cost of government and do so without a proportional representation in the determination of how their money is spent!


H.R. 25, as does an income tax, as does a flat tax, allows the spending of tax revenue to be influenced without regard to a proportional influence by those who filled the national treasury. In short and simple language, it ignores the Founding Founder’s rule of representation with proportional obligation and embraces a Marxist idea: “from each according to their ability to each according to their need“


For a full explanation see: The Fair Tax Con Artists




Regards

JWK

ACRS



P.S.


If H.R. 25 was enacted into law tomorrow, and a future Congress followed its language to the letter, would that future Congress have authority to calculate a tax from corporate income as upheld in FLINT v. STONE TRACY CO., 220 U.S. 107 (1911)? The answer is, YES! Our socialists in Congress would still be able to lay and collect a tax calculated from income just as is now calculated under the Income Tax.

 
Written By: john w k
URL: http://

 
Add Your Comment
  NOTICE: While we don't wish to censor your thoughts, we do blacklist certain terms of profanity or obscenity. This is not to muzzle you, but to ensure that the blog remains work-safe for our readers. If you wish to use profanity, simply insert asterisks (*) where the vowels usually go. Your meaning will still be clear, but our readers will be able to view the blog without worrying that content monitoring will get them in trouble when reading it.
Comments for this entry are closed.
Name:
Email:
URL:
HTML Tools:
Bold Italic Blockquote Hyperlink
Comment:
   
 
Vicious Capitalism

Divider

Buy Dale's Book!
Slackernomics by Dale Franks

Divider

Divider