Huckabee hawks the fair tax

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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:

  1. 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.

  2. Consumption taxes are generally agreed to be economically preferable to flat income taxes, because they encourage savings and investment.

  3. It ends the enormous amount of time that Americans spend trying to figure out their taxes.

  4. It involves radical tax simplification, an idea that would be endorsed by virtually every economist as an improvement over the current system.

  5. The prebate simplifies welfare policy by eliminating the means-testing component.

The downsides:

  1. It's unlikely to raise as much revenue as claimed

  2. Because the tax is not calculated separately, but included in the price, it would be to some extent less transparent than the income tax

  3. It will end up being quite regressive, with the highest effective burden falling on the lower tiers of the middle class.

  4. 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

  5. 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.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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