Fair Fight

Brad DeLong absolutely dismantles the "fair tax" proposed by Mike Huckabee:

From another perspective, however, you have to scorn Huckabee. He is adding yet more layers of confusion to America's conversation about taxes. Huckabee says that the FairTax would mean a 23 percent sales tax rate on all items. First of all, the real tax rate proposed is 30 percent. The FairTax would add 30 cents to every dollar spent, but since 30 cents is 23 percent of $1.30, the FairTaxers call the rate 23 percent.

Second, and more important, both conservative and liberal economists believe the real rate would end up even higher. Estimates of the actual rate of taxation required for the FairTax to be "revenue neutral" (meaning for it to bring in exactly the same amount of revenue that the federal government collects under the current system) start at 30 percent and keep climbing. William Gale of the liberal Brookings Institution think tank says it's a de facto 44 percent sales tax. Calculations go still higher once you add in all the necessary and politically inevitable exemptions on big-ticket items -- like a new home or hospital care. Congress' Joint Committee on Taxation, which draws members from both parties and both houses, says the real rate would be 57 percent. (And this leaves aside the enormous federal outlay required by the "prebates," which even FairTax advocates say would cost the government $485 billion per year.)

... it's a mammoth tax cut for the crowd making more than $200,000 a year and a substantial tax increase for those making between $30,000 and $200,000 a year. Does this make economic sense? It is hard to see how: What makes the $200,000-plus crowd especially deserving of a tax cut? This is part of a pattern with Huckabee. Anxious to distinguish himself on policies from his competitors but without the staff and the network to perform due diligence on policy proposals, he ends up with ideas that aren't fully worked out and don't make much substantive policy sense.

... Governor Huckabee promises that this plan would be "like waving a magic wand, releasing us from pain and unfairness."

... Is Huckabee's FairTax smoke and mirrors? Yes. Is it voodoo economics? Yes.

But Arnold Kling asks for a more nuanced perspective:

Our current tax system takes its biggest bite out of people who earn much more than they consume. Because the Fair Tax (or any consumption tax) would abstain from tapping this rich vein of unspent earned income, it would taking larger bites out of others to obtain the same revenue.

Consumption taxes reduce tax rates drastically on people who earn more than they consume. To be revenue neutral, they have to increase taxes drastically on people who consume more of what they earn. Whether this is a bug or a feature of consumption taxes is more debatable than Brad lets on.

I'm (mostly) with DeLong. If I were starting a system from scratch, I might consider a national sales tax, although I'd prefer a broad-based value-added tax instead. But considering the system we have now, trying to convert to such a system would be disastrous. Additionally, the main selling points of the "fair tax" -- it would simplify the system and lead to a lower overall tax burden -- simply appear not to be true. Additionally, I do believe in a weak utilitarian framework for setting certain aspects of social policy, and that would dictate a progressive tax scheme. Adding that in to a system of national sales taxation would be very difficult.

DeLong is also correct about Huckabee's intellectual capabilities: they are small. He is proposing this plan without fully understanding the consequences of it or the costs of implementing it.