When the Fair Tax becomes law, it will be like waving a magic wand releasing us from pain and unfairness.
Mike Huckabee makes the Fair Tax sound lovely. But he's glossing over objections raised by a host of critics who say that the Fair Tax is unfeasible and unworkable. The Fair Tax would be a sales tax that would replace all income taxes. Legislation to create it, which Huckabee supports, is introduced annually in Congress; the latest version can be found here . It's true that if the Fair Tax were implemented, people would get all of their paychecks (unless their employers decided to cut wages and keep the tax savings for themselves). Getting all your taxes back certainly sounds like a nice release from pain. But there are other potentially painful implications down the road that Huckabee sidesteps. Proponents of the Fair Tax support a 23 percent tax rate that assumes most people would pay the taxes they owe. Economists say that when sales taxes reach that level, the incentive for people to cheat rises. People will try to buy things off the books, and underground economies will develop. To compensate for tax evasion, the tax would have to be raised even higher, which would lead to more evasion. Abolishing the Internal Revenue Service would exacerbate the problem of compliance, said economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. "At the end of this story, when you add in some state sales taxes, we could be close to 50 percent." he said. "Almost all the economists who have looked at proposals for relying exclusively on a sales tax have concluded that it is unworkable because the tax rate would have to be very high." That sounds kind of ouchy to us. The transition process could also cause economic disruptions as people across the country stock up on goods before the sales tax takes effect. "The economy would experience a surge in demand for goods as the switchover date approached and then demand would collapse," wrote David Cay Johnston in his book on tax evasion and enforcement, Perfectly Legal . A change-over would also negatively impact people who've saved, especially senior citizens. Retirees, who already have paid taxes on their income, will be taxed again on purchases they make from savings they already paid taxes on. (For a longer discussion of the Fair Tax, read our article on it here .) Much of the Fair Tax debate depends on what will happen if the country switches from an income-based system to a consumption-based system, a major overhaul of U.S. tax policy that could have significant unintended consequences. To be clear, we're not ruling on what will happen if the Fair Tax is implemented. Rather, we're pointing out that Huckabee's statement blithely glosses over a number of highly credible objections. It's tempting to give him a pass on his statement as just more overheated campaign rhetoric. But it seems clear to us that such a massive overhaul of the U.S. tax system would not be an end to pain and unfairness "like a magic wand." So we find his statement False.
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