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.

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.