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November 29, 2007
Mike Huckabee's FairTax Proposal Is Crazy
by Nicholas Beaudrot of Electoral Math
Let's be very clear on this: Mike Huckabee's claim that he would "abolish the IRS" is bunk. "Abolishing the IRS", of course, is the purported effect of enacting the "FairTax" proposal Huckabee supports. This would replace the income tax with a national sales tax. But you would still need a bureaucracy to enforce the sales tax! Business owners aren't going to be willing to hand over 30% of the cost of goods sold [the tax rate you would need to have a revenue neutral sales tax] just because they're a bunch of really swell people. In addition, a sales tax of that magnitude is terrible economics. The FairTax idea is beyond silly, and in the unlikely event that Huckabee is the GOP nominee, right-of-center economists will be committing professional malpractice if they don't rise up en masse to debunk this malarky. Bruce Bartlett provides a good template: "In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it."
Frustration with the complicated nature of the tax code is a reason to simplify the tax code, not to enact some crazy regressive tax scheme that would have the side effect of creating a massive informal market in untaxed goods. You could have an income tax that computed your tax liability based on a seventh degree polynomial that you could fill out on a post card, so long as the only input is "How much money did you make last year?". Instead, our tax code asks you how much you made from working, which is treated differently from money earned from interest and dividends, which is treated differently from capital gains. And then we start asking how much you gave to charity, how much you spent on health care, how many kids you have, whether any of them are in college or require child care, whether you bought a hybrid car, etc. ad nauseum. In addition, all these nickel-and-dime deductions and credits end up forcing the government to increase its overall tax rate on the income that is taxable. It makes you have a lot of sympathy for the "broad base, low rates" position that used to be the mainstream position in the Republican party.
November 29, 2007 | Permalink
Comments
You could have an income tax that computed your tax liability based on a seventh degree polynomial that you could fill out on a post cardExactly, and simplifying the income tax has nothing to do with how many tax brackets there are. There could be an infinite number of tax brackets (in fact, that would probably be slightly preferable to having the sudden jumps), and it wouldn't make the tax calculation any more complicated for any filer. It would affect only the tax software and the calculation of the printed tax tables.
Posted by: KCinDC | Nov 29, 2007 5:53:41 PM
Well, one advantage of a sales tax or VAT is by taxing businesses, we can eliminate the huge government bureaucracy dedicated to policing INDIVIDUAL income tax, which includes invading individuals' privacy, forcing them to keep records and to incriminate themselves, and forcing them to pay tax preparers to fill out complicated forms.
This is one part of the tax fairness debate that I don't think enough liberals grasp-- progressivity is not the ONLY virtue of a good tax system; you want one that doesn't force onerous demands on the average individual as well.
Posted by: Dilan Esper | Nov 29, 2007 6:36:59 PM
Actually your gist is a fair bit off as well. It could lead to the end of the IRS.. it would need to be replaced, but that is a much simpler task then you allude to in this piece.
1. Most states in the US have sales tax alread. I am accutely aware of this having lived in 2 that dont, and owning a business in 1 that does. So in all but those 5 states the mechanisms are already in place for taking the revenue. All that remains is a formula, and a mechanism for sending it on to the federal govt.
2. Businesses are much simpler entities to enforce tax law on, most especially with sales tax, then individual citizens. With the exception of internet 'freelancers' (ebay) most businesses have licenses and other paperwork at the state and local level that nail them down to a specific address. MOST people do as well, but not all, and leaving a false address or ID is much simpler for an individual then a company.
3. Sales tax is dirt simple compared to federal income tax.. at least in washington. x percent of receipt sales.. see if you meet any of a handful of small rebates and your done. (small business, soda syrup are a couple of rebate examples.)
For a financial guy this review was pretty darn simplistic. I would have expected a deeper review, and maybe even an insight into a possible better alternative.
Posted by: david b | Nov 29, 2007 6:41:16 PM
ps. didnt mean you were 100% a 'financial guy'. I know you focus mostly on healthcare issues.. but Ive seen you write an awful lot of in depth economic opinion. ..as such I would think, even hope that you would have a better grasp of these things, in the proper scale, then a common man like myself.
Posted by: david b | Nov 29, 2007 6:43:38 PM
But you would still need a bureaucracy to enforce the sales tax!
Ummmm....we do this pretty easily and inexpensively with sales tax ALREADY!
One of the huge benefits is the billions and billions that currently escape taxation in the underground economy such as prostitution, sports gambling, drugs (really huge), and all of those people in cash businesses that don't report income. The IRS believes that they collect 98% of tax on wages, but only 70% of self employment.
