Huckabee’s Fair Tax Endorsed
Economist Steven Landsburg has a new article in Slate magazine in which he gives his approval to Huckabee’s Fair Tax plan. His conclusion:
the underlying issue becomes a lot clearer once you realize that a sales tax is a modified income tax. The right question is: Is the proposed modification a good one? The answer, according to a growing consensus among macroeconomists, is: Yes.
What’s even more interesting about Landsburg’s endorsement of the plan is the rather obvious distaste he has for Huckabee’s Christianity. His approval is grudgingly given because of his evaluation of the idea’s merit; therefore, the highest form of endorsement.
Referring back to a previous Republican debate, Fred Thompson indicated that he would not be opposed to the plan on principle. But Thompson was concerned about the possibility of ending up with both a consumption tax AND an income tax, the worst possible outcome for Americans.
Personally I like the idea because it distributes the tax burden based on consumption, allows fewer loopholes than the present system, and government tax increases cannot easily be hidden in arcane language, an important factor in my mind.
My brother is a small business owner and he recently told me that he feels the Fair Tax would hurt him greatly; he said this as someone who otherwise likes Huckabee reasonably well and this is one of the concerns he has. I didn’t get a chance to talk at length about his concerns about Fair Tax, though I can imagine some of them and I haven’t had a chance to revisit it to see if I agree with his opposition to it on that basis. One thought I immediately had on hearing his views was to wonder if he’s representative of the entrepreneurial class in general, because Huckabee’s overall rhetoric is attempting to appeal to them but I wonder if Fair Tax will be a deal breaker for them.
Thompson is right about the need to abolish the income tax first; the legislators who’ve been working on Fair Tax have written into the legislation that it wouldn’t go into effect until the 16th Amendment is abolished.
FairTax Flaws by Jerry Bowyer of RealClearMarkets:
Read the rest and then come back and decide if you all think the "fair tax" plan proposed by Huckabee is the tax wonder drug he makes it out to be.
Human Events:
I’d say both of those criticisms aren’t completely accurate. First, if Huckabee is using the kind of populist rhetoric which says that CEOs must start earning less or paying more in taxes, I haven’t heard it. He does use rhetoric to appeal to the working class, but he’s talking about trying to convince them that they’ll be better off with smaller government, not bigger. Frankly I’m getting tired of people labelling Huckabee as an economic liberal just because he was forced to raise taxes to balance the budget (as required by state constitution) in AR, and a lot of the budget shortfall was due to a court ordered restructuring of their education budget. When you look at his record on taxes and spending, there’s really little basis for labelling him a ‘big government conservative’ unless you believe that state governments shouldn’t be concerned with collecting enough tax revenue to pay for schools and road maintenance.
And the RealClearPolitics article that Dustin quoted gets some major parts of the FairTax plan wrong: mainly that businesses wouldn’t be taxed on purchases, so the hypothetical about larger companies buying out suppliers isn’t an apt criticism. Also the part about service based industries: the FairTax would apply to both services and goods, at the retail level.
I think there’s room for critical examination of the plan, but it’s annoying that an economist would dismiss it without knowing even the main points of the plan.
I think the article Dustin linked to is right on! If nothing else, it shows the fallacy of simplicity argument very clearly. Additionally, I don’t understand Huck’s populist stand against corporate CEO salaries and this so-called fair tax idea: how are the two consistent? What percentage of your income do you have to spend (and thus taxed) just to live on if you are in the low- to middle-earning bracket? And what percentage if you are a CEO?
Nihat: Have you actually read the Fair Tax proposal? Your argument against it based on inadequate progressivity isn’t valid because the plan would prebate everyone at a level based on basic living needs- so that low income folks pay nothing. It’s actually quite a progressive tax, plus it rewards people for saving and investing.
No, CS, I haven’t studied it. But I had heard Huckabee on TV mentioning of untaxing the poor. Some tax reimbursement/rebate is meant obviously. Well, I just don’t like the idea of rebates. In this specific context of progressive tax rebates, it will inevitably mean the government’s getting in the business of classifying goods and services for their rebate-worthiness.
Bowyer’s bias is also just words. As for small-business persons, I cannot understand any small business person being against the FairTax, as it ends the government, as creditor; it doesn’t discourage hiring employees! Further, let’s get to the meat of it:
The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces. [BHKPT]
The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan. [THBP]
Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case. [THBNP]
The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be. [ALM]
Consumption benefits [ALM]:
• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.
• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.
• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.
• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.
Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system. [KR]
Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively. [JK]
Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax. [THBPN]
Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20. [THPDB]
On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base. [TBJ]
The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent. [WM]
References:
[ALM] Arduin, Laffer & Moore Econometrics, “A Macroeconomic Analysis of the FairTax Proposal,” July 2006.
[BHKPT] Bachman, Paul, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck, “Taxing Sales under the FairTax: What Rate Works?” published in Tax Notes, November 13, 2006.
[JK] Jokisch, Sabine and Laurence J. Kotlikoff, “Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax,” National Tax Journal, June 2007.
[KR] Kotlikoff, Laurence J. and David Rapson, “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation,” NBER Working Paper No. 12533, revised October 2006.
[THBNP] Tuerck, David G., Jonathan Haughton, Keshab Bhattarai, Phuong Viet Ngo, and Alfonso Sanchez-Penalver, “The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model,” The Beacon Hill Institute at Suffolk University, February 2007.
[THBP] Tuerck, David G., Jonathan Haughton, Paul Bachman, and Alfonso Sanchez-Penalver, “A Comparison of the FairTax Base and Rate with Other National Tax Reform Proposals,” The Beacon Hill Institute at Suffolk University, February 2007.
[THBPN] Tuerck, David G., Jonathan Haughton, Paul Bachman, Alfonso Sanchez-Penalver, and Phuong Viet Ngo, “A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the FairTax Plan,” The Beacon Hill Institute at Suffolk University, February 2007.
[THPDB] Tuerck, David G., Jonathan Haughton, Alfonso Sanchez-Penalver, Sara Dinwoodie, and Paul Bachman, “The FairTax and Charitable Giving,” The Beacon Hill Institute at Suffolk University, February 2007.
[TBJ] Tuerck, David G., Paul Bachman, and Sylvia Jacob, “Fiscal Federalism: The National FairTax and the States,” The Beacon Hill Institute at Suffolk University, June 2007.
[WM] Walby, Karen, and Dan Mastromarco, “Promoting home ownership: How the FairTax’s benefits for homeowners exceed the mortgage interest deduction,” Americans For Fair Taxation White Paper, August 2006.
A new book will be out in mid-February titled "FairTax: The Truth: Answering The Critics." Those who support the FairTax should help get the word out about this book.
If those who are opposed to the FairTax can’t come up with a better idea, then they’d better step aside, because change is coming. With a recession lurking around the corner, we’ll have no choice but to implement tax reform. The FairTax is the best solution offered so far. I’m all for it.