The (un)Fair tax

One of the interesting things about Huckabee's campaign is that the press has largely ignored the fact that he has an absolutely ludicrous tax plan– the Fair Tax.  Berkely economics (and blogger) Brad Delong, nicely deconstructs this absurd plan for Salon:

Enter the FairTax. It promises to be a game changer. It would abolish
the IRS and all current federal taxes, including Medicare, Social
Security, and personal and corporate income taxes, and replace them
with a national, across-the-board, 23 percent point-of-purchase retail
sales tax. It would also give each household a multi-thousand-dollar
“prebate” every year on their expected annual taxes and exempt people
living below the poverty line from taxes altogether…

From another perspective, however, you have to scorn Huckabee. He is
adding yet more layers of confusion to America's conversation about
taxes. Huckabee says that the FairTax would mean a 23 percent sales tax
rate on all items. First of all, the real tax rate proposed is 30
percent. The FairTax would add 30 cents to every dollar spent, but
since 30 cents is 23 percent of $1.30, the FairTaxers call the rate 23
percent.

Second, and more important, both conservative and liberal economists
believe the real rate would end up even higher. Estimates of the actual
rate of taxation required for the FairTax to be “revenue neutral”
(meaning for it to bring in exactly the same amount of revenue that the
federal government collects under the current system) start at 30 percent and keep climbing. William Gale of the liberal Brookings Institution think tank says it's a de facto 44 percent
sales tax. Calculations go still higher once you add in all the
necessary and politically inevitable exemptions on big-ticket items —
like a new home or hospital care. Congress' Joint Committee on
Taxation, which draws members from both parties and both houses, says
the real rate would be 57 percent. (And this leaves aside the enormous
federal outlay required by the “prebates,” which even FairTax advocates
say would cost the government $485 billion per year.)

Here's the kicker:

Also, Huckabee calls his proposal a “fair” tax. But it's a mammoth tax cut for the crowd making more than $200,000 a year and a substantial tax increase
for those making between $30,000 and $200,000 a year. Does this make
economic sense? It is hard to see how: What makes the $200,000-plus
crowd especially deserving of a tax cut?…

Does the FairTax make political sense? It is hard to see how — at
least not if people know what he is really proposing. After all, a lot
more people make between $30,000 and $200,000 a year than make more
than $200,000. Politicians prefer, other things being equal, to take
positions that are advantageous to more people rather than those that
are advantageous to fewer.

So, how can Huckabee get away with this?

I believe the reason is that he is counting on people not knowing
what he is really promising. I believe he is counting on the nigh total
fecklessness of America's press corps — a fecklessness that I at least
now see as deployed with a sharp partisan edge. As economist John Irons
laments on his blog, ArgMax.com: “I'm not sure how he is getting away
with adopting the FairTax as part of his platform. Wouldn't Democrats
be skewered in the media if they proposed a tax increase on people
making between $30,000 and $200,000?” Yes.

But Huckabee is a Republican. And it is different if you are a
Republican. The New York Times in its big Huckabee profile by Zev
Chafets said:

Huckabee's answer to his opponents on the fiscal
right has been his Fair Tax proposal … Governor Huckabee promises
that this plan would be “like waving a magic wand, releasing us from
pain and unfairness.” Some reputable economists think the scheme is
practicable. Many others regard it as fanciful … In any case, the
Fair Tax proposal is based on extremely complex projections.

And that's all the crack journalism of the New York Times has to say. If you are seeking information in a daily newspaper, look elsewhere — I recommend the Financial Times.

Delong goes on to further explain just how politically infeasible and policy-wise unsound the plan is, should you be curious.  For now, just remember that the “Fair Tax” would most likely mean increasing your taxes so the rich could pay less.  As for my readers in the $200,000+ tax bracket– “Hello, Douglas.”

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