Fair Tax? Huckabee's win in Iowa requires more discussion of his tax proposals

Mike Huckabee won the Iowa Republican caucuses last night, as certainly most everyone knows by now.  Many may not realize, however, that Huckabee has taken a position in favor of the so-called "fair tax" (a national sales tax, which is claimed to be feasible at a 30% tax-exclusive rate) and also claims that adopting a national sales tax will permit abolishing the IRS.  His website proclaims the possibility of an IRS "going-out-of-business sale."

For background information, you can see various earlier "consumption tax" posts about the issues here, and in particular my most recent post on the "Fair Tax" at this link.

The problems with the tax reform Huckabee supports are legion.  The rate is unrealistic (even when expressed appropriately as a tax-exclusive 30% rate rather than as a 23% tax-inclusive rate).  It would have to be much higher to account for the many items that won't be taxed (imputed rents, government expenditures), the rebates for a poverty-level consumption, the "reimbursements" to states to act as the federal tax collectors, and the loss from non-compliance by taxpayers and by withholding agents. 

The idea of abolishing a federal tax agency is unrealistic.  States cannot be forced to be the federal tax collectors, and their taxes are quite different from the proposed tax, so something will have to give.  Most likely result--a new federal IRS-like agency that works on sales tax issues, audits, collection and enforcement to replace the current federal IRS. 

States also are likely to increase their use of income taxes.  So we might (might but likely not) get rid of the income tax in order to have a consumption tax (more likely we'd add a consumption tax component to federal taxation).  But states would likely (probably) increase their reliance on income taxation.  The result would be increased audit and enforcement issues at the state level, replacing possibly somewhat laxer audit and enforcement issues at the federal level.  Not much of a gain for individual taxpayers.

Sales taxes are regressive.  Income taxes can be (and ours is) progressive.  The majority of Americans have long supported progressive taxation and have recognized that it is unfair to expect lower-income families to bear a  proportionate share of the tax burden.  The "fair tax" supposedly deals with this through rebating a poverty level amount to every single household (even Bill Gates would get one).  But that's both arbitrary and complex.  Children don't count for as much as adults.  Single parents get the shaft compared to married couples. The amount won't cover real needs for poor and almost poor families since the poverty threshold is a 1960s number that doesn't really cover today's needs. 

And the transition problems are enormous.  People who've saved under one system would be taxed when they spend it under the new system, unless some kind of very complicated tracking system were initiated. Either fairness or simplicity would be thrown out the window, no matter what.

Of course, Huckabee doesn't get the description of the "fair tax" right, even given what the "fair tax" purports to be.  He says, for example, that it is a tax on wealth.  Not so.  It is a tax on expenditures (consumption).  (He says that later too.)

So did Iowans just not understand what Huckabee was talking about?  Or did he just come across as folksy and down to earth, so they voted for that?  Or did his use of his "Christian conservatism" win the day for him (see his website about his belief that faith belongs in politics)?  I suspect it was some combination of all three.  And each one of those possibilities is very disturbing.  The first means that Americans continue to be too darned ignorant about policy issues that really matter.  The second means that Americans learned nothing from the disaster of the Bush presidency, when a "good ol' boy" from Texas was elected with almost non-existent credentials for leading a superpower mainly because he projected a "just one of the folks" image (which was put on for the cameras--he's a rich kid, after all).  The third is very worrisome--religion has taken an unprecedented role in public affairs under Bush, and Americans don't seem to heed the lessons that our founders paid particular attention to--that governments should stay out of religion and religion should stay out of government.

I'm crossing my fingers that this was a fluke and that Americans will know better than to buy this kind of tax hokem as the symbol of the regime change we need.

Note (added 1/7/08):  See Tom Redburn, Huckabee's Tax Plan Appeals, But Is It Fair?, NY Times, Jan. 6, 2008.

Comments

[Denver]

I'm sorry, but your post is simply ridiculous. You don't seem to quote any reliable sources for your highly opinionated views, and you speak in direct contradiction to a significant amount of research into the topic. You may want to pay a visit to fairtax.org, where you will find numerous articles, papers, and studies by some of the nations greatest economists and research teams which effectively call your disagreement ignorant and biased at the least. You will also find many references to even more study and research which prove the same plethora of points.
Or, you may wish to research the growing number of nations world-wide which are implementing consumption taxes similar to the FairTax, and the great success and economic boost those countries are attaining as a result.

Finally, to quote the First Amendment to our Constitution, part of the Bill of Rights: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances."
This says *nothing* about religion staying out of government, or really even government staying out of religion. It simply guarantees that the tyranny of the British government (and others) which forced or preferred one religion over others will *not* be repeated in this country.

