Huckabee's Tax Plan Is Brilliant

[one...two...tree 2,762]

By Steven E. Landsburg

Mike Huckabee is not my favorite candidate, though I relish the irony of an evolution-denier whose basic appeal is to voters' most apelike instincts. But I do give him credit for one thing: an innovative tax plan that's being trashed by journalists who almost universally fail to understand its consequences.

Basically, Huckabee's plan is to eliminate the income tax and replace it with a national sales tax. To a first approximation, that's not such a radical change. As long as you spend what you earn, a sales tax feels just like an income tax. If you earn $1,000 a week and spend $1,000 a week, it doesn't matter whether I take 20 percent of your income or 20 percent of your spending.

In the long run, most people, or at least most families, do spend what they earn. (Why earn it if you're not going to spend it?) True, some of us die with money in the bank, but usually our children or grandchildren step in to spend the remainder for us. So, as far as your dynasty is concerned, a 20 percent income tax and a 20 percent sales tax are equally painful

Except for one thing: With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008. (Actually, you'll pay more, of course; I'm assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!

So, one way to mimic the effect of a sales tax is to let you deposit every dollar you earn directly into an IRA. As far as your family—or any family—is concerned, the effects are identical. A sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties). The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.

A lot of economists, myself included, think that there's a lot to be said for unlimited IRAs. Any conceivable tax system discourages work, which is unfortunate but unavoidable. But the current system also discourages saving, which is avoidable. A liberalized IRA policy—or, equivalently, a sales tax—eliminates that problem. The downside is that when IRAs grow, there's less income to tax, so tax rates must be higher—which increases the disincentive to work. But for the past decade or so, the macroeconomics journals have been rife with papers arguing—on highly technical grounds—that the terms of that tradeoff are well worthwhile.

Bottom line: Unlimited IRAs, coupled with somewhat higher tax rates, have advantages and disadvantages, but the advantages are bigger. And whatever can be said about unlimited IRAs coupled with somewhat higher tax rates can equally be said of a national sales tax.

Another alleged difference between sales and income taxes is that income taxes can be graduated, while sales taxes can't. Maybe, maybe not. There might be a way to design a graduated sales tax. Your credit-card providers have a pretty good idea how much you spend each year, and the government could in principle use that information to set your tax rate. Yes, there are a lot of details to be worked out, and yes, it's highly intrusive—but I'm not convinced it's any more intrusive than what we've got now.

But the good news is that the details don't matter, because there's an easier way to design a graduated sales tax. Namely, keep the graduated income tax and add a provision for unlimited IRAs. Presto, you've got the equivalent of a graduated sales tax.

That's not necessarily desirable. You could well argue that a flat tax rate is a feature, not a bug. But that's a topic for a different column. The point of this column is that the whole flat-versus-graduated issue is quite tangential to the sales-versus-income-tax issue. And the underlying issue becomes a lot clearer once you realize that a sales tax is a modified income tax. The right question is: Is the proposed modification a good one? The answer, according to a growing consensus among macroeconomists, is: Yes.

http://www.slate.com/id/2181833/nav/tap3/

[no name 1]

Good message does not = good messenger

[w¡n9Nµ7 §£@¥€r 123]

With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008 ... With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!

You're taxed on tax-deferred IRA savings when you withdraw the money from the IRA, not when you spend it.

That is such a basic fact of IRAs that I wonder how much the author really knows on the subject.

For more information about the Fair Tax, which is the plan Huckabee advocates, go to http://www.fairtax.org.

[one...two...tree 2,762]

With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008 ... With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!

You're taxed on tax-deferred IRA savings when you withdraw the money from the IRA, not when you spend it.

That is such a basic fact of IRAs that I wonder how much the author really knows on the subject.

For more information about the Fair Tax, which is the plan Huckabee advocates, go to http://www.fairtax.org.

I didn't get that he was trying to say it otherwise. He may have structured his sentence poorly, but I'm pretty sure he knows enough about IRA's...he's an Economics Professor, University of Chicago.

[w¡n9Nµ7 §£@¥€r 123]

With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008 ... With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!

You're taxed on tax-deferred IRA savings when you withdraw the money from the IRA, not when you spend it.

That is such a basic fact of IRAs that I wonder how much the author really knows on the subject.

For more information about the Fair Tax, which is the plan Huckabee advocates, go to http://www.fairtax.org.

I didn't get that he was trying to say it otherwise. He may have structured his sentence poorly, but I'm pretty sure he knows enough about IRA's...he's an Economics Professor, University of Chicago.

I can withdraw money from an IRA, pay taxes on it that year, and not spend it for many years to come even though I've already been taxed on it. The analogy is highly imperfect. He is pushing the Fair Tax.

I'm not saying the Fair Tax is a bad idea. Simply pointing out that the IRA comparison is flawed.

Edited January 11, 2008 by VJ Troll

[JohnK 0]

A tax on spending is a much heavier tax on the poor than it is on the rich. While the rich may spend more money in general, they usually spend much less percentage-wise of their incomes than poor people. So a poor family that lives hand-to-mouth gets taxed on 100% of their income and a rich person who only spends $2 million out of their $10 million of income is only taxed at 20%.

[w¡n9Nµ7 §£@¥€r 123]

A tax on spending is a much heavier tax on the poor than it is on the rich. While the rich may spend more money in general, they usually spend much less percentage-wise of their incomes than poor people. So a poor family that lives hand-to-mouth gets taxed on 100% of their income and a rich person who only spends $2 million out of their $10 million of income is only taxed at 20%.

Actually, that's not entirely accurate:

All valid Social Security cardholders who are U.S. residents receive a monthly prebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The prebate is paid in advance, in equal installments each month. The size of the prebate is determined by the Department of Health & Human Services’ poverty level guideline multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc. See chart in Figure 1 below.

[one...two...tree 2,762]

NM...what Gupt said.

Edited January 11, 2008 by Mister Fancypants

[w¡n9Nµ7 §£@¥€r 123]

deleted - what MF said.

Edited January 11, 2008 by VJ Troll

[one...two...tree 2,762]

deleted - what MF said.

LOL...sorry. Huckabee was interviewed on my local radio station several months ago about his tax plan. I was really impressed. The talk show host brought on some economists who talked about the tax proposal (I think both of them represented a 'left' and 'right' view), and they both believed it to be a reasonable alternative to our current tax system.

One problem I think it would create though is that it is putting a huge burden of tax collecting on merchants and with that I think it opens the possibility of tax fraud on that end.

[w¡n9Nµ7 §£@¥€r 123]

One problem I think it would create though is that it is putting a huge burden of tax collecting on merchants and with that I think it opens the possibility of tax fraud on that end.

It works well when there are few, large merchants. As is the case today with the big box stores. A fair tax would kill wal mart by driving more business to smaller merchants who can successfully evade the fair tax.

[one...two...tree 2,762]

One problem I think it would create though is that it is putting a huge burden of tax collecting on merchants and with that I think it opens the possibility of tax fraud on that end.

It works well when there are few, large merchants. As is the case today with the big box stores. A fair tax would kill wal mart by driving more business to smaller merchants who can successfully evade the fair tax.

Ewwww...I'm liking it even more then. Anything to level the playing field.

[no name 1]

deleted - what MF said.

M.....F.....

[one...two...tree 2,762]

deleted - what MF said.

M.....F.....

MoFo works too.