Republican presidential candidate Mike Huckabee has been in early-primary-state New Hampshire talking up his support for eliminating the federal income tax and replacing it with a national sales tax.
Let us begin by saying that we’re thrilled that a presidential candidate is talking about fundamental tax reform. And the Institute for Policy Innovation is based in Texas, which is one of the states with a state sales tax rather than a state income tax. So we’ve seen sales taxes serve as a more than adequate replacement for income taxes.
That system works pretty well; Texans don’t fill out or file any income information with the state. As a way to address the regressivity inherent to a sales tax, Texas excludes several necessities, such as food, housing, prescription drugs and medical bills—items that take up a disproportionate share of low-income workers’ incomes.
Were we able to get a national sales tax working that well, we’d be all for it. But—You knew a “but” was coming, didn’t you?—count us as skeptical.
The biggest problem with the national sales tax is that the rate is too high. Huckabee supports what’s known as the FAIR Tax, which proposes a 23 percent sales tax—though many tax experts think it is really 30 percent.
Add state and local sales taxes on top of that and people will start actively looking for ways to engage in business off the books. In other words, avoiding sales taxes will likely be a bigger “business” than avoiding income taxes. Especially since that 23-percent rate includes taxing new homes, medical care, attorney’s fees, etc.
The FAIR Tax also eliminates the payroll tax, which pays for Medicare and Social Security. But rather than just lumping entitlements in with all other government spending, a better solution to our entitlement problem is personal retirement savings accounts.
Sales taxes are inherently regressive, so the FAIR tax envisions sending Americans a monthly check so that the poor pay no net sales tax and to offset the taxes people would pay on essential goods and services.
But is it a good idea to implement a scheme where every American gets a monthly check from the federal government? Yes, it’s meant to be a rebate, but our guess is that over time, that distinction would get lost.
FAIR Tax proponents have a habit of talking about “eliminating the IRS” as a result of their tax plan. One strength of a sales tax is that it preserves taxpayer privacy—you don’t have to tell the IRS how many children you have, what their names are, or divulge all of that other private detail about your finances.
But let’s face it—there is always going to be a government agency in charge of collecting revenue. You can rename it, and you can make it less invasive, but there is always going to be an IRS, or its equivalent.
The biggest advantage of the FAIR Tax is that it makes the process transparent -- people will know how much they are actually paying for their government. And the question is: Once they see it, will they be moved to cut the government or simply avoid the tax?
Ultimately, the biggest problem with replacing all federal income taxes with a national sales tax is its honesty. By condensing all federal taxes into a single sales tax rate, the cost of our enormous government is an enormous sales tax rate, probably too big to swallow, politically. Ignorance, in this case at least, is political bliss.