The Huckabee Tax Shuffle

There are some maxims that live forever because, despite the shifting foundation of human knowledge, they are still true. Death comes to us all. You can’t take it with you. There’s no such thing as a free lunch. There’s a sucker born every minute. To those old saws, we should add: a higher sales tax increases the tax burden on those at the bottom of the income scale. Regressive taxes are just what they appear to be: regressive!

Nobody likes to pay taxes. We all enjoy driving on interstate highways, sending our kids to public schools, drinking sanitary water, working in safe conditions, and taking medicine that has been tested for its safety and efficacy. We also enjoy the protection of our military and police force. These things do not come about by magic. They are not free. We can, and should, argue about how much government should do, but we can’t argue about one point: whatever it does, someone will have to pay for it.

If newspapers were published the first time a human society taxed its citizens, you would probably read about various plans to get around it. Surely, one would think, there has got to be a way to have that free lunch. When the Laffer Curve was in vogue, we were told that cutting taxes would increase revenue—something that is mathematically possible under certain conditions, but runs headlong into reality in a complex economy like that of the United States. In 2005, the Congressional Budget Office concluded that, in a best-case scenario, the macroeconomic benefits of such cuts would only offset the loss of revenue by 32 percent in 10 years. (1) No matter what you do, it doesn’t all come back. For those of us who prefer balanced budgets, it is a deal-breaker.

Republican presidential candidate Mike Huckabee tells us he can eliminate the income tax and the IRS. (2) This is a big promise, and not one to be taken lightly for budget hawks. What does Huckabee plan to replace the income tax with? He supports something called the “Fair Tax”. Many people have learned about it from The Fair Tax Book by Neal Boortz and John Linder. In a nutshell, the so-called Fair Tax advocates replacing the progressive income tax with a national sales tax, sometimes tastefully called a “consumption tax”.

How much would the tax be? The state and county tacks on somewhere between 8% and 10% to your purchases, depending on where you live, and some states exempt essential items like food. How much would the federal government have to charge in order to provide their services? The army isn’t cheap! The claim is that the national sales tax rate would be 23%. As Pat Regnier of Money Magazine observes, the Fair Tax has to do some mathematical shuffling to get that 23%: “Say you buy a $1 pack of gum, and then pay 30% in tax, for a total price of $1.30. The extra 30 cents you paid is 23% of $1.30.” (3)

So it is not 23%; it is 30%. That’s a pretty good chunk of change. That adds nearly a third to the price of bread, beer, and baby food. In addition, state governments would also have to pay the tax. “States would have to pay 30 percent more on every highway and bridge they build, local governments would have to pay 30 percent more for police and fire protection.” (4) Expect your state and local taxes to go up to pay for the national sales tax. Still sound fair?

Sales taxes are called regressive because they disproportionately affect the lower incomes. The poor and middle-class spend most or all of their incomes just to maintain their lifestyles. We’re not talking about people taking Aspen ski vacations, we’re talking about people who are just keeping clothes on their backs and food in their bellies. Those in higher income levels spend a much smaller portion of their incomes on taxable goods, so the percentage of their money that goes to sales taxes is miniscule. Any increase in the sales tax increases the price that the working class must pay for necessities.

Huckabee’s tax is a regressive tax, but he is aware of the criticism and tries to head it off. “All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities. That means people below the poverty line won't be taxed at all.”(5) That sounds good until one realizes that the poverty line for a single person in 2007 was $10,210, according to the Department of Health and Human Services. (6) The rebate would do very little for most of us, since the poverty level does not reflect our real expenses. Despite the efforts to mitigate the regressive aspects of the Fair Tax, it is still sharply regressive. Average Americans would still pay more. Let me know when we can stop calling it “fair”.

The only beneficiaries of the plan would be the rich. When the tax is applied to a billionaire, “if he can somehow manage to scrape by spending, say, $100 million, the other $900 million is tax free. He'll have paid about 2% of his income in taxes that year.” (7) That’s 2% total, while those who spend their entire income just to feed their families and keep a home pay 30%, minus whatever pittance they get from their monthly rebate check. Those who benefit the most from the system—those who take advantage of the monetary and securities systems to invest their money with a reasonable amount of risk—pay the least. Those who are the most able to pay, because their tax burden does not significantly affect their lifestyle, pay the least. Nearly all of the tax burden, which goes to pay for a navy and air force that protects all of us, lands on the poor and the middle class.

Huckabee is essentially advocating the mother of all tax cuts for the rich.

The Huckabee plan has its advocates, such as Steven E. Landsburg on Slate. Landsburg recognizes some of the problems with the Huckabee tax, and tries various ways to resolve them. Among them, he suggests making the sales tax graduated. How can that be done? It is easy to do with an income tax, but how could the government charge different percentages on purchased goods based on who purchases them? “Your credit-card providers have a pretty good idea how much you spend each year, and the government could in principle use that information to set your tax rate.” (8) To say this is intrusive is an understatement. Landsburg suggests that it may be no more intrusive than the current income tax regime, but that notion is absurd on its face. With the income tax, the government knows how much money you make. If the government tracks your spending through collaboration with credit card companies, the government could learn about virtually every aspect of your life. If this doesn’t scare you, then you have far more trust in the government than I do.

What about getting rid of the IRS? Wouldn’t that be good? A sales tax would not need a big agency to administer it, but it creates administrative problems of its own. With so many people paying such a large portion of their income on items that they need to live, there is a potential that a black market could develop to avoid it. Regnier writes: “with all taxes rolled into one high rate, the temptation to cheat could be very high as well. Too much evasion would require the government to raise the tax.” With a greater incentive to evade the tax, the government would need to hire more people to catch the cheaters. The IRS would essentially be replaced with a different bureaucracy to enforce the new tax.

The Fair Tax should be called the Big Tax. That is what it would be to the vast majority of Americans. It is easy enough for the layman to see the problems with it, so the economists who support the plan have tried to plug the holes. Why put lipstick on a pig? There is no reason to think it will work any better than our current progressive income tax, and many reasons to think it would be a lot worse. That will not stop Huckabee from smiling for the cameras, playing his guitar, and promising voters that free lunch.

© 2008 Bryan Lower

Feedback: