The "Fair Tax"

Mike Huckabee won the Iowa caucus and has gained a lot of national momentum without having to explain much about his proposed economic policies. Many conservatives, such as the Club for Growth and other supply-siders, paint him as a closet economic liberal because tax rates went up during his tenure as Arkansas governor. Huckabee, for his part, has come out in favor of the "fair tax," a nebulous name for a somewhat interesting economic idea. Instead of the "flat" income tax proposed by some conservatives (e.g. Steve Forbes), the "fair tax" proposes to eliminate all income taxes and replace them with a national sales tax, usually assumed to be roughly 23%. The concept is so alien to our current system that many people are confused by it, but Megan McArdle has done a decent enough job summarizing its major tenets, benefits, and flaws:

Leaving aside the moral quandaries inherent in the flat tax--I will blog
about those in another post--here are the specifics: the fair tax is essentially
a 30% sales tax, with a "prebate" mailed to everyone to cover necessities up to
the federal poverty level. Advocates promise that we can eliminate the IRS, that
everyone will get to keep 100% of their paycheck, and that angels will descend
from heaven singing "Hallelujah" the moment it is passed.

The proposal's technical merits are as follows:

Compliance is considerably easier to get from companies than it is from individuals; overall, I would expect the level of tax compliance to rise slightly under this scheme.

Consumption taxes are generally agreed to be economically preferable to flat income taxes, because they encourage savings and investment.

It ends the enormous amount of time that Americans spend trying to figure out their taxes.

It involves radical tax simplification, an idea that would be endorsed by virtually every economist as an improvement over the current system.

The prebate simplifies welfare policy by eliminating the means-testing component.

The downsides:

It's unlikely to raise as much revenue as claimed

Because the tax is not calculated separately, but included in the price, it would be to some extent less transparent than the income tax

It will end up being quite regressive, with the highest effective burden falling on the lower tiers of the middle class.

After eliminating the IRS, you're going to have to create a new, very
large government bureaucracy to manage distribution of the "prebate". Also, now
every American citizen will have to immediately register any change in address
with the Federal government

This will not stop politicians from playing
games with the tax code; stand by for long campaign arguments over increasing
the prebate.

[In short] It's not the worst possible tax policy, but it's certainly not
the best one either.

She is more optimistic than I am, and so I link to Bruce Bartlett, who has written an excellent article describing the trouble with the "fair tax". It should be read by everyone who is interested in the idea. Note: this will never get done, if only because it is regressive and a lot of the most negative effects will be felt by retirees (who get a lot of their "income" by drawing down savings which have already been taxed as income) and larger, lower middle class working families. These groups are very strong lobbies, and will never allow it to happen.