The revenue nutrual figures you cite are not the ones when ecnomists take these added sources of taxation into account.
Posted by: El viajero | Nov 29, 2007 6:53:40 PM
I have a conservative friend who is otherwise very intelligent who believes the income tax is too much of an imposition on his privacy and is too regressive besides (i.e. he doesn't see why he, as a nearly impoverished grad student had to pay any income tax) ... and yet he has expressed support for something very much like Huckabee's proposal and also is anti-abortion.
Go figure ...
Posted by: DAS | Nov 29, 2007 7:00:02 PM
Is this really an either/or issue as Bartlett suggests?
Most developed nations have in addition to an income tax, a form of national sales tax and, not coincidently, universal health care.
No one wants to pay more taxes, yet a nation's social programs have to be funded. Why do Americans reject a form of taxation that is broadly accepted in other countries?
The Canadian Government that imposed its national sales tax was defeated (mauled actually) in the following election but it is now generally accepted that without it, the country would be far worse off.
The regressive nature of the tax is debatable. Wealthy people clearly spend more and consequently pay more. Any system can be tweaked by exempting groceries for example.
I would ask those opposed to some form of national sales tax how they propose to pay for federal social programs such as Medicare?
Posted by: Griff | Nov 29, 2007 7:08:34 PM
Although we should not care if the government can take our privacy, freedom, or access to the judicial system away, by god, they better not take our money.
Posted by: El Cid | Nov 29, 2007 7:13:38 PM
A broad and simple income tax would be better than we have now. Eliminate all deductions other than a household deduction of $20,000 or so and individual deductions of $5,000 or so (that would mean a family of four would earn $40,000 tax exempt). Then levy your taxes on income above that. If capital gains are taxed as income, there should be some inflation adjustment of the basis to incentive government not to raise taxes be debasing the currency. If dividend and interest are taxed they should not be taxed at the corporate level also. SIMPLE is good.
Posted by: DCPI | Nov 29, 2007 7:15:51 PM
Is this really an either/or issue as Bartlett suggests?
Most developed nations have in addition to an income tax, a form of national sales tax and, not coincidently, universal health care.
No one wants to pay more taxes, yet a nation's social programs have to be funded. Why do Americans reject a form of taxation that is broadly accepted in other countries?
The Canadian Government that imposed its national sales tax was defeated (mauled actually) in the following election but it is now generally accepted that without it, the country would be far worse off.
The regressive nature of the tax is debatable. Wealthy people clearly spend more and consequently pay more. Any system can be tweaked by exempting groceries for example.
I would ask those opposed to some form of national sales tax how they propose to pay for federal social programs such as Medicare?
Posted by: Griff | Nov 29, 2007 7:26:12 PM
No one wants to pay more taxes, yet a nation's social programs have to be funded. Why do Americans reject a form of taxation that is broadly accepted in other countries?
Let's say we need to raise $X in additional revenue. As between the option of leaving income taxes alone and creating a sales tax that will raise X, versus increasing the current income tax rates to bring in X and having no sales tax, can you make the case for why the former is the better option?
It seems to me that either way, we the people cough up the same amount of money, but in one case you're creating a new, regressive tax and in the other you're not.
Posted by: Steve | Nov 29, 2007 7:41:21 PM
Ezra you're banking on republican pundits to behave honestly? wtf
Posted by: yoyo | Nov 29, 2007 7:42:41 PM
I doubt drug dealers are going to report sales tax any more than they report income tax. Less likely, actually, since its less suspicious for a person to have 0 sales revenue than to have 0 income.
Posted by: yoyo | Nov 29, 2007 7:47:04 PM
Im getting really frustrated here.
I love the left wing blogs, I find the point of view more representative of the country on a variety of issues, and I serves a very important role in our media. But when it comes to economics the left either doesn't care or doesn't understand it.
The Fair Tax is probably the most researched tax proposal on the table today, and just by calling it a sales tax and then dismissing is with common misconceptions is irresponsible.
The Fair Tax will not need any new bureaucracies, the sales tax will be administered by the Social Security Administration, and the tax will be collected by the states who already have a built in mechanism to do so.
More so the economy will grow an average of 7-9% per year for a minimum of 5 years because of this shift. $900 Billion dollars will be repatriated back to the USA which would become the biggest tax haven on earth.
People up to the poverty line would pay 0% in tax, and it would be more progressive than our current system.
More so, it will get rid of the income tax, corporate tax, payroll tax, gift tax, estate tax, and a series of other taxes saving not just the actual tax money, but all the nonsense related to filing for taxes and all the loopholes.