Friend, I recommend that you read up on your history, starting with our Declaration of Independence and Constitution, both of which place an emphasis on religion and it as a cause for our country's very existence. You might perhaps visit http://chaplain.house.gov/archive/continental.html and read what was prayed at the first meeting of our Continental Congress.

Become an expert in the facts instead of quoting simply from your beliefs or convictions.

[LindaMBeale]

"Denver"'s comment is typical of many proponents of the so-called "fair" tax. It relies on the "experts" and misleading studies at fairtax.org, its author apparently claims to be an expert himself and makes an ad hominem attack on the blog author for lack of source materials while presenting the commenter's own opinions as fact and claiming to have the right interpretation of constitutional provisions that have been much debated over time, based on claims about historical reading and a chaplain's office for a religion clause interpretation.

In fact, I provided a link to my last commentary on the "fair" tax, and noted that a number of previous posts about consumption taxes that discuss the pros and cons (and include substantial source materials) are on my blog.

As far as "the growing number of countries worldwide" using consumption taxes similar to the "fair" tax, Denver is confusing apples and oranges. Many countries do use a VAT (value-added tax) as a SUPPLEMENT to an income tax, but that is not the same at all. The VAT is immensely different from the "fair tax", as Bruce Bartlett has written (see earlier A Taxing Matter post), and its use as a supplement (making up for noncompliance and adding a consumption element) is quite different--in progressivity, administrability, and overall revenue generation--than relying solely on a consumption tax for government revenues. A VAT is also very different from a national retail tax as proposed in the "fair tax" proposals, since it is collected at many points from raw material to final consumer purchase, rather than collected solely by the retailer who sells to the ultimate consumer. that means compliance (while an enormous problem for the VAT) is much less of a problem for the VAT than it would be for the "fair tax."

A few countries have also adopted a flat or quasi-flat tax. They are very small countries with enormously different economies, compared to the US.

I've done a considerable amount of historical reading myself about the religion clauses. I'll try to do a regular blog entry about religion and tax (and religion's role in the public sphere) sometime soon. In the meantime, suffice it to say that the contrast between John F. Kennedy's speech about his Catholicism and the Huckabee posting about faith in politics is monumental and worrisome.

Rants like Denver's are a disturbing part of the political discourse. When proponents of a theory cannot talk about it without such rants, it means that they are so committed to an idea that they are not willing to listen, absorb new information, and make rational decisions. Again, a very worrisome trend .

[Scott]

Let's talk about progressive. Undser our current Income tax based system, the "poor" still have to payroll taxes (7.65%). Under the fairtax, they pay zero taxes up to the government defined poverty level. This sounds pretty progressive to me.

[LindaMBeale]

Scott, you are implicitly making several assumptions that don't hold for the "fair tax" as proposed. One assumption underlying your comment is that it will fund government programs adequately. The tax as proposed won't raise enough money, and the tax at a higher rate sufficient to do that won't work. Another assumption is that the "no tax" threshold is appropriate. In fact, the "prebate" program of poverty-level rebates to everyone will be both difficult to administer and unfair. It won't really provide a sufficient exemption to provide a decent standard of living because, as I noted in the blog, the poverty threshold is arbitrary and has little to do with what families of different sizes require to have a decent standard of living. And it won't make the tax progressive. It will simply provide those at the very bottom with some small amount of security. Those at the very top--with incomes of $200,000 a year and above--will be the chief beneficiaries. Their taxes would be reduced. The middle class--$30,000 to $100,000--would see considerable increases in their taxes. (These trends might be exacerbated by corresponding changes in state taxation or might be somewhat ameliorated if states respond with more progressive income tax rate schedules.) Government programs currently give back to lower-income Americans in various ways, including the earned income tax credit, medicaid, and other benefits. One of the goals of many of the proponents of "fair tax" "reforms" of the tax system is a desire to shrink government. And the shrinking is usually intended to be aimed at the "entitlement" programs that help the elderly and the poor. The elite have enormous influence over those issues, and skew the system to favor themselves. Read David Cay Johnston's newest book "Free Lunch" and Sullivan's "Gotcha Capitalism" for a view on these issues.

[Robert, The Issue]

The debate is going strong.
Many want minor adjustments to be made to our progressive taxation system to attempt to fix what so many feel is broken, tough I'm not quite sure that is the case.
The fair tax is definitely at the forefront of the debate relating to Huckabee's campaign, and objectively speaking is the fairest model. Unfortunately, no one seems to able to agree on what the ramifications of such a drastic overhaul would be on the economy. Many have their own predictions on how the new system would affect the poor. Questions remain unanswered...
TheIssue.com has a very interesting feature that highlights the different s perspectives of this new proposal (link below).
Feel free to post comments and let us know what you think.

