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Former Arkansas Gov. Mike Huckabee, shown speaking at a Republican presidential debate in Des Moines on Wednesday, has passed Mitt Romney (left) to become the GOP front-runner in Iowa polls. Huckabee says he would replace the current federal tax system with a national sales tax if he is elected president.
Former Arkansas Gov. Mike Huckabee, shown speaking at a Republican presidential debate in Des Moines on Wednesday, has passed Mitt Romney (left) to become the GOP front-runner in Iowa polls. Huckabee says he would replace the current federal tax system with a national sales tax if he is elected president. John Gaps III/Getty Images
Mike Huckabee's "fair tax" plan:
- Would eliminate all federal income and payroll taxes, including personal, corporate, gift, estate, capital gains, Social Security and Medicare, and shut down the Internal Revenue Service.
- Would replace the income tax with a national sales tax of 30 cents on the dollar.
- Would provide a prepaid monthly rebate ("prebate") for taxes paid on purchases up to the poverty line, meaning people below it would be effectively exempt from the tax.
- Would only apply to new goods.
- Is intended to keep the federal government's revenue the same.
- Promises to make American products more competitive because prices would not be increased to cover taxes and compliance costs.
- Promises to encourage growth by promoting investment and capital formation.
The Fair Tax: Is It 23 Percent or 30 Percent?
The actual rate of the so-called "fair tax" is a source of considerable confusion and disagreement.
Proponents of the tax, and legislation before Congress, refer to a tax rate of 23 percent. But this is based on a calculation that most people wouldn't use or understand.
The proponents of the tax arrive at the 23 percent number this way: They say the tax will add 30 cents to every dollar; then they calculate what percentage of the total (cost plus tax) is represented by the tax. In other words, the additional 30 cents represents 23 percent of $1.30. This is called the "tax-inclusive rate."
But if you want to know how much the tax would add to every dollar spent, the answer is 30 percent. This is called the "tax-exclusive rate." To put it more simply, adding 30 cents to every dollar is a 30 percent tax.
This is an example of how semantics can blur substance.
In recent weeks, the presidential contest in Iowa has found a new Republican front-runner in former Arkansas Gov. Mike Huckabee. His appeal has been primarily to social conservatives — and he has been attacked by anti-tax activists for approving tax increases as governor. But he has an answer for those critics: Abolish the income tax and the Internal Revenue Service.
Huckabee pitched his support for what he calls the "fair tax" at a recent debate in Iowa.
"It's the best proposal that we ought to have because it's flatter, it's fairer, it's finite, it's family friendly. And instead, we've had a Congress that spent money like John Edwards at a beauty shop," he said.
Huckabee is proposing a consumption tax. Instead of paying taxes on what you earn, you would pay on what you spend. Huckabee would abolish virtually all federal taxes — including the income tax, the corporate tax, the Social Security tax — and replace them with a 23 percent national sales tax.
Huckabee's plan comes from a group called Americans for Fair Taxation.
"It's a good idea because the income tax system is badly broken and damaging the national economy," said Ken Hoagland, the group's spokesman. "The IRS would be abolished. April 15 would become just another nice spring day."
But could the plan really work?
"The answer's no," says Bill Gale, director of economic studies at the Brookings Institution. "There is an arithmetic problem. There's a political problem. And then there's an enforcement problem."
Gale says the way the proposal is presented is misleading. The way the tax is calculated, Gale says, means it would be 30 cents on the dollar, not 23 cents.
Gale also asks whether Americans would accept a tax on everything — from retail sales to home purchases to health insurance. If enacted, there would be political pressure to create a series of exemptions, which could push the 30-cent rate even higher.
"I think the real rate they would have to impose would be much higher — around 40 to 50 percent — if it were enforceable. And that's the kick," he said. "There is literally no country in the history of the world that has enforced a retail sales tax with rates anywhere near that amount. The incentives to evade just get so big at that point."
That's not true, say proponents of the "fair tax." Among them is Laurence Kotlikoff, a professor of economics at Boston University who was hired by Americans for Fair Taxation to evaluate their proposal. He says he believes it is sound and that tax evasion would not be a problem.
"We'd have all these otherwise unemployed IRS agents who can focus on the relatively small number of taxpayers: all the retail outlets... So I think there is some potential for more evasion, but there's also potential for more enforcement," he said.
But would the tax really be fair? Economists generally regard sales taxes as regressive because the poor spend a greater proportion of their income than the wealthy. But Kotlikoff says that under this plan, all families would receive a monthly subsidy, a so-called "prebate," to offset the tax on bare necessities. So low-income families would end up paying no taxes at all. The wealthy, who buy and spend a lot, would pay a lot.
"Somebody like Steve Forbes, if he was to throw himself a big birthday party and spent $10 million, 23 percent of that would go right to the government. Whereas, right now, that wouldn't happen. So this has got a lot of progressive figures that most Democrats and liberals don't understand," he said.
FactCheck.org analyzed the plan and concluded that the poor probably would do better thanks to the subsidy. But it also found that many middle-class taxpayers would end up paying more than they do now — and that the very rich would pay much less than they do now.
And what about the plan to abolish the huge bureaucracy of the IRS?
"Well, it's a great talking point," says Brooks Jackson, a former reporter for CNN and The Wall Street Journal who is now the director of FactCheck.org. "But you would need two other bureaucracies, and they could be huge: One to enforce the sales tax. You'd also need a bureaucracy to administer the biggest welfare system ever devised, which would give every American a prebate to make up for the effects of this tax on low-income people."
Skeptics also question whether it would ever be possible to sweep away the current tax system, protected as it is by special interests and powerful members of Congress. But supporters of the "fair tax" say if enough people rise up, even Washington couldn't resist a second tax revolution.