Oh, and everything is revenue neutral, so money going into all current programs will stay the same. But the closing of loopholes and increase in economic activity will actually increase revenues.
Posted by: Michael Haimson | Nov 29, 2007 8:12:30 PM
The Fair Tax is probably the most researched tax proposal on the table today,
That just doesn't make sense. It strikes me that the most researched tax systems are the ones that are actually implemented and in use in most industrialized countries, not the systems that aren't.
Oh, and everything is revenue neutral
So you're saying that the public will support a 60% national sales tax in order to keep things neutral? That's what current estimates are.
Posted by: Tyro | Nov 29, 2007 8:38:59 PM
But when it comes to economics the left either doesn't care or doesn't understand it...The Fair Tax is probably the most researched tax proposal on the table today...
Michael Haimson: The Fair Tax is an interesting concept, but the numbers just don't add up. It requires overly optimistic assumptions about tax avoidance, and fails to adequately account for both the effect of price increases on the federal budget (price increases driven by the fair tax itself, that is) as well as the cost of the plan's "prebate." Bartlett's piece suggest the Fair Tax rate would have be to be set not at 30% as advertised (actually, its backers falsely advertise it as a 23% rate, but that's another story), but rather at something more like 50%.
I think you'll find plenty of support in the progressive blogosphere for tax simplification, including plans that rely on increases in consumption taxes. But the Fair Tax, at least as currently composed, doesn't stand up to scrutiny from numbers crunchers. It's also the mother of all long shots, politically. I suggest backers of the plan sharpen their pencils, get back to us with the real numbers (40%? 47% 55%?) and then we'll talk.
Posted by: Jasper | Nov 29, 2007 8:53:06 PM
Only Liberals would think it is cheaper to tax a couple million businesses then 200+ million plus citizens.
American's don't pay 50% of their income now in taxes, it doesn't take even a napkin to logically conclude if we kept all of our money up front and where taxed at the point of sale we would only need to pay the percentage under the old system. The increase in spending and thus taxes would be huge. It's accepted that a dollar is spent 7 times in a year, if you take all the billions that the governemnt holds for refunds and filter it through the system 7 times the growth would be off the charts.
Posted by: Nate O | Nov 29, 2007 9:37:15 PM
I also happen to think that a Fair Tax that relies on raising sales tax significantly would be political suicide. Sure the $ Republicans are going to be very pleased and anyone with a big checkbook will appreciate the once-a-year savings, but ordinary people are just going to feel like they're paying a ton more for ordinary items - every single time they buy groceries. And that will likely lead to them buying less. And last time I checked, corporations don't permit the Republican Party to implement policies that drastically reduce American consumption.
Posted by: Mavis Beacon | Nov 29, 2007 9:45:33 PM
Money not spent but saved or invested benefits us all.
Seeing that:
The sales tax can be avoided by the poor to a degree, the SS tax is more difficult to legally avoid.
The SS tax is not charged on earnings greater than $90,000/year.
The capital gains tax rate is low.
The taxes on cigarettes, gasoline and alcohol are very high and very regressive these could be reduced as part of the plan.
A NST done carefully tax may not be more regressive than what we currently have.
As for a black market it is not like all taxes are collect now and alcohol and gasoline are very high now without producing a huge black market. (I must admit that there is a thriving black market in cigarettes now though.)
People in business hate the income tax and the IRS. The income tax wastes billions of man hours, huge effort is spent avoiding the income tax, there is a whole industry in turning income into capital gains and avoiding high tax rates. Also the complication of the income and SS taxes is a major obstacle to uneducated people running businesses. Better to just hit people with one tax.
Posted by: Floccina | Nov 29, 2007 10:08:26 PM
Have any of the sales tax supporters in this thread actually read Bartlett's article? Every single one of their "arguments" in favor of it are handily and thoroughly dismantled in the article.
Jeez, people, the deputy assistant Secretary of the Treasury under George H.W. Bush, a devoted supply-sider, writes an editorial for the Wall Street Journal that completely eviscerates the proposed "Fair Tax," and these dummies just keep saying the same things over and over again.
Endlessly repeating inaccurate data and disproven theories may have worked on the Fair Tax supporters, but it isn't going to work on me.
The biggest problem with the idea is how regressive it is. Even if food is exempted - which would decrease proposed revenue, BTW - the majority of the American economy is based upon small purchases, not large ones. The truly wealthy - the ones who buy those multimillion dollar homes and cars with manufacturing runs of less than 100 - actually spend extremely small fractions of their wealth. Once that home is purchased and furnished, then Bill Gates and Warren Buffet are pretty much just regular people, unless they buy diamond-encrusted Mach 3 Turbo blades for their razors and get their groceries from super-secret stores that are more expensive than Whole Foods.