[LindaMBeale]

Robert,
Your claim that the "fair" tax is the fairest is simply not founded in fact. It is regressive and will give the biggest tax cuts to the wealthy and increase taxes significantly on the middle class. Further,the experts aren't confused about this. Only the dogmatic proponents of the proposal think it can work, and they do so by ignoring the clear contradictions within their proposal and unworkable aspects of their proposal. Almost every economist and tax lawyer who has looked at it seriously considers it clearly unworkable.

[Robert]

Linda:
I am not in any way arguing that the "fair" tax is something that I think should be implemented. By all means it has its fair share of flaws-- keep in mind that so does our current system.
My point from an objective stand point was that on paper it actually is a very 'fair' system. I mean come on, don't you think that it makes sense that we all get taxed the same amount? X should not be penalized more to take care of Y and Z? In that sense the fair tax system lives up to its name. Realisticly though, this practice would not be pratical and it definitely is not progressive.
I understand that we live in a society and with that we as individuals have certain obligations when it comes to our fellow neighbors. I am also very aware of our history therefore I know that the "have nots" outnumber the "have lots" and that the disparity between the two is not only as a result of hard work.

Robert
The Issue | www.TheIssue.com

[LindaMBeale]

No, Robert, I do not think that fairness applies if "we are all taxed the same amount", by which I assume you mean a flat percentage of each person's income. Fairness is a more nuanced concept than that suggests. An income tax seems fairest because it is based on ability to pay, and a progressive income tax seems fairest because it recognizes that every dollar counts to someone who lives in poverty and a dollar is close to worthless to a multibillionaire. So fairness demands that a multibillionaire pay a heck of a lot more than a homeless person. This is especially true in a society such as ours where the elite have for years been the ones setting the laws and many of those laws, not unsurprisingly, work for the benefit of the elite. So a progressive rate structure is much fairer than a flat rate structure.

On top of that, the "fair" tax is on consumption only. So the elite, whose main source of income is investments, will only pay tax on the portion of income they consume (and the assumption underlying the various fairness consumption tax theories that everybody consumes all their income in their lifetimes is obviously meritless). Since the elite consume a much smaller proportion of their income than do the poor or even those in the middle, the elite will pay a much, much smaller share of their income in tax than the middle class. The distribution of the tax will change, compared to the income tax, drastically favoring the rich and disadvantaging the middle class (and, actually, also the poor, because the prebate system has all kinds of flaws as well--like the fact that most truly poor have no bank accounts to cash checks, etc.).
The "fair" tax, in other words, is anything but.

As far as our current system goes, I think its flaws are overstated by those "think tanks" pushing for their particular brand of reform. The income tax works amazingly well for the vast majority of taxpayers. It is not all that complicated and it is reasonable and fair. It is complicated for sophisticated taxpayers, but my response to that is--so what. It is complicated for them because they tend to be the ones who try to hire sophisticated tax advisers to game the system.

Of course, it isn't perfect, and the political exigencies of the day often lead to not so good decisions and extraneous propositions included in the income tax that would be better dealt with elsewhere. At this point we are conducting energy and environmental policy almost entirel through the Code and that means we are not doing the best job of either. But let's face it--all of that will occur no matter what the tax system is, because the tax system is a product of the political system in which it is placed.

[Alan Lidstone]

Is the Fair Tax Good for You?
The implementation of the Fair Tax is predicated upon all active businesses entities, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships, reducing their prices for services and new products by 23%.

It is also predicated upon a Federal sales tax of 30% being imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of services (including medical, legal, and insurance) and new products (including houses, food, and prescription drugs).

Business entities and investors will be exempted on paying the Federal on any new products or services constituting part of the business activity.

The Fair Tax proposal is defined as being "revenue neutral" in that it will take in the same approximate amount of Federal sales tax revenues as comes in from the existing business income taxes, payroll taxes and personal income taxes.

Shortcomings to the average working American appear to be that:

(1) NO GUARANTY OF PRICE REDUCTIONS: It appears to be intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors, not the customers or employees.

There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus to offer Medicare Part C over and above what Medicare was already obtaining from the healthcare industry for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

It appears that the preponderance of profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST WORKING AND RETIRED AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the Middle Class, retirees, and children.

(3) If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

The net result is that all Americans (children, working, and retired) will be paying a 30% tax rate on services and new products from the hospital bill from their birth to their casket when they die.

CONCLUSION: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It is also disastrous to Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes).

In addition, State and Local governments will have to increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will have less income available to provide services.

In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in wage increases or reduced prices for the products and services they sell.

[Ian from Ann Arbor]

I've delineated some research conclusions over at Slate ( http://snipr.com/fairtaxslate ). Additionally, Dr. Kotlikoff has recently published a rebuttal to yet another Bruce Bartlett diatribe ( http://snipr.com/bbrebuke ).