Huckabee's Retail Sales Tax: It Doesn't Add Up
Mike Huckabee wants to replace the entire federal tax system with a national retail sales tax of 23 percent. Trouble is, he can't do it and maintain anything like the government that Americans have come to expect.
In the real world, the actual tax rate would be at least one-third higher than the 23 percent the former Arkansas Governor claims. To put it another way, Huckabee's proposed 23 percent rate would produce about $7 trillion less revenue than the feds expect to collect over the next decade. That would result either in a staggering increase in the national debt or a massive 25 percent reduction in government.
Huckabee is surging in the GOP presidential polls, and his ideas are generating a lot more attention. Among the most controversial is his national retail sales tax, which would eliminate all federal individual and corporate income taxes, estate taxes, and payroll taxes for Social Security and Medicare. He would also abolish the Internal Revenue System. At first glance, it sounds pretty attractive, especially for Republican primary voters.
But look a little more closely. In theory, the sales tax would be imposed on every retail transaction, including home mortgages, car purchases, health care, education, and food. No exceptions. Even government purchases would be taxed. Because relatively poor people spend more of their income than rich people, Huckabee includes a rebate to partially offset the impact of the levy.
That's the theory. The reality is that long before such a tax becomes law, lobbyists would convince politicians to exempt many goods and services. Imagine the firestorm when Congress tries to impose a 30 percent tax on health care or nursing home costs.
If this tax ever did become law, it would induce staggering sticker shock among consumers and massive evasion would follow. “Paper or plastic” would be replaced with a new question at the checkout line: “How much for cash?”
Even without the lobbying and cheating, policy experts say the rate could never get close to 23 percent. Don't take my word for it. In 2005, President Bush's Tax Reform Commission figured the rate would be at least 34%. The Tax Policy Center's Bill Gale estimates it would be at least 44% and probably lots higher.
A word about the rates: While Huckabee says his sales tax rate is 23 percent, he'd actually add 30 cents in tax to the price of something that costs $1. To understand why, you should know that economists measure taxes in two ways—the tax-inclusive rate and the tax-exclusive rate. The tax-inclusive rate, which is the way we figure income taxes, is the percentage of something's total cost, including the tax itself. That's how Huckabee gets a 23% rate. But when most people talk about sales taxes, they are thinking about the tax exclusive rate. By that measure, Huckabee's tax rate isn’t 23 percent at all. It is 30%.
When it comes to economic policy, Huckabee is usually a pretty serious guy. But a national sales tax just doesn't add up.
In addition to the concerns pointed out by the President’s Commission and those Howard notes, there are two other issues: phoney simplicity and federalism.
The so-called allure of the Fair Tax has always been the potential for eliminating the IRS, because it would simply (sic) be the imposition of the 23 or 46 or whatever percent national sales tax on all good and services—taxes, of course, to be collected by states, lest the federal government be required to create the FRS (Fair Revenue Service). But there are some 750 different state and local sales tax systems currently in the United States. Is the intention here to create a 751st? Who will determine and define what this is? Who will be in charge of enforcement?
To Governor Huckaby’s credit, he has always been a strong proponent of simplifying the mystifying miasma of different and conflicting state and local sales tax systems to bring the sales tax into the 21st century and to overcome the Constitutional nexus discrepancies. A national sales tax would force the issue and mayhap have a consequential beneficial impact for states and local governments.
Any such benefit would be far more than offset, however, at the concept of federal taxation of essential state and local government purchases and services—a concept antithetical to any of those thoughtful Philadelphia discussions of the founding fathers, but potentially reverberating into significant pressures on local property taxes and state sales taxes. Because, of course, in our federalism piggy-backing of state and local corporate and individual income taxes, elimination of the federal income tax would, perforce, pull the rug out from under existing state and local income tax systems.
The Tax Doctor