Wal-Mart is the world's largest retailer and accounts for 5% of the USA's GDP. The majority of their sales are to middle- and lower-income people, and they aren't making near the money off their plasma TVs that they are off their store brands for Tylenol and Pampers. Think about your ability to add 30% to the cost of every item you buy, even excluding food, and tell me that the US economy wouldn't completely grind to a halt because of people's inability to stock their cupboards and bathroom cabinets.
Most Americans don't pay that much in federal income taxes. We think we do because people are always pissing and moaning about them, but my family's income taxes are always lower than the payroll taxes we pay, which of course would stay exactly the same even with a so-called Fair Tax. Adding 30% to the cost of all our clothes, diapers, doctor visits, toiletries, cleaning supplies, oil changes, toys, haircuts, and every other thing would more than eat up the measly 5% of our income we currently pay in federal income tax.
I'm not surprised to see NateO, El Pendejo and others just reflexively support whatever a suspected liberal doesn't, but you'd think they would know enough about this to at least stay away from it. It's a profoundly stupid idea that has no chance in hell of actually accomplishing anything good.
Posted by: Stephen | Nov 29, 2007 10:33:51 PM
Brazil does have high sales taxes(Something coming from 15% to 30%) and almost small business cheat it. It also requires complicated accounting rules and it helps to create a big informal sector.
Posted by: André Kenji | Nov 29, 2007 10:35:30 PM
People up to the poverty line would pay 0% in tax, and it would be more progressive than our current system.
What is the concept behind people up to the poverty line paying no tax? Do they present proof of indigency every time they go to the store? Or is the idea that they pay 50% more for everything they buy, but at the end of the year, they get a big rebate if they've saved all their receipts? I assume this post refers to some actual plan on the table but it's hard for me to imagine how it might be designed.
By the way, I'm just curious, how do you establish that your income is below the poverty line... in a world where no one files a tax return?
Posted by: Steve | Nov 29, 2007 10:42:05 PM
American's don't pay 50% of their income now in taxes, it doesn't take even a napkin to logically conclude if we kept all of our money up front and where taxed at the point of sale we would only need to pay the percentage under the old system.
In this half of your argument you claim that there would be no net change because the gain in income offsets the rise in sales taxes. But you then go on to claim that spending will rise without understanding that the amount of economic activity (i.e. number of goods and services actually bought and sold) will remain unchanged because the new purchasing power will be offset by higher prices due to taxes. Perhaps you should have used a napkin.
Posted by: DMonteith | Nov 29, 2007 10:46:10 PM
People please do your research. Much has been done specifically on the FairTax, not some varient like the detractors will oftentimes push as "The FairTax." In the research section of www.fairtax.org you can see the detailed estimates for tax rate, tax burden and industry impact.
Businesses no more hand over money (of their own) any more than they do now with sales taxes. It's a consumer tax when consumers now have their paychecks free of federal withholding. Bartlett is the one with crazy analyisis and is thoroughly rebutted on FairTax.org.
Posted by: Aaron | Nov 29, 2007 11:48:40 PM
...but my family's income taxes are always lower than the payroll taxes we pay, which of course would stay exactly the same even with a so-called Fair Tax.
Actually, payroll taxes, too, would vanish with the FairTax. In fact, it would be the ONLY federal tax levied. No more estate tax, corporate income tax, personal income tax, or payroll taxes. I actually think the price rise effect wouldn't be all that draconian if the rate were really set at only 30%. Presumably many firms -- relieved of the burden of corporate income taxe -- would attempt to gain market share by eating some of the price increase they'd otherwise pass on to consumers. I think conceptually the FairTax is kinda sorta interesting. But the problem is, in the real world, the rate wouldn't be set at only 30% for the reasons outlined in the Bartlett piece. The rate would likely have to be set at least in the mid 40s. But at such high rates, surely the temptation to cheat and buy things on the black market would become overwhelming. Which would mean the rate would have to be set even higher. I would expect a big comeback for cash under the FairTax, and an explosion in the size of the black market's take of the economy, and therefore the necessity to make the rate even higher. Having, say, a tax of 60 or 70 percent added to every transaction just doesn't sound plausible. It sounds Kafkaesque. The FairTax is a fun idea to toss around with your libertarian friends when you're out getting buzzed. It's nothing more.
Posted by: Jasper | Nov 29, 2007 11:51:12 PM
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