Huckabee's tax plan appeals, but is it fair?

Long before Mike Huckabee began campaigning for president, advocates for replacing the entire federal tax system with a national sales tax were campaigning to convert him to their cause.

Long before Mike Huckabee, the former Republican governor of Arkansas, began campaigning for president, advocates for replacing the entire federal tax system with a national sales tax were campaigning to convert him to their cause.

They succeeded. “Am I running for president to shut down the federal government? Not exactly,” Mr. Huckabee says on his Web site. “But I am running to eliminate all federal income and payroll taxes. And I do mean all — personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment.”

“Instead,” adds Mr. Huckabee, who demonstrated his appeal to voters with his victory on Thursday in the Iowa caucuses, “we will have the FairTax, a simple tax based on wealth.”

Under the plan, Americans would pay only one federal tax, which would be applied to just about everything they buy: not just the goods people buy at stores on which most states assess a sales tax, but nearly all services, including health care and insurance, the purchase of a new home or rental of an apartment, even things like a teenager mowing a lawn or baby-sitting for a neighbor.

But the FairTax, as its many fervent backers call it, is not as simple as its supporters describe. And, to most tax experts who have looked at the proposal, it is anything but fair. For one, its burden would fall disproportionately on middle-income people.

Still, the plan has undeniable appeal. “There is a yearning across the political system to make the tax system better,” said William G. Gale, a critic of the proposal who is a leading tax economist at the Brookings Institution, the liberal-leaning research organization in Washington. “Right now the only people talking about tax reform are the sales tax advocates.”

Supporters, including a handful of tax experts like Laurence J. Kotlikoff, an economist at Boston University, contend that a rate of about 23 percent, applied across the board, would bring in just as much money to the Treasury as all the taxes the federal government now collects.

It is not the same as a normal sales tax, however. Under the proposal, the tax is included first. That means a $100 item would cost $130, or 30 percent more. The plan’s supporters say that works out as a 23 percent rate because $30 is 23 percent of $130. Americans would no longer face federal withholding from their paychecks. But most analysts say the tax rate necessary to replace current federal revenues, under any likely plan, would actually need to be much higher. By some estimates it could add 40 percent, if not more, to the cost of living.

Whatever the rate, critics say, a steep federal retail tax, piled on top of existing state sales taxes, would encourage widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.

“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson, an economist at Harvard who opposes the plan but whose research into problems with the current system is sometimes cited by supporters. “It tries to roll everything into one tax, which simply can’t carry all that weight.”

Mr. Huckabee, according to polls, won the Iowa caucuses largely on the strength of his appeal to evangelical voters and voters’ desire for change. But his campaign received much of its early backing from FairTax advocates who flocked to his banner and continue to fill seats at campaign rallies and provide financial support.

In May, at a rally in Columbia, S.C., about 10,000 supporters of the proposal turned out to hear Mr. Huckabee declare, “I realize that the FairTax organization does not endorse candidates, but let me be very clear: I endorse you.”

Supporters of the sales tax plan are particularly drawn to the feature that calls for repealing the 16th Amendment and abolishing the Internal Revenue Service. That fits with the insurgent, populist-tinged nature of Mr. Huckabee’s campaign.

“The public desperately desires a better way to collect federal taxes for the common good and recognizes the current system as both inherently flawed and then further corrupted by inside-the-Beltway machinations,” Leo E. Linbeck Jr., the multimillionaire founder of Americans for Fair Taxation, wrote in a recent letter defending the decade-old proposal. “It is understood by those who are joining our effort that overcoming the self-interest of the increasingly disdained Congress and the army of income tax system defenders is no small task.”

For Mr. Huckabee, the sales tax plan also helps provide political cover against attacks from antitax Republicans, who suspect, based on his actions as governor, that he might be tempted to raise taxes in the White House.

“It would certainly help limit runaway government spending,” Mr. Kotlikoff said. “Everybody would understand that there is a single tax: the government spends more, everybody’s tax rate will go up.”

Like any tax on consumption, the biggest burden, comparatively, would fall on the poor. To help compensate for this, the plan would provide a monthly check from the government to every American household, rich and poor alike.

The rebate amount would be set to equal what a household living at the poverty level would pay in taxes, leaving some of the poor better off and cushioning the proposal’s impact on the middle class.

But, apart from the administrative nightmares associated with giving every household a rebate, it would still not prevent transferring a substantial part of the current tax burden from those with annual incomes above $200,000, who tend to save a large part of their income rather than spending it, to those earning less.

“Even with the rebate counted the way FairTax supporters want it calculated,” said Bruce Bartlett, a conservative tax analyst and policy maker in the Reagan administration who has emerged as one of the proposal’s most powerful critics, “there would be an enormous shift in the tax burden from the wealthy to those with lower and middle incomes.”

Advocates for the proposal look at the distribution of taxes differently. Mr. Kotlikoff argues that over a lifetime most people spend just about everything they earn from their work and investments, so that those who avoid taxes on their savings now would end up paying later when they consume their wealth.

“The FairTax, looked at correctly, is actually pretty progressive,” contends Mr. Kotlikoff, who has been paid by the FairTax organization for his research. “Liberals should love it: it lowers taxes on wages and imposes a tax on wealth.”

Like many single-issue causes of the past, including the “Cross of Gold” campaign of William Jennings Bryan at the turn of the 20th century and the Depression-era “Every Man a King” plan of Huey Long to redistribute wealth, supporters make plenty of grandiose claims for the sales tax plan.

Advocates say that businesses, no longer required to pay taxes themselves, would pass on their savings to consumers through lower prices. The plan would also eliminate hundreds of billions of dollars to comply with the income tax, provide a huge jolt to economic growth and give American companies a competitive advantage against foreign producers.

But even though critics acknowledge that there would be some economic benefits from introducing a broad-based consumption tax, Mr. Gale of the Brookings Institution said that the proposal itself was “fundamentally a ruse.”

“The notion that there is a 23 percent rate that solves all our problems,” he said, “is politically unrealistic and mathematically impossible.”