November 18, 2007
The Fair Tax Posted by John Steele Gordon at 06:15 PM EST Mike Huckabee, the former governor of Arkansas and current Republican presidential candidate, was on Fox News Sunday this morning. According to two polls, he is suddenly a contender in Iowa, despite having spent only a tiny fraction of what Mitt Romney has spent there. He is now running an amusing ad. One of his signature issues is the “fair tax.” For a short run down on its provisions see here. Basically, it junks the federal income tax, social security tax, corporate income taxes, gift taxes, estate taxes, self-employment taxes, etc., and replaces them all with a retail sales tax of 23 percent on goods and services. Because sales taxes are inescapably regressive (i.e., they impact the poor more than the affluent, because the poor, by definition, spend most of their income on necessities while the rich bank most of their income), the fair tax would rebate monthly to everyone 23 percent of poverty-level income. I have not, by any manner of means, looked at the fair tax proposal in depth. But almost anything that would replace the current income tax would have to be an improvement. The federal income tax code, as originally passed in 1913, was only 14 pages long. Today, 94 years later, it is tens of thousands of pages long and quite literally nobody really knows all of what is in it. After the original tax was passed, the rich—the only people who had to pay it in 1913—naturally looked for ways around it, and their well-paid lawyers and accountants quickly found “loopholes” to allow them to do so. Ever since, the government and the lawyers and accountants have been engaged in an evolutionary arms race: Lawyers find loopholes, Congress either plugs them or, just as often, regulates them, leading the lawyers to find new loopholes, and so on ad infinitum. Worse, Congress regularly passes out goodies in the form of amendments to the tax code that benefit only a favored few and often only a single individual. In recent years the tax code has been amended at a rate of about 4,000 times a year. This allows members of Congress to sock it to the rich—-”these people must pay their fair share!”—in public, while quietly letting them off the hook in private. As a result, the so-called progressivity of the tax code is an utter sham. The poor don’t pay incomes taxes, and neither do the rich, who shelter their incomes in trusts, corporations, and a thousand fiddles. It is the middle class, those dependent on a regular salary, that get socked. Warren Buffett has said he pays a lower tax rate than most people who work in his office. Teresa Heinz Kerry, the very rich wife of Sen. John Kerry, reported during her husband’s 2004 presidential campaign that her income was over $5 million but her taxes were only about $600,000, or 12 percent. I don’t know about others, but my income, at least, was a lot lower and my tax rate a lot higher. The fair tax certainly has great advantages. The IRS would go out of business. The vast underground economy would no longer escape taxation, because the earners of that unreported and sometimes illegal income would get taxed when they spend it instead of when they earn it. The huge compliance costs of the current system, for both corporations and individuals, would disappear, going into their respective pockets to be spent (and taxed) or saved (and not taxed). Prices would decline as the passed-along costs of the corporate income tax and payroll taxes were taken out. It would encourage savings and discourage consumption. It would, to be sure, not be nearly as apparently progressive as the current income tax. But it would be even more progressive in fact, which is what should count, even for ideologues. Who would be hurt? Tax lawyers would be hurt badly, and tax accountants would be devastated. Tax bureaucrats would be out of a job. So would tens of thousands of Washington lobbyists. And members of Congress would be hurt in two ways. First, they would no longer be able to hand out dark-of-night tax fiddles to the well-heeled. Worse, they would no longer be able to play the game of “Don’t tax you and don’t tax me/ Tax the man behind the tree.” They could still raise or lower taxes, but only for everyone. Taxation for reasons other than raising revenue would be much more difficult. Social engineering via the tax code would be, effectively, impossible. Such idiocies as an estate tax that has been declining for years and will disappear entirely in 2010, only to arise, like the phoenix from the ashes of its own cremation, in 2011 at the original rate would vanish. If Mike Huckabee should win in Iowa in early January, or even come close, the major issue of the 2008 election might very well not be Iraq. It might be taxes. The Democrats wouldn’t like that one little bit.
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