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Huckabee Supports The Fair Tax

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When the Fair Tax, which is essentially a high federal sales tax with exemptions for lower income earners, was first introduced a few years ago I didn’t really give it much consideration. I read about it and I understood it but I never thought that it would ever happen because it was so radical and so “out there” that people would be hesitant to change to it. Governments and societies are like big battleships, you can get them to change direction a degree every few miles but have them turn on a dime? Forget it. Well, it looks like the battleship is turning a little with Huckabee winning the Iowa primary and him being one of the more visible supporters of a Fair Tax. So, before passing judgment on whether the Fair Tax is a good idea, let’s look at the mechanics.

Ten Second Primer on Fair Tax

CNN had a good recap of the gist of the Fair Tax. First, you’d abolish the IRS in its current state, all the taxes it collects in income taxes, Medicare, Social Security, etc. and replace it with a flat sales tax on practically everything you buy. To combat the regressive nature of a flat sales tax, the government would send a check to each family based on their income – so those earning less would get a bigger check. This takes away the regressive nature of a sales tax.

My Concerns

The economy will surely suffer. When you levy a 30% tax on everything, even if you stop taxing people’s incomes, it will have an effect on the economy because people will spend less. (I’m not an economist, though I play one online, but I’m pretty confident in this even though my only academic support is an undergraduate degree in economics.) People think of their salaries in terms of their gross income – “I make $50,000 a year” or “I make $7 an hour.” We don’t think of it in terms of after-tax income because we probably don’t know what our after-tax income is after all the deductions and credits. However, with our purchasing we do understand it in after-tax values. A $15 dress shirt is $15 in after-tax income. Jack that baby up to $19.50 and we start buying fewer shirts because they’re 30% more expensive. If we can change the way we fundamentally think about income and expenses, perhaps this could work. (There are more complicated and compelling reasons why the economy will suffer but I’ll let the experts discuss those).

I think the people who have fallen in love with this idea have fallen in love with the idea of a simpler tax structure and an abolishment of the IRS, they haven’t really analyzed the details and seen the true impact of a flat tax system like this. However, since the IRS is one of the only profitable organizations in the government, I’m inclined not to demand their abolishment so quickly. :)

Lastly, I’m not particularly familiar with how the value added taxes (VAT) work, perhaps a topic for the future or a guest post by UK-based Plonkee, but those appear to work relatively well in the countries that implement them.

What are your thoughts on the flat tax?

{ 49 comments, please add your thoughts now! }

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49 Responses to “Huckabee Supports The Fair Tax”

  1. bryan says:

    those complaining about the taxes they pay: if you are paying more, you are probably earning more. if this is not the case, then you are not taking advantage of the tax breaks that you are afforded. choose what situation you want to be in. you cant change it so work with it.

    the fair tax does work, a similiar version works in europe and it would work here. the poor are not taxed more as every family is given a “prebate” to offset the higher tax on goods. in the end, it is SUPPOSED to work out that the rich pay more on luxury goods such as yachts, highend cars, etc.

    if nothing else, it will change american consumption habits, encourage people to save or invest, and shut people up that the IRS is stealing from them.

    good day

  2. Anonymous says:

    Also remember that the Fair Tax will tax those that partake in illegal activities and cash under the table transactions. They still have to buy goods, so in fact the Fair Tax would increase the tax base.

    Under the FairTax, landlords will have to register with the tax collector (e.g. get a sales tax license like retailers do now) and this will open the door to excessive regulation of rental properties. I’m cool with regulation of rental properties as long as owner-occupied homes are subject to the same regulations, but homeowners are never willing to accept the same regs on THEIR homes that they impose on rental properties.

  3. Anonymous says:

    hah. Nice Manzman. I think Minimum Wage is a troll or just a bitter person who was babied for too long and can’t handle life.

    Who babied me? I have WORKED for a living my whole life, except for a year with an extended illness and hospitalization and limited mobility. I started working when I was ten and saved up the equivalent (in today’s dollars) of $20K by the time I graduated high school.

    Oh, and I had a dysfunctional family and left home at 17.

  4. Anonymous says:

    And what guarantee is there that net pay goes up 15 percent under the FairTax when payroll taxes are eliminated?

    Yes, the hamburger flipper WILL get the 7.65 “employee contribution” part of his payroll taxes. But the employer can do whatever it wants with the “employer contribution” and minimum wage employers have plenty of other uses to which it could put that money. Increasing dividends…increasing management compensation…cutting prices…you don’t seriously think the hamburger flipper will get it, do you?

