Aug 032011
 

 FairTax Embedded Tax Theory.

     I once described embedded taxes as mysterious and magical.  Now, we can add elusive as a butterfly to that list. At least to FairTax.org they are. We’re going to follow the metamorphosis of the magical world of everything is perfect and beautiful, to the world of truth, where we find out that all is not well in FairTax Land.
     On the FAQs, page 1, from FairTax.org, we are told that,
“According to Dr. Dale Jorgenson of Harvard University, hidden income taxes are passed on to the consumer in the form of everything you buy.”
     But they’re not mentioned in The FairTax Bill, H.R. 25 at all.  Why not?  Because to legislate, to describe something in legal terms, you must be able to identify and accurately quantify the subject.  We can do neither with embedded taxes.  Each business is unique, and every employer will make different decisions.  Their costs and circumstances are unique.  Their profit-hunger is different.  Therefore, where embedded taxes are concerned, there are no guarantees.  Even the FairTax folks totally misunderstood Dr. Jorgenson’s embedded tax theory.
     Much of FairTax theory, rests on Embedded Tax theory as proposed by Dr. Dale Jorgenson.  Promises in the original hardcover edition (2005), say that we can have our cake and eat it too.  On page 111,  we’re promised:   “We start collecting 100% of our earnings in every paycheck.”
Over and over, in the FairTax publications, we’re promised that not only will we take home fat paychecks, but also that retail prices will fall by 22% to offset the high retail sales tax of 23% inclusive and 30% exclusive.
     But soon, the butterfly world starts to crumble, as Dr. Jorgenson reveals that Fairfax .org has misinterpreted the  research from his 1996 report before the House Ways and Means Committee,  “The Economic Impact of Taxing Consumption”.  FairTax tries to use the same dollar to both increase paychecks and reduce prices.  Dr. Jorgenson states that:
     “A more reasonable interpretation of my 1996 testimony is that workers would keep that after tax pay. Producers prices would fall (PPI, not CPI)  but retail prices would be increased by the national retail sales tax.  Any gains by workers and investors would be the result of increased economic activity.”1
      In other words, there can now be no valid promise of a fat paycheck. Many Fairtax proponents still erroneously make the claims, though. Your income and payroll taxes are at the mercy of your employer. Decisions, decisions.  Will he give you a little or none at all?  Will he keep it for himself, for stockholders, or hide it in an overseas account?  Will he use it to bring down prices, or give CEOs yet another big bonus?  No one knows for sure. 
 
1.Vance, Laurence, The Fraudulent tax, page 7, Mises Daily, October 9, 2006.
 
     From Neal Boortz himself, in his own words, from Nealz Nuze, is a version of what may really happen to your paycheck.  Finally, forced to answer critics, who were right all along, it comes with no apologies:
 
     “On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the Fairtax that could have been present with more clarity in the book;  the concept of embedded taxes and keeping 100% of your paycheck…
     “We write in the FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes.  Does this 22% include the income and payroll taxes that are paid to employees?  Yes it does. 
     When FairTax is implemented and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision.  He will either take some of the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call ‘take home pay’ before the FairTax.  The employer may also decide to do a little of both.  Either way, you can see that the amount of money you actually receive as pay — the amount you can put into your bank account — will not decrease, and may actually increase.
     On a larger scale real wages will rise to the extent to which the nation’s employers decide to return the embedded costs of their employee’s income and payroll taxes.  Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income taxes together with the other taxes on capital and labor eliminated by the FairTax.”2
     The entire decision-making process is in the hands of the employer.  How does that make you feel?  Rather helpless doesn’t it?  If like many of us, your employer is more like Darth Vader than Mother Theresa, we’re in trouble.  All along, we’ve been led to believe that this change of tax plans will put us in control, and we find that it’s the federal government and Social Security Administration who will set the rate of taxation, and our employers will decide whether or not they’ll play along and give us a little something in our pay packets, or make other decisions.  They don’t have to lower prices either.  We just lost what little control we had in this whole process, except to pray that inflation doesn’t so quickly outrun the prebate that even that poverty level assistance will be negligible.
      By the second release, paperback edition of The FairTax Book, 2006, some subtle changes were made that might go unnoticed by all but the most perceptive.  Our butterfly has performed a biological miracle.  It’s gone into hiding in a cocoon.  Boortz spins and weaves to cover the false premises made in the hardcover edition.
2 Ibid., Page 7.
 
