One key idiosyncrasy which has sustained the under-funded presidential campaign of former Gov. Mike Huckabee (R-Ark.) is his support for the “FairTax,” a plan which replaces all federal taxes with a 30 percent sales tax. Closing the IRS is appealing to many, but it is important to give due consideration to whether or not this plan can actually work. Huckabee is fond of saying that his plan will be a “magic wand releasing us from pain and unfairness.” This is just the funniest in a long list of dubious claims about how the tax will work.
The FairTax is touted as a progressive tax policy because households are to be sent rebates each month equaling the tax they would pay on goods up to the poverty line. Further, the tax would be levied only on services and new goods, so the poor would be able to buy used goods and avoid even more taxes. But no one can choose not to buy food, gasoline or medical services. Such a heavy tax would push many with low incomes closer to poverty. That doesn’t sound very progressive to me.
It is supposedly revenue-neutral, but Huckabee also claims on his Web site that the plan would reduce the tax burden of every person, regardless of their place on the income scale. Without even crunching any numbers, I can tell immediately that that is mathematically impossible. If each person is paying less than under the current tax code, how can government revenue remain at current levels? There is no explanation of where this extra money is supposed to come from. Enforcing the current tax code is expensive, but state governments will be met with massive costs as they administer this new system. The Justice Department would also be forced to police an expansive black market.
Huckabee lauds the plan as promoting the traditional American values of thrift and hard work. The notion that hourly workers will supply more labor if their net wage increases is a fundamental tenet of supply-side economics, but it has not usually been born out in real-world data. Most people choose to work fewer hours for the same check rather than put in more time at work. One thing that is discouraged by taxation is consumption. I agree that thrift is a virtue, and would much prefer to live in a society not obsessed with consumer goods, but from the standpoint of economics pushing aggregate demand downward is not in line with our national goals right now. Anyone who realizes a savings under the FairTax scheme will do so by buying fewer goods and services. Output would increase, but what good is that if fewer people are willing to buy?
The preponderance of the FairTax’s benefits will not go to the blue-collar conservatives Huckabee is trying to court with his populist milieu. He is the latest in a long line of conservatives advocating solutions which will take our tax system from bad to worse.
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