  5. Lord says:

    The FairTax is filled with wishful thinking. It is not going to remove politics from taxes. It is not not going collect taxes that are not collected. It is not going to simplify that which can’t be simplified. It is easily evadable and unworkable as written. Changing it to a VAT tax would make it workable, but not nearly as simple. The pre/rebate is so low, it will remain highly regressive. The real effect will be to change asset values. In the end, nothing really changes, but in the transition, big winners and big losers.

  6. Becca says:

    Boston Burbs–

    Thank you! You’re completely right–I was going off of something I had thought I’d read, but I double checked it after you mentioned that to see if I’d just had old information and I can’t find it. I should have done that BEFORE I said it above. Ron Paul supporting FairTax is much more sensible, anyway–after all, it would abolish the IRS and thus (hopefully) reduce some of the inefficiency of bureaucracy.

  7. Annie says:

    OKAY:

    So, if we were to move on to a different tax system, what happens to all of us who have who have worked hard and put pre tax $$ into 401(k)s and IRAs, not to mention post tax $$ Roth IRAs?

    And, with this system, what happens to the tax structurre of individual states, where some states don’t have income taxes already and other states don’t have sales taxes?

    Of course, before something like this is done, I would like to see the earnings cap taken off the SS income taxes – so that people earning XYZ dollars continue to pay into the system. These individuals will likely not need their social security $ or medicare health insurance in their later years – however, why they should stop paying into the system?

  8. Lord says:

    The 30% is only enough to replace Federal taxes. States would have to decide what to do for themselves. People with assets have generally already paid income tax to acquire them and would be taxed again when they consume them. Tax deferred accounts would be fine as no tax has been paid on them. The Roth however would be double taxed since income taxes have already been paid on it. Real estate is both investment and consumption so logically one should tax the structure but not the land, but nothing I have read made this distinction. Smuggling would be quite profitable. So would working here and retiring abroad, traveling abroad to consume, foreign vacations, medical tourism, international waters, etc. Living on or across the border would highly profitable.

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  10. Rory says:

    At issue – it allows the government to increase taxes at their whim – just like today…. start at say 30% – oops, not enough – 34% etc.

    You need to pass the bill in congress that states a supermajority of congress can only change the % taxed….

    sorry, I am a government pessimist. You simply CANNOT trust government with your $$$

    I am more of a proponent of a simple flat tax on income – with the appropriate super-majority protections of course….

    *NEVER* trust Government with your $$

  11. Boston Burbs says:

    Individuals and businesses in this country spend on the balance of BILLIONS of dollars each and every year simply to comply to a complicated and completely politicized tax code. And I’m not talking about the actual taxes paid, I’m talking about the amount of money spent to simply comply.

    It’s ridiculous and broken.

    And to say that the FairTax is more evadable than the current income tax system is really missing the boat. Are people going to all of the sudden assume legal risk by buying their goods on the black market to save a mere 20%? Not happening. And I wonder how that small amount of fraud compares to the wholesale and systematic fraud that occurs today – particularly by the people and companies that have the lobbyists on K Street to open up those loopholes.

    Regressive? Absolutely not.

  12. Kirk says:

    The problem with the current tax system is it has grown too confusing. This is due to the fact that the government tries to control our behavior with tax policy. I don’t see this changing with a sales tax. The government will start taxing certain products at different rates. Booze, fast food, and certainly cigarettes will see much higher taxes – a regressive tax. This system would still be open to government control.

    Better solutions would be a flat tax on all income regardless of how it is earned (capital gains, earned income, dividends, interest, etc.). Or, the Value Added Tax is fair as well. Both systems would severely limit the IRS, which is a positive in my view.

  13. db says:

    I am not sure what I think about the FairTax.

    But one thing that does puzzle me is this — I’ve seen figures floating around that our economy is something like 60-65% based on the rates of consumption. Basically, that the largest thing keeping the economy afloat is that we all do our part as good little consumers. All those companies out there are actually counting on the little consumer to consume their goods and services.

    So, if we adopt the FairTax, which is meant to discourage consumption, are we also intending to change this paradigm? Meaning, is the policy going to be that we actually expect something else to replace the overweighted emphasis on consuming that’s currently built into the system?

    I know that the philosophy behind the FairTax itself is to encourage saving — that’s not my question. My question is how will we reconcile that with the greater economic environment that is dependent on our high rate of consumerism?