    Using carefully sculpted language,  we’re told we’re no longer entitled to both a bigger paycheck and lower prices.   For instance, on page 59 of the hardcover edition, it says,
     “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.”
     The same paragraph on page 60 of the paperback 2006 version reads,
     “Once the FairTax takes effect, you will be in complete control of your paycheck as nothing will be withheld — and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.”
     Receiving 100% of your paycheck, is not the same as being in complete control.  It’s a subtle shift in language, found throughout the paperback, to try to cover for the total misinterpretation of Dr. Jorgenson’s theories.  Laurence Vance gives many such examples in his article, The Fraudulent Tax, on mises.org.
     In the latest release, FairTax: the Truth, 2008, pages 75 through 79, make for very interesting reading.  Our cocoon has become an insatiable, prickly little caterpillar, spinning scenarios to explain all the myriad of decisions your employer will have to make about your former tax contribution.  Remember when we were promised  in the perfect butterfly world that we would be in control?
     Where, on page 76, they come up with 50% more pay is beyond my mathematical imagination, unless they’re using a 35% bracket, which is a bracket where most don‘t get paychecks, they give them.  It’s just another attempt to lure people into thinking there is some magical windfall. Even then, 35% plus 2.9%  Medicare taxes (above  $106,000 pays no more social security taxes)  equals 37.9%.  It sounds llike a way of getting support for a tax plan that is designed by billionaires to benefit billionaires.  But even they need the votes in Congress to enact this and the support of the people to urge their congressmen to pass it.
     On page 75,  Boortz presents one scenario for the future under FairTax:
     You would still only have your old take-home pay.   “…you’d be neither harmed nor helped by the implementation of the FairTax.”  “Your employer would save by reducing the cost of your employment by an amount equal to the money he would normally have withheld from your check for federal income taxes, Social Security taxes, and Medicare taxes, and he could  pass that savings down the line.  Eventually this would lead to a reduction in the price of whatever product or service you’re involved in creating.” 
     The truth now is exposed, that having both a whole paycheck, and reduction of prices by 22% is not possible.   It even hints that the employer might decide to do something different with that savings, with your tax monies.  Might he give bonuses to managers, send his CEO a bonus, pass it along to stockholders or do stock buyouts, use it to launch further overseas companies where there are no child labor laws and few or no regulations at all?  As you will see later, that is exactly what has been done in other experiments like FairTax!
     This doesn’t sound like the promises of old does it?  It also lets you know that this will be a decision for your employer, not you. 
     On page 77, Boortz says:  “When we first started this FairTax journey, we felt certain that all employees would be willing to stick with the same take-home pay that they have today and allow all of today’s tax payments to be removed from the price of goods and services that they produce.  Well, we’ve been on the road for 2 years now talking to you at speeches and book signings, and we have learned the shocking truth:  You want to keep your money. All of it. You worked for it, you earned it, and you want to keep it.   You often don’t trust your employer to do the right thing and lower the price of goods.”
     What a fairy tale that one is.  When were we ever told anything from FairTax.org  that didn’t sound like we could have our cake and eat it too?  Even in the current on-line version of The Thumbnail sketch on FairTax.org., they still say, “Americans take home their whole paychecks.  Not only do more Americans have jobs, but they also take home 100 percent of their paychecks…”
     They have not keep abreast with all the changes and admissions from FairTax: The Truth, 2008.  So people read this and make a false assumption.  Boortz just told us that there is no guarantee of what your employer will decide to do.  FairTax volunteers are also still spreading these untruths.  In a local Scene Magazine published in Brooksville, Florida, the volunteers promise a worker that he’ll take home $1000 more in his paycheck each month.  There is no way that anyone can make that promise, and it’s cruel and dishonest to delude people into supporting a tax plan with falsehoods.
     From FairTax: The Truth 2008, by Linder and Boortz:
     Under their second scenario, a magnanimous employer decides to give you even the matching portion of payroll deductions (not very likely) so that you have a big paycheck.  “the fact that you haven’t reduced the price of your labor to your employer by an amount equal to your reduced tax burden would mean that your employer  wouldn’t be able to pass those particular tax savings down the line.”  So it’s as if they’re saying “shame on you for wanting to survive with a chance to get a little ahead.”   
     They tell us prices won’t be reduced much if at all.  So this means for an average worker in the 15% bracket (FairTax.org FAQs tell us that’s the most common bracket), it means you might potentially have that plus your 7.65% contribution in payroll taxes, for a 22.65% extra in pay.  If you work for a Saint, who decided to give you their own contribution too, however unlikely that might be, it would still only account for 30.3%.  But under this scenario, when you make any new purchase, or use a service,  you’ll be charged a tax of 23% inclusive or 30% exclusive so any savings become a wash.  What about the prebate you say?  Well that is only on necessities up to the poverty level which isn’t very much.  For a married couple, it would barely cover the new sales tax on health insurance. Everything else for the month would be subjected to a new sales tax.  The prebate for a single is only about $200 a month.  If your rent is $800 a month, there goes your prebate, and you haven’t even gotten to the grocery, paid your utilities, paid the babysitter, gotten gas…
     Then, Boortz gives us a third scenario, that admits it might be a combination of the two.  You might get more pay, or not.  You might see lower prices at the retail outlets and for services……or not.  Nothing is guaranteed.  Nothing is sure. 
     Thomas Jefferson, speaking of the Constitution, wrote:
     “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.”  We’d like to be able to say that we could bind them down with the chains of H.R. 25, but it really has no chains.  Can we someday, hold a radio talk show host and retired congressman responsible when our worst nightmares about FairTax come true?  
The bill itself does not make these promises.  It just keeps the government funded to the amount the government itself sets for its needs.
     Then Boortz  tells us on page 78, “Any real increase in the price of goods and services would be offset by corresponding increases in the amount of money we take home from our jobs.”  So we go to all this trouble and expense to change our method of tax collection, running two tax agencies simultaneously for over four years, just to get the same basic results for the average taxpayer?
     I’m sure, that the last picture Boortz paints in this conjecture, on page 79, is the one that has occurred to most any real wage earner in the real world.  This is the one where your employer “would simply keep their prices where they are, even after implementing the FairTax– trying to reap the extra profits that would come after the embedded taxes fall away.  To be honest, even your coauthor (the loud one) was worried about this before the publication of our first book.”
He still needs to be worried about it, because we have results from a real world experiment by the George W. Bush administration.  In 2004, Congress enacted the American Jobs Creation Act, to drop corporate taxes to 5.25% to bring home the jobs and the dollars sheltered offshore.  The promise was a failure.  Eight hundred companies took advantage.  It lured $312 billion back to the U.S..  The biggest winners were Pfizer, Honeywell,  and Hewlett Packard.  But 92% of that money was returned to shareholders, dividends, stock buybacks, bonuses and whatever the corporations wanted.  They promised reinvestment to create American jobs.  It never happened.  There were no chains to bind them.  Where large corporations are concerned,  profit is the law of the land, so don’t expect anything to be gratuitous except that rare Henry Ford type who comes along now and then, who might really care if his workers had a life too. The non-partisan National Bureau of Economic Research concluded that the program “did not increase domestic investment, employment or research and development.”  Many companies continued to shift profits overseas and develop business there, because even with lowered taxes, we cannot at this time compete with far fewer regulations overseas and in essence their serf/slave labor rates.
     Huge corporations like Google, Apple, Pfizer and Duke Energy (where FairTax founder Leo Linbeck, Jr. sat on the board),  are once again forming a group called WIN AMERICA, to get their tax rate dropped to 5.25%, to bring their business and dollars back.  It’ll cost us. It’s in the nature of tax amnesty programs; some 80 billion dollars this time. Just one time don’t you wish congress would drop our personal income tax rates down to 5.25 %?  Now that would be real tax reform, but then they’d have to cut spending…. 
     Corporate tax amnesty has been tried many times, with the same results.  What makes us think we’ll get different results when we give them no corporate taxes under FairTax?  The definition of insanity is doing the same thing over and over and expecting different results. (Albert Einstein)
 
     According to the Brookings Institute, “Many other countries have attempted to implement a national retail sales tax or variants of such a tax…
Almost all of these countries have ended up with value-added taxes (VATs).”
Nineteen countries since 1967 have had some form of national retail sales tax.  By 1995, all nineteen had converted to VATs, partly because there is less fraud connected to the taxing at each stage of production than in a high sales tax that can be easily  avoided.  The FairTax relies on 100% compliance, which is not in the realm of reality.  States only expect 50% compliance on their sales tax.  
     That is probably why so many reputable sources, including the President’s Advisory Panel on Federal Tax Reform 2005, felt that the FairTax had underestimated it’s 23% inclusive 30% exclusive rate.  The lowest correction they give is 34.9%, but it could be much higher.
     On page 50 of FairTax: The Truth, Ireland is lauded as a wonderful example of what can happen when a country lowers its corporate tax rate by 40% and reforms its tax system.  Boortz maintains that their economy exploded.  I guess you already know the rest of the story. They didn’t control their spending and now they have 98.4% GDP, and are on the verge of economic collapse.
     Most countries who have tried national sales taxes try for much lower rates, as 10% seems more reasonable to most folks resulting in far less evasion.  The few countries who have tried  rates much more than 10%, like Iceland, Norway, South Africa, Sweden, and Zimbabwe, have failed.   None of them currently maintains such a tax.3
     This article lists three reasons for failure of national retail sales taxes:
1. Retailing is the weakest link in the entire production chain.
2. If a retailer evades the tax, the full tax on the sale is lost under a retail sales tax, but only the tax on value added at the retail level is lost under a VAT.
3. There is no paper trail with a sales tax.  Evasion is thought to be less when there is an employer as the third-party reporter as in income tax or stages in VAT.
     Since FairTax makes no provision for evasion at all, you can be assured of a higher rate immediately to raise the amount needed by the federal government.  Again, Einstein’s definition of insanity comes into play again when we realize how many other countries have failed at a national retail sales tax.  We,  of the Tea Parties should be using our efforts to pressure Washington to reduce spending, instead of endlessly arguing a  hopeless tax plan. 
 
 3The Tax Policy Briefing Book, Tax Policy Center, Urban Institute and Brookings Institute , National Retail Sales Tax : What is the experience of other  countries? page 1                                                                                       
                                                                                          
 Shirley and Pat Miketinac
      July 4, 2011
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