Mike Huckabee's Fair Tax Fallacies
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Fair tax supporters, some of whom are economists at distinguished institutions like Boston University, have not been shy with rebuttals. They counter that the 2005 study didn't factor in the elimination of payroll, corporate, and estate taxes and that Gale didn't account for sufficient economic growth. It's almost impossible for nonexperts to decide who's right. But sometimes the lack of consensus itself is telling. Revenue neutrality is no sure thing.
Economists do, however, generally agree that the fair tax can spark economic growth. Without income taxes there's no need for tax shelters, so the United States should see an inflow of capital from international accounts. Getting rid of corporate income taxes should also attract more companies to set up shop in the U.S. With fewer tax-administration and compliance worries, businesses can work more efficiently. And because the fair tax only taxes money spent, savings would probably increase.
For these reasons, pro-fair tax economists predict a GDP growth of 10 percent within the first five years of the national sales tax. They may well be right. But supply-side economics also promised universal prosperity through tax reform and the results have been, to put it kindly, underwhelming.
There's also a flip side to the fair tax economic utopia. The transition to tax-inclusive pricing would increase every price tag by 30 percent, potentially reducing consumption via nationwide sticker shock. There may be a drop in transactions that are untaxed today but would be taxed under the fair tax, like medical care, legal services, and new home purchases. And since the fair tax only affects federal taxation, some of us would still have to pay state income and sales taxes, meaning our wallets may not be as full as optimists suggest.
Still, this idea of having more money in your pockets is probably the most powerful economic selling point of the fair tax. Time and time again, fair tax supporters say that without income taxes workers will keep 100 percent of their paychecks. But once again, this is only half the story. With no income taxes, employers might be tempted to pocket what would have gone to income taxes, perhaps paying new hires less than they would have in a pre-fair tax world. Retired Americans, who have earned all the money they will earn and have paid taxes on all of it, will still face the high sales tax—in effect, they are taxed twice.
Though it promises simple solutions, the fair tax is incredibly ambiguous—which may be why Huckabee is such a big fan.
Of all the candidates, Huckabee has the most to gain from touting a tax package that claims to be all things to all people. As governor of Arkansas, Huckabee cut taxes 90 times, reducing state revenues by $378 million; but he also brought in more than that through 21 tax increases. At the start of Huckabee's administration, in 1998, Arkansas' state budget was $10.4 billion (adjusted for inflation); by 2006, it was $15.6 billion.
With such a seesaw history of taxing and spending, Huckabee has had a rough time with the conservative base. No lesser authority than the Club for Growth has said that a Huckabee nomination would be an "abject rejection of the free-market" and Grover Norquist has called him a "serial tax increaser."
But the fair tax gives Huckabee an out. He can trash the IRS and appeal to populists, corporate interests, and the superrich without forcing himself into a corner. He can talk tax reform without talking tax cuts. And by supporting prebates and revenue neutrality, Huckabee has wiggle room to distance himself from antigovernment radicals in the general election.
It's fitting that the main champion of the fair tax is someone so eager to gloss over his fiscal record. In many ways, the fair tax is Huckabee's tax policy soul mate: a slickly packaged pretext of straightforwardness that masks deep contradictions.
Niko Karvounis is a Program Assistant at The Century Foundation in New York City where he works on issues of economic inequality and health care.