  14. The Fair Tax will never work for a myriad of reason including the following.

    1. It will reward good behavior (saving) while punishing bad. The culture in this country is to reward bad behavior and punish good.

    2. The tax and waste Democrats, who own both houses of Congress, will never let it happen. They like things complicated and adding new taxes “for the children” each year.

    3. With more money in the average Joe’s pocket the State Democrats will see new opportunities to raise State taxes. The Republicans will turn a blind eye to Big Corporations jacking their service fees dipping their hands into the extra cash.

    4. The suits in Washington do not like change as if it fails they lose their job. Case in point the excellent idea of getting rid of the failed social security program and replacing it with a similar private plan that the fat cat politicians benefit from. It made complete logical sense and would benefit the nation but they smeared it and shot it down due to AARP pressure and Democrat special interest. They don’t like change folks and could care less about your future only their own.

    So yes this would be great and would make me rich but no it will never happen.

    Cheapster Bob

  15. db says:

    @Minimum Wage:

    IF you are really working at minimum wage, I guarantee you are not paying a higher relative tax rate to others with higher paying jobs. I pay more than 25% of my income in taxes every year, and I’m blocked out of a lot of deductions that people with a lower income / are married / have children can take. The amount of TAXES I pay every year are on a par with a year’s salary for a minimum wage worker.

    I’ve made minimum wage at one point in my life. I know what my taxes were like then, and my tax burden is much more significant now.

    You really need to take some personal responsibility for yourself — I’ve asked you before — if you are really this bad off, how do you afford a computer on which to comment on blogs and whine about your miserable life? (and if you are computing from a library then good for you! but don’t forget I paid for your computer and your internet time with my tax dollars.)

    If you are really this bad off, shouldn’t you put that energy into fixing your situation? Nobody else is going to do it for you.

  16. Foobarista says:

    Huck is definitely not my cup of tea (about as opposite from my politics as can be and still be a Republican), but something like the Fair Tax could make many things simpler and cleaner. Here’s an interesting compromise by an economist.

  17. Andy says:

    The first $20,000 in income for a single individual and $40,000 in income for a couple should be income tax free, Allow a $5000 allowance for a couple’s first two children and $3000 for the next two. Single individuals would get one $5000 allowance and one $3000 allowance. No allowances per dependant after that. Adjust the number for for inflation each year.

    The tax rate is 15% on everything over that to $100,000 in earnings. It should be 26% from $100,000 to $1 million and it goes to 38% over $1 million.

    A national sales tax of 3.8% on all products, no exceptions. Services would be exempt from the tax.

    Finally, add a national Lottery system, that splits its money 50% with the states where the tickets were purchased.

    Lower the social security tax to 5% and apply it to all income. If we are going to have a socialist program, treat it like socialism.

    Add a Heath Care fund that will be taxed at 2% of all income.

    None of the tax rates can ever be raised or lowered.

    Automatically sign workers up for 401k’s etc. for a minimum of 3% of their income with the stipulation that it must be used to purchase anything but their own company’s stock. Anything the employee adds on top of the 3% can be used to purchase company stock.

    The only deduction (other than for dependant children) allowed in any income tax is for donation to charity, and it should be a dollar for dollar deduction up to a 10% of their income. They would not get money back from the government if their donation was more than their tax burden.

    Eliminate taxes on business, they don’t pay them now, so stop forcing individuals to pay them through lower salaries and higher prices. It is the quickest way to bring jobs back to this country.

    Charge a 10% estate tax on estates from $3 million to $5 million and a 15% tax on estates over the $5 million mark.

    That should be plenty of money to fund this government and take care of it’s people.

    So take a typical family of 4 making $42,000 a year. The family would pay $2,940 in social security and health care tax. They would pay $0 in income tax. The would automatically have a minimum of $1,260 put into a retirement fund (that money would be counted toward their current taxed income now and it and all future earnings would be tax free upon retirement). So their take home assuming they don’t make a charitable donation would be $37,800.

    Let’s say they spent $20,000 on products in one year. Their additional tax burden would be $760. So in total a family of four making $42,000 a year would pay $760 in federal income tax. Based on current tax law, the same family of four would pay $1386 this past year.

    This plan roughly amounts to a 45% tax cut for the middle class. They would still have state and local taxes to deal with, but on a federal level this is the best way to go. It doesn’t punish people for achieving and it doesn’t put the tax burden of America on the middle class.

