Mike Huckabee's Fair Tax Fallacies
News: Huckabee says replacing all federal taxes with the fair tax "will be like waving a magic wand." Actually, its economic benefits are nothing more than an illusion.
December 13, 2007
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As Mike Huckabee travels the country trying to build on his momentum in the Republican presidential race, he claims he has a plan to ease the tax burden on all Americans and abolish the universally loathed IRS.
Huckabee's IRS killer is the "fair tax," a policy idea originally thought up in the mid-1990s by the Texas-based Americans for Fair Taxation. The concept behind the fair tax is simple: abolish all federal income taxes and replace them with a national consumption (a.k.a. sales) tax that states will collect and forward to the federal government. According to Huckabee and other fair tax supporters, this setup would ensure a fair, progressive, and fiscally sustainable tax system that would foster economic growth—all while letting Americans take home 100 percent of their paychecks.
These are bold promises. But behind the rhetoric, the fair tax is an uneven policy built on a slew of hidden equivocations.
The fair tax is often confused with the flat tax, but the two are very different. The flat tax is about setting one income-tax rate for everyone, regardless of what she earns. Fair taxers want to scrap the entire federal tax system. Payroll taxes, corporate taxes, capital-gains taxes, the estate tax, you name it—all gone. In their place would be a national sales tax of 23 cents for every dollar spent on a new purchase.
Supporters of the fair tax say that this amounts to a tax rate of 23 percent; but it's really more like 30 percent. As is currently understood, a $100 good with a 30 percent sales tax is promoted on the shelf as $100 and is sold at the register for $130. Under the fair tax, the list price and the register price would be the same—$130. The retailer would give 23 percent of that $130 to the government. But the math works out the same: The retailer keeps $100 and the government collects 30. The consumer, therefore, has actually paid a 30 percent premium despite the fact that the fair tax itself is nominally—and misleadingly—listed at 23 percent.
Fair tax math isn't completely disingenuous. It just doesn't square with how we currently think about sales tax. Advocates claim that they use a tax-inclusive rate because today's income taxes are tax-inclusive. Opponents say that this is irrelevant—we still need to talk about sales tax consistently or risk misleading the public.
Other fair tax fundamentals are just as unclear as this basic issue of tax rate. Consider this essential question: Does the fair tax impose a higher tax burden on those who are richer (making it progressive) or on those who are poorer (making it regressive)? Sales tax is traditionally regressive because the less money you make, the larger share of it you lose to spending—and thus a sales tax hits a greater proportion of your income.
Fair taxers offer a solution to this problem through "prebates," monthly government checks sent to every household in the United States. At the end of the year, a household's prebates would add up to 23 percent of the poverty line for that household size. For example, a couple with two children would have received $6,297 in 2007, according to Americans for Fair Taxation. Since the prebate would cover taxes for those who spend less than or equal to the poverty line, Huckabee and company argue that the fair tax is progressive.
But according to Department of Labor data for 2006, households at every income level spend more than the poverty line. For spending beyond the poverty line, that is, over the amount that prebates cover, regression kicks back in. The average American family that makes less than $70,000 a year spends more than it earns, and a prebate wouldn't do much to make up the difference. Meanwhile, the average family that brings in more than $150,000 spends barely more than half of what it makes. Sure, the wealthy would pay more in total taxes because they're spending more money. But middle-class families that spend more than the poverty line and most, if not all, of their income would still get hit hardest. The fair tax is regressive for everyone but the destitute for whom the prebate would be enough.
The progressive/regressive issue isn't the only elaborate balancing act surrounding this policy proposal. Supporters insist that the fair tax is revenue neutral, meaning that under the fair tax the federal government would bring in exactly as much money as it does today. Skeptics argue that this is mathematically impossible. A 2005 President's Advisory Panel on Federal Tax Reform study concluded that it would take a 34 percent tax-exclusive rate, not the fair tax's 30 percent, to keep the fiscal status quo. Brookings Institution economist William Gale has pegged the magic number at 39.3 percent. It could rise even higher if consumers seeking to avoid the high sales tax develop a strong black market that sucks money out of federal coffers. Buying in Canada or Mexico would have the same effect.
Combating that black market and keeping tax payers honest in the collection of their prebates would likely require a tax-enforcement agency that would resemble the IRS. The hated taxman that Huckabee invokes would not be dead.
