So with Huckabee's Iowa victory, many people are wondering: what should I think about the Fair Tax?
Leaving aside the moral quandaries inherent in the flat tax--I will blog about those in another post--here are the specifics: the fair tax is essentially a 30% sales tax, with a "prebate" mailed to everyone to cover necessities up to the federal poverty level. Advocates promise that we can eliminate the IRS, that everyone will get to keep 100% of their paycheck, and that angels will descend from heaven singing "Hallelujah" the moment it is passed.
The proposal's technical merits are as follows:
- Compliance is considerably easier to get from companies than it is from individuals; overall, I would expect the level of tax compliance to rise slightly under this scheme.
- Consumption taxes are generally agreed to be economically preferable to flat income taxes, because they encourage savings and investment.
- It ends the enormous amount of time that Americans spend trying to figure out their taxes.
- It involves radical tax simplification, an idea that would be endorsed by virtually every economist as an improvement over the current system.
- The prebate simplifies welfare policy by eliminating the means-testing component.
- It's unlikely to raise as much revenue as claimed
- Because the tax is not calculated separately, but included in the price, it would be to some extent less transparent than the income tax
- It will end up being quite regressive, with the highest effective burden falling on the lower tiers of the middle class.
- After eliminating the IRS, you're going to have to create a new, very large government bureaucracy to manage distribution of the "prebate". Also, now every American citizen will have to immediately register any change in address with the Federal government
- This will not stop politicians from playing games with the tax code; stand by for long campaign arguments over increasing the prebate.
It's not the worst possible tax policy, but it's certainly not the best one either.