  18. Minimum Wage says:

    IF you are really working at minimum wage, I guarantee you are not paying a higher relative tax rate to others with higher paying jobs. I pay more than 25% of my income in taxes every year, and I’m blocked out of a lot of deductions that people with a lower income / are married / have children can take. The amount of TAXES I pay every year are on a par with a year’s salary for a minimum wage worker.

    I’m including all the tax breaks out there that most middle class people take for granted. So I’m including untaxed fringe benefits in the “income” calculation – compensation that middle class Americans enjoy without paying tax on it. I’m referring to EFFECTIVE tax rates, which requires inclusion of all income, deductions, and exemptions.

    I made $15K last year, my state has a higher minimum wage. Someone earning an $11K minimum wage obviously not paying as much in taxes as I am.

    It sounds like you are a victim of what I call stealth taxation – the loss or phaseout of deductions above a certain income ($100K – $150K in most cases). It is a dishonest way to tax higher incomes, transparent taxation while retaining deductions would require higher nominal rates (and invite more flak) which is what Congress is avoiding.

  19. Adfecto says:

    Most rational people will come to conclusion that a single, all inclusive source of tax revenue is not the best approach. Nearly (I can’t think of any exceptions off the top of my head) all developed nations fund their tax system in variety of ways: income tax, sales tax, estate tax, capital gains tax, and so on. Politicians will not resist the urge to add more streams of revenue to the tax system just because we have a high sales tax. IF (huge ‘if’) we do make a drastic change, it will only be a few years before new taxes start getting tacked-on and the complexity of the system returns. Also, a single source of collection increases the incentive to avoid the system and create a thriving black market. If we tax a little bit at every angle the system gets harder to avoid completely. Right now, no matter how good your tax accountant you still pay somewhere, somehow (maybe just not your entire ‘fair share’). The right approach to taxation is to decide what services need to be provided and then decide how to equitably pay for them, rather than our current system where legislators tack-on spending for political gain rather than to serve the people. Lets provide for life, liberty, and pursuit of happiness and forget about bridges to no-where and check-every-month subsidies for able bodied people.

  20. Lord says:

    The Fed would have to keep real interest rates negative to keep the economy from stalling.

    The FairTax appeals to savers who see it as the way to wealth. Since it doesn’t tax capital, it does allow greater savings. However, it would cause the even more rapid appreciation of the assets they would buy with it, driving prices up and future returns down. Present owners, the rich, would be handsomely rewarded, but these wannabes would find themselves priced out of the market, paying more for less. In the end, they would find wealth to be a receding target.

  21. Phil says:

    The FairTax is an interesting plan; what would be even more interesting is if Congress actually passed it after having passed a Constitutional amendment to repeal Congress’ power to tax income.

    The idea of taxing use/sales versus income is that it would tax wealth, not income. Most “rich” people get themselves off of the payroll as soon as they can, and so are usually not affected by income taxation.

    Nevertheless, I believe that the real appeal of proposed systems like the FairTax is not so much wanting the concept of completely untaxing income (which would, by definition, get the Federal government out of the business of intruding into our personal lives — after all, if it’s going to tax income, it must know what income you’ve received and whether or not your employment matches the level of your lifestyle!). Rather, it is the simplicity of it all.

    Personally, I would love to see the US head towards the concept of a choice in taxation. That is, keep the current system as it is, but provide citizens with the option of going towards a flatter income tax. If you can get enough people to agree with this concept, it might be a bit easier to then convert over to a use tax.

    Regarding a VAT: This is nothing more than embedded taxation, whereby each business-to-business transaction is taxed at each level of production, through to the point of final consumption.

  22. db says:

    @Minimum Wage —
    No, I’m making considerably less than $100-150K. I’m at the high end of the 25% tax bracket. And yet — my taxes are closer to your salary than to a true minimum wagers.

    But, I don’t think all those deductions are really all they are cracked up to be. And I think you are suffering from deduction-envy.

  23. db says:

    @Minimum Wage –

    And — btw, I’m single — that 25% tax bracket stops for single people at $77K of taxable income. Then we get bumped up to the 28% tax bracket, which is where I’ll be in 2009 if not 2008.

  24. rosco says:

    Since so many of the products we buy are produced overseas, usually in asia, how would prices for goods fall?
    The vast difference in labor cost will still see more and more of our production move into these countries.
    What is their motive to decrease the cost of their product, since their competition is usually overseas also.


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