An Idea So Crazy It Just Might Work

Mike Huckabee's candidacy may be about to expire, but it would be too bad if the talk about the so-called Fair Tax expired as well. Fair Taxers propose eliminating the federal income tax and replacing it with a national sales tax. Not only would the income tax go away (and the filing headaches that go with it), but so too would payroll taxes, estate taxes, and taxes on corporate profits. Instead, consumers would tack on 30% to everything they purchase.

Now 30% may sound hefty, but it would apply primarily to discretionary spending. Subsistence spending would be covered by a per-person "prebate" provided by the government. Besides, 30% is the minimum that a self-employed person is already paying in combined income (at least a 15% marginal rate) and Social Security and Medicare taxes (the latter adding to 15.3%). For people who do not borrow to spend, the tax swap is a wash. For those who save some of what they earn, the Fair Tax is better.

One of the problems with the income tax is that it does not get at all the income. Some income is received under the table (and not reported), some is generated by illicit activity (and certainly not reported), and some of it is sheltered by loopholes not available to peons like you and me. Consumption, on the other hand, is much harder to hide. When a drug-dealer surfaces to buy his fancy new car, that is when we extract his contribution to society. In such a case 30% does not seem like too much.

A consumption tax with prebate is more progressive than our current tax system, which wealthy folks have learned to game. Much of their income is reported as capital gains, which are taxed at 15% and are not subject to the same payroll taxes taken from wage-earners. But why even realize capital gains? The rich can borrow cash, using their assets as collateral, at a rate far lower than 15%. Nice work, if you can get it.

What economists have to say about government intervention can be summed up briefly. If you want less of something, tax it; if you want more of something, subsidize it. It would follow, then, that the Fair Tax would lead to more production and less consumption, an outcome that would begin to repair our personal and collective balance sheets. The State of Maine could do its part by adding a penny or two to the state sales tax and shrinking income-tax collections by an equivalent amount.