On January 3, Iowa voters spoke out and voted for Mike Huckabee, the former Republican Governor from Arkansas. Over the past few week’s Huckabee has garnered a lot of media attention due to his far right religious views and his support for a national sales tax. These views appealed to the people in Iowa as 35% of Republican voters selected him to represent their party in the general elections. Although the Iowa voters supported Huckabee, his “fair tax” views are likely to become the Achilles heel of his campaign, and could cost him the election.
The fair tax policy is an idea that was actually thought-up in the mid-1990s by the Texas based Americans for Fair Taxation. The basic premise is simple. Instead of charging a federal income tax all of the federal revenue would be generated from a 23% flat tax on purchases. According to the plan, states would collect the funds and forward them to the federal government. Huckabee claims this system ensures a fair, progressive, sustainable tax system that encourages economic growth. He claims it allows working individuals to take home 100% of their paychecks and it would encourage saving and responsible spending.
This plan may look good at a glance, but upon further inspection it’s full of holes. Tax experts across the country, both Republican and Democratic, agree this plan will not work. Bruce Bartlett, a conservative economist and former official from the Department of Treasury even goes as far as saying, “anyone who supports it {the fair tax} should not be taken seriously.”
Supporters of the fair tax claim a 23% sales tax would need to be levied on all purchases Americans make. But how they came up with this number is a mystery. Independent research continues to show that the tax would need to be far higher to support the government at current levels. One bipartisan group, the Advisory Panel on Tax Reform, conducted a study that showed the tax rate would need to be at least 34%. Additional studies put the tax rate as high as 50%.
Huckabee’s plan also predicts that American spending habits will stay the same as they are now. However, with a massively higher sales tax many predict a strong black market would surge, thus providing a way for many to avoid the tax on larger purchases. Not paying the sales tax would be as easy as driving across the border to make a purchase in Canada or Mexico.
One major selling point of the fair tax is that people can keep 100% of their wages. People seem to respond well to this idea of not having to hand over a portion of their wages. This logic has problems. What about retirees who have paid an income tax their entire lives? Would they not be – in effect – taxed twice? So far, Huckabee’s plan fails to account for these individuals.
Huckabee also claim’s his fair tax is progressive. “All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities,” Huckabee explains. “This means people below the poverty line will not be taxed at all. We will be taxed on what we decide to buy, not what we happen to earn.” However, these rebates would cost the federal government an estimated $600 billion per year.
Consider this: a 2006 Department of Labor study shows that households at every income level spend more than the poverty line. The average family making under $70,000 per year spends more then it earns. While the average family making more then $150,000 per year spends less then half of what it makes. Therefore middle-class families would get hit the hardest from a national sales tax. This plan is not progressive whatsoever it’s regressive.
Huckabee’s plan also calls for the abolishment of the Internal Revenue Services (IRS). This has many people wondering - if there is no IRS, then who will collect and monitor the new sales tax? Additionally, who is to monitor the distribution of the tax rebates? The government certainly cannot rely on the “honor system.” The American public disdains the IRS and any plan to get rid of it sounds good to most Americans. However, in order for the government to function and collect the sales tax a new institution with many of the same responsibilities as the IRS would need to be setup. It would just have a different name.
Granted, the fair tax plan is not completely bad. Economists do generally agree that a fair tax has the potential to cause economic growth. Without income taxes there will be no need for corporate tax shelters. With no corporate taxes, corporations would be more likely to do business in the country. However, it is unlikely these small benefits will outweigh all the other holes and discrepancies in the fair tax plan.
It is also interesting to note that Huckabee is the strongest supporter of the fair tax plan, when his history as Governor of Arkansas gives a drastically different impression of his tax views. While he was in office, he cut taxes 90 times but more than made up the difference with 21 tax increases. Between 1998 and 2006 Arkansas’s state budget increase by over $5.2 billion.
Huckabee may have won over Iowans with his empty promises of a fair tax, but he will have a much harder time as this election year continues. So much attention has been placed on his moral and religious beliefs that voters probably have not given any real though to his radical tax plans. If Huckabee wants to stand a chance in the general election, then he will slowly begin to distance himself from the fair tax plan. However, he may have dug himself into a hole as going back on his fair tax plays would get him labeled as a flip-flopper.
