Huckabee's rise attracts attention to his embrace of controversial tax plan

Kevin G. Hall | McClatchy Newspapers

last updated: December 10, 2007 07:32:19 PM

WASHINGTON — Republican presidential hopeful Mike Huckabee's rise to the top of Iowa opinion polls has drawn attention to his embrace of a national retail sales tax. Backers of this tax concept call the former Arkansas governor a visionary; detractors call the plan unworkable.

Huckabee supports the FairTax, a type of national retail sales tax that his campaign Web site says would abolish the Internal Revenue Service and federal income and payroll taxes.

"And I do mean all — personal, federal, corporate federal, gift, estate, capital gain, alternative minimum, Social Security, Medicare, self-employment," Huckabee said on his site's tax-policy section. "All our hours filling out forms, all our payments for help with those forms, all our shopping bags filled with disorganized receipts, all our headaches and heartburn from tax stress will vanish."

In the simplest terms, the federal tax code would be replaced with a national tax of at least 23 percent on consumption. It's a retail sales tax like those levied by 45 states and the District of Columbia.

Under the plan, all Americans would get "prebates" — a calculation equivalent to 23 percent of the poverty line. This sum, which could change annually, would be disbursed to all Americans in monthly payments. Working off of 2006 numbers, the Treasury Department last year calculated that the proposed prebate would be $6,694 per year for a family of four, or a monthly payment of just under $558.

The prebates attempt to offset what would be a disproportional burden for the poor, because their consumption reflects a greater proportion of their total income. With the prebates, the poorest Americans would effectively pay no taxes.

"The FairTax taxes us only on what we choose to spend on new goods and services, not on what we earn," the group Americans for Fair Taxation says on its Web site. Sales of new homes would be taxed, but not sales of existing homes. The same would go for sales of new cars and computers, but not sales of used vehicles and electronics.

No nation relies on a retail sales tax alone to fund its government. Some countries use value-added taxes, or VAT, which work in much the same way but tax transactions along the production chain, not only at the end point of consumer consumption. More nations, many in Europe, have income-tax systems that are augmented by VAT taxes to help pay for health and social welfare programs.

Tax-policy experts praise Huckabee for raising the sensitive issue of taxes, but some of the top U.S. thinkers on tax issues and a recent blue-ribbon presidential tax panel oppose the FairTax.

"It's unfair and it's unworkable," said Len Burman, the director of the influential Tax Policy Center, a Washington research group run jointly by The Brookings Institution and the Urban Institute, two center-left think tanks.

Although the FairTax proposal exempts the poorest Americans from federal taxes, it disproportionately lets wealthier Americans off the hook, said Burman and other critics. That's because the wealthy spend a much smaller percentage of their total income on consumption. Thus, the FairTax would rely on the spending power of the middle class to fill government coffers through the retail sales tax.

"They are not wrong in that, but that is using the old class-warfare argument to judge the fairness of a tax," said Ken Hoagland, a Houston-based spokesman for FairTax.org. "To us, the true measure is how much money is left over in your own pocket and how much of that money goes toward taxes."

Fairness was a principal reason why President Bush's Advisory Panel on Federal Tax Reform, which devoted the final chapter of its report last year to the idea of a national retail sales tax, rejected the concept.

Members of the bipartisan panel said they couldn't advocate a national sales tax because the tax burden would fall disproportionately on low- and middle-income Americans. The progressive nature of tax brackets also would be lost under the new system, although the FairTax would end payroll taxes, which are regressive because they don't distinguish between income levels.

The panel concluded that to be fair, a national retail tax would have to provide offsetting cash grants to many Americans. That could cost nearly $700 billion a year and would be the biggest entitlement program in American history, the panel said.

FairTax supporters are correct in saying that their plan could promote economic growth because it doesn't tax savings or investment, the panel acknowledged.

Opposition from state governments, many of which have retail sales taxes and state income taxes, would be another major hurdle for the FairTax plan.

"They see the sales tax as their tax base, and they wouldn't want federal encroachment," said Chris Edwards, the director of tax policy for the libertarian Cato Institute.

One major flaw in the FairTax concept is that studies across the globe repeatedly show that high retail sales taxes invite tax evasion.

In addition, the FairTax envisions a 23-cent federal retail sales tax, a number that many tax-policy experts call unrealistically low to fund the federal government.

Moreover, who would enforce collection of the retail sales tax if the IRS is abolished?

"We don't think that criticism is all the way off the mark, but we do think there are ways to deal with it," said Hoagland, noting that the brunt of American shopping is done at big stores such as Wal-Mart and national supermarket chains. He added that "there will have to be a federal government auditing function."

Hoagland also acknowledged that cross-border tax evasion would happen, but he said it would be on a smaller scale than current evasion under a system with 120 million Americans filing tax returns annually, weak enforcement on loopholes and countless deductions.

FairTax supporters have been raising money on the Internet and have driven a promotional bus across Iowa pitching their concept. They plan similar campaigning in South Carolina and Florida in coming weeks and insist they're getting traction nationwide.

"The area where we're not finding much traction is inside the Beltway of Washington, D.C.," said Hoagland.

The view inside the Beltway doesn't seem likely to change.

"It has a certain simple logic to it, but it doesn't work," Burman said of the FairTax, though he acknowledged that its supporters are zealous about a national sales tax. "It's like a religious thing.