Huckabee's Tax Plans Come Under Microscope

by Leroy Baker, Tax-News.com, New York

07 January 2008

Republican presidential candidate Mike Huckabee's surprise victory in last week's Iowa caucus has led to increasing scrutiny of his policy proposals, particularly his plans for a flat tax, which some observers have argued would be difficult to legislate and unworkable in practice.

Huckabee, the former Governor of Arkansas and an ordained baptist preacher, emerged from the Iowa vote as the leading Republican candidate in the race to succeed George W. Bush in the White House, easily beating more recognisable candidates such as former New York Mayor Rudy Giuliani and Arizona Senator John McCain. However, many analysts and political pundits believe that his controversial plans replace the US tax code with a sales tax and effectively scrap the Internal Revenue Service, will not stand up to scrutiny as the primaries move on to New Hampshire, scheduled for Tuesday, and beyond.

"Am I running for president to shut down the federal government? Not exactly. But I am running to completely eliminate all federal income and payroll taxes," Huckabee states on his campaign website, continuing:

"And I do mean all - personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment."

Huckabee's proposed 'FairTax' would replace the Internal Revenue Code with a consumption tax, based on retail sales tax levies in forty-five states and the District of Columbia, and will apply only to new goods. Under this system, all taxpayers will get a tax rebate up to the poverty line, with the intention that people below the poverty line are untaxed. He claims that the FairTax will instantly make American products 12% to 25% more competitive because the cost of those goods will no longer be inflated by corporate taxes, costs of tax compliance, and Social Security matching payments.

Huckabee also argues that the sales tax system will eliminate a long-standing competitive disadvantage that US goods have, compared with goods produced in countries with value-added tax (VAT) systems.

"If you buy a bottle of French wine, the producers had their Value Added Tax rebated to them when the wine was exported. So French consumers pay those taxes, but you don't. Our current tax system puts our goods at a disadvantage both here and overseas. Other governments give their goods an advantage on the world market, an advantage estimated at 18% compared to American goods," he has stated.

The FairTax would also, Huckabee argues, encourage investment and capital formation within the US by removing incentives in the current tax code for companies to relocate overseas, and creating incentives for foreign firms to invest in the US.

"When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness," he claims.

However, as popular as Huckabee's proposals may be, whether such a bold plan could pass Congress is another matter. President George W. Bush had similar aspirations when he created the Presidential Advisory Panel on Federal Tax Reform in January 2005. Three years later, the panel's recommendations, released with little enthusiasm in November of that year, are presumably gathering dust on the Treasury Secretary's bookshelf.

What's more, analysts question whether such sales tax proposals are workable in practice. Some say that in order to be be revenue neutral, a federal flat sales tax would have to be set at a much higher rate than is desired by its exponents, eventually leading to the growth of a substantial 'black economy' as buyers and sellers seek to avoid paying the tax; according to a New York Times editorial, some estimates put the increase in the cost of living at 40% or more.

Another argument against flat taxes, and especially flat consumption taxes, is that they are regressive, because the poor pay a significantly higher proportion of their income in tax than the wealthy, meaning that the 'FairTax' would be anything but.

It is also unclear what effect the new tax system would have on government spending and future deficits. Under the FairTax rebate system, $600 billion would be paid out to taxpayers in refunds every month. Governments would also have to pay the sales tax on all the goods and services they buy, with the exception of educational services.

Huckabee's flat tax would supposedly be set at 23%. But on closer examination, critics, such as Bruce Bartlett, a conservative economist who served as deputy assistant secretary of the Treasury for economic policy from 1988 to 1993, point out that in reality, the rate will be higher. It is assumed that a 23% sales tax would raise the cost of a USD1 item to USD1.23, but Bartlett says that under Huckerbee's system, a USD1 item will be USD1.30, because the tax is factored in first, and 23% of USD1.30 equals USD0.30.

The FairTax is unworkable, Bartlett wrote in a critique of Huckabee's plan for the Boston Globe, suggesting that:"It is a fantasy to think otherwise."

William G. Gale, a tax economist at the Brookings Institution agrees. “The notion that there is a 23% rate that solves all our problems is politically unrealistic and mathematically impossible," he told the New York Times.

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