Economist Bruce Bartlett has recently published an excellent article debunking the "Fair Tax," a proposal to replace the federal income tax with a 23% sales tax that has been endorsed by Republican presidential candidate Mike Huckabee and a few other conservatives. As Bartlett explains, some prominent Fair Tax supporters falsely claim that it is what he calls a "double free lunch." Against both empirical evidence and basic economic theory, they claim that people will get to keep all the money they would now pay as income tax without experiencing any increase in the prices of goods and services they purchase (even though the latter would now have a hefty new sales tax attached to them).
In addition to Bartlett's many well-taken objections, there is another serious problem with the Fair Tax and other schemes to replace income taxation with sales taxes: they makes the true cost of government less visible to voters. For all its flaws, the income tax system at least gives taxpayers a fairly clear indication of what their total income tax liability is: every April you have to calculate it, or hire an accountant to do it for you. In a sales tax system, by contrast, you don't really know how much money you're paying the federal government in all. To be sure, you can calculate the amount by keeping close track of all your purchases and then multiplying by 0.23 at the end of the year (assuming the proposed Fair Tax rate of 23% is the one enacted). However, given that most voters are "rationally ignorant" and have little incentive to keep close tabs on government policy, it's unlikely that many will do so. Moreover, as Bartlett explains, Fair Tax supporters intend to supplement their basic proposal with a complex system of rebates that would make the total tax burden even more difficult to calculate. The net result of the Fair Tax would be to make the true cost of government less visible to voters. That, I would argue, has been one of the effects of the somewhat similar value added tax (VAT) by which many European countries raise a large part of their revenue.
I'm not suggesting that this effect is Huckabee's objective or that of other Fair Tax supporters. The libertarian in me is a bit suspicious of Huckabee's motives, given his simultaneous support for high levels of government spending and "nanny state" regulation. A political leader with Huckabee's views has an obvious interest in establishing a tax system that would reduce public awareness of the costs of the many government programs he advocates. However, I don't doubt that there are many people who support the Fair Tax in good faith, and perhaps Huckabee is one of them. Whatever their motives, however, the potential harm caused by the enactment of the Fair Tax is likely to exceed any benefits.
UPDATE: It's worth noting, as Bartlett points out in his article, that the 23% Fair Tax rate is misleading. If one were to calculate the FT tax rate the same way we normally describe income taxes and state sales taxes, the true FT rate would be about 30%. The 23% figure is arrived at by calculating the tax's percentage of the total price of a good, including the tax, as opposed to the conventional method of calculating the tax's percentage of the pretax price. If you want a more detailed explanation of this point, see Bartlett's article. For the purposes of this post, the bottom line is that the misleading way Fair Tax advocates calculate their proposed tax rate is likely to make it even more difficult for taxpayers to figure out how much they are actually paying to the government each year.
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