By Jonathan Weisman
Washington Post Staff Writer
Friday, December 28, 2007
To former Arkansas governor Mike Huckabee, supporting a national retail sales tax is more than a policy proposal. It has provided much-needed muscle for his campaign, filling rallies and events with fervent supporters hoping to replace the entire income and payroll tax system.
There's one problem: A national sales tax won't work, at least not according to tax experts and economists of all political stripes. Even President Bush's Advisory Panel on Federal Tax Reform dedicated a chapter of its 2005 final report to dismissing such proposals.
"After careful evaluation, the Panel decided to reject a complete replacement of the federal income tax system with a retail sales tax," the panel said. It concluded that such a move would shift the tax burden from the rich to the poor or create the largest entitlement program in history to mitigate that new burden.
Under the proposal, known to supporters as the FairTax, the Internal Revenue Service and the entire income and payroll tax system would be abolished. Americans would then pay a sales tax on virtually everything: a new home, yard work, food, health care. Only education would be broadly exempted.
FairTax advocates say a 23 percent tax rate would maintain the same amount of money flowing into the Treasury, though that number is debatable. An item priced at $1 would actually cost consumers 30 percent more, or $1.30. FairTax advocates say that amounts to a 23 percent rate, because 30 cents is 23 percent of the product's after-tax cost of $1.30.
To offset the burden on the poor, the FairTax system would send monthly checks to everyone in the nation, compensating for taxes paid up to the poverty level and ensuring that some minimum standard of living would go untaxed. The president's tax overhaul panel, in its final report, estimated that such a program would cost $600 billion to $780 billion a year, making "most American families dependent on monthly checks from the government for a substantial portion of their income."
But the biggest criticism is that the tax cannot be administered. Many economists say a black market would develop overnight, especially in the service sector.
"Under the FairTax, every time you purchase a service, you would probably get two prices -- one you can pay with a check or credit card that includes the FairTax, and one you can pay in cash and save 23 percent," conservative economist Bruce R. Bartlett wrote this week in the publication Tax Notes. "Because there would no longer be any audits of income, since the IRS would have been abolished . . . massive evasion is inevitable."
At the same time, federal spending would shoot up because the government would have to pay sales taxes on purchases. To compensate, the sales tax rate would have to rise to more than 40 percent for the government to take in as much as it does now, said William G. Gale, a tax economist at the Brookings Institution. State and local governments, facing a new burden on purchases, would have to increase taxes to maintain current levels, as well.
To Huckabee, there seems to be no downside to a national sales tax. By eliminating federal income and payroll taxes, businesses would save considerable sums and pass on the savings. The FairTax would lower the cost of retail goods, make U.S. companies more competitive internationally, send the economy into overdrive and even encourage thrift, since the national sales tax would apply only to new goods.
"Am I running for president to shut down the federal government? Not exactly," Huckabee says on his Web site. "But I am running to completely 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 we will have the FairTax, a simple tax based on wealth."
Once an advocate of a single, "flat" income tax rate, Huckabee was converted by FairTax advocates who peppered town hall meetings while he was governor. Now, FairTax supporters pack events to cheer him on. A May rally in Columbia, S.C., attracted about 10,000 FairTaxers, who cheered rapturously when Huckabee declared: "I realize that the FairTax organization does not endorse candidates, but let me be very clear: I endorse you."
Nonetheless, FairTax's detractors are legion. In Tax Notes, Bartlett spent 15 pages attacking the proposal and its advocates, whom he accuses of being ignorant or dishonest. Dale W. Jorgenson, a Harvard University economist and elder statesman on tax overhaul, called the FairTax "reform by focus group."
"These people have to be taken seriously," Jorgenson said of the organized campaign for the FairTax. "They're not terribly experienced in politics. But they have this grass-roots movement out there. They have cornered the market, and nobody in the political world is out there saying this is nuts."
Alvin Rabushka, the father of the flat tax and a senior fellow at Stanford University's Hoover Institution, said anyone who professes to be an independent businessman or contractor would label every purchase as a wholesale transaction or business necessity, because business-to-business purchases would not be subject to the tax.
"For me at least, a national retail sales tax is an attractive idea," Rabushka wrote on his blog this month. "Only fools pay retail."
Charmaine Yoest, a Huckabee spokeswoman, said that all tax systems have their flaws, and that Huckabee would address issues of compliance as president.
In all these criticisms, FairTax advocates see sour grapes. Ken Hoagland, a spokesman for Americans for Fair Taxation, said Bush's tax panel was headed by tax lobbyists, including former senators Connie Mack (R-Fla.) and John Breaux (D-La.), intent on maintaining the current system and their livelihoods.
As for Rabushka, a hero in many conservative tax circles, "This is a guy who's been trying to sell an idea on tax reform for years and gotten nowhere with it," said David G. Tuerck, an economist at Suffolk University in Boston and a FairTax advocate. "He's showing some signs of panic, now that we've got at least one serious presidential candidate backing us."