I want to disclaim at the beginning that I am no tax policy expert. Yet, I think that the concepts argued for and against the “fair tax” as proposed by Mike Huckabee are simple enough that most people should be able to understand them.

Mike Huckabee describes on his campaign web site his version of the Fair Tax:

When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness.

The FairTax will replace the Internal Revenue Code with a consumption tax, like the taxes on retail sales forty-five states and the District of Columbia have now. All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities. That means people below the poverty line won't be taxed at all. We'll be taxed on what we decide to buy, not what we happen to earn. We won't be taxed on what we choose to save or the interest those savings earn. The tax will apply only to new goods, so we can reduce our taxes further by buying a used car or computer.

Our current progressive tax system penalizes us for working harder and becoming more successful. As we climb the ladder, the government lurks on each rung, hungry for a bigger bite out of our earnings. The FairTax is also progressive, but it doesn't punish the American dream of success, or the old-fashioned virtues of hard work and thrift, it rewards and encourages them. The FairTax isn't intended to raise any more or less money for the federal government to spend - it is revenue neutral.

There are a lot of different points to be made. Easily dismissed is the claim that the Fair Tax will release us from pain and unfairness. Such a silly claim gets at the unseriousness of the Huckabee campaign in general. More substantively, only six countries have ever adopted retail sales taxes at rates of 10% or more; none do now. 58 Fla. L. Rev. 1043, 1048; Joel Slemrod, Presentation to the President's Advisory Panel on Federal Tax Reform: The Costs of Tax Complexity (Mar. 3, 2005), available at http://www.taxreformpanel.gov/meetings/ docs/slemrod 03032005.ppt.

Huckabee next says that all will get a monthly rebate for purchases up to the poverty line. This argues against one of the main points that he promotes in arguing for the Fair Tax: administrative ease. Huckabee has argued for abolishing the IRS, but it seems that he would have to replace it with some other agency by which to mail out every American’s monthly rebate check. The type of money being passed through the mail would also invite all sorts of criminal behavior (remember how well the debit cards went after Katrina?).

Huckebee also says that the Fair Tax will create positive incentives for saving. That is probably true. Through a combination of zero tax on savings and the dramatic increase of goods after the Fair Tax is enacted, people are likely to refrain from spending. The Fair Tax creates the incentive to withhold income from being put back into the economy. How this will affect the economy only an economist could predict, but the incentives seem to lead to a slowing of the economy as people withhold their dollars from the marketplace. However, eventually, even savings will be taxed as they are spent. The savings argument is misleading because it really only marks a delay in taxation, not an abolition of the tax on savings.

Huckabee argues that both taxes are progressive. However, the Fair Tax is difficult to make progressive. Since the tax applies to all at the point of sale, regardless of economic status, it would generally appear to be either a flat or regressive tax. The single rate of taxation on purchases hits low-income people harder than high-income people because the purchases are a larger proportion of the low-income person’s wealth. Higher income people are able to save a larger portion of their earnings. Thus, even with the rebates he proposes, for anyone above the poverty line, the tax is regressive. To make it progressive, Congress would have to add in additional complexity Graduated tax rates, differential rates, or higher rates all would lead to increasingly complex taxpayer behavior and legislative and administrative responses. 88 Calif. L. Rev. 2095, 2141.

In sum, and these certainly aren’t all the points to be made about the Fair Tax system, the Fair Tax likely does little to improve the current tax system and likely does harm. It does little to improve the complexity or administrative burden. It only shifts the time of taxation from when it was produced to when it was consumed. Finally, it likely dulls economic growth by creating a disincentive to spend.

Beyond its inherent political impracticability, the Fair Tax should be rejected. The better alternative, and the more realistic one, is the one Mitt Romney has proposed: lower marginal rates, end the death tax, end taxes on savings, and lower corporate taxes. These things combined will do more for the economy and the nation than the enactment of the Fair Tax.

Labels: fair tax, mike huckabee, Taxes