More on the Huckabee Hoax

Its getting harder to heart Huckabee these days, what with his befuddlement on the NIE and the revelation that he intervened to get a serial rapist released from prison, who then promptly went out and raped and murdered a woman. But some who do take Huckabee to heart have taken me to task for criticizing his call for a 30% National Sales Tax. This should be called the “Starship Enterprise Tax” because it will go where no sales tax has gone before: homes, medical services, legal services, food, government purchases—in short, everything. Democrats, in the meantime, have got religion, praying to whatever gods may be that the Republicans will endorse such a whack-o tax plan; they plan a leisurely campaign while every voter mentally adds 30% to each purchase during the election season, each time figuring out just what a Republican victory will cost him at the check-out counter.

Ian, a Fair Tax reporter, posts a long response. Well, actually, it is not a response at all, at least not a response to me; it is the same canned post that he sends to every blogger who dares to question the space cadets at FairTax.org. Nevertheless, let us try to address his major claim. Yes, he concedes that there will be a 30% tax (he calls is 23%, but we agree that whatever you call it, it will still be 30 cents added to every dollar of purchase), but prices will magically go down by 22%. Thus there is hardly any tax at all! And its revenue-neutral! And Progressive! Wow! I'm impressed. But also a bit suspicious. So let's look at these claims, one by one.

The Effect on Prices

Ian tells us Prices after FairTax would look similar to prices before FairTax - not 30% higher. This is because FairTax removes the cost of business income and payroll taxes currently embedded in prices. Ian calculates this cost at 22%, and presumes that it would immediately come off of current prices. I can only assume that Ian does not now reside in a capitalist country, and therefore does not know how prices are set. They are not set by the cost of production, but by the market using supply and demand. The cost of production provides the floor beneath which prices cannot, for any long period of time, fall, but it does not provide the ceiling, or even the average price. The fact that you can make a shirt in Bangladesh for 30 cents direct labor doesn't mean it sells here at some small multiple of 30 cents. Nor would doubling the labor cost to 60 cents double the price, nor would halving the labor cost to 15 cents halve the price. If its market price at Macy's is $30, there won't be any change because they have eliminated payroll taxes. The labor cost has very little to do with the price in such a case, and since we import so many of our goods, this will be the case most of the time. The Arabs will not reduce the price of oil because we have a consumption tax. The cost of housing bears very little relationship to the cost of building the house, and a lot of relationship to the location of that house. A house that in the country might sell for $100,000 will sell for $500,000 dollars in the city center, even if they are the exact same house. This will not change because the company has skipped a few tax accounting steps.

There are some highly elastic goods, in highly competitive markets in which a vast number of firms compete, where prices are very sensitive to costs, so much so that a change in costs leads to a near immediate change in price. But such markets are the exception rather than the rule. Don't look for prices to change much with the national sales tax, other than the fact that they will go up by 30%.

Revenue Neutral​?

No one outside of Planet FairTax believes that 30% will be “revenue neutral.” (Independent analysts place the revenue neutral rate at between 34% and 39.9%, and some even place it at 57%.) The space cadets get their number by ignoring fraud and by taxing government services. Everything that the national, state, and local governments buy will be taxed. But this can only mean that your state and local taxes go up by enough to finance the 30% additional for all government purchases. In other words, they make it “revenue neutral” by building in state and local tax increases—voodoo economics at its best!

Furthermore, they totally ignore the effects of fraud. With the prospect of undercutting all competition by 30%, the opportunities for fraud will be immense; people will find all sorts of ways to sell you things outside of the system, and with a 30% price advantage, there will be no shortage of customers. Indeed, the FairTax people themselves build in an exception that is sure to lead to fraud: used items won't be taxed at all. Used homes, cars, clothing, washing machines, etc., all escape the tax. I can pretty much guarantee that there will be whole new industries manufacturing “used” goods. You can never underestimate the creativity of the American entrepreneur to find a way to get around such a high tax. Indeed, there will have to be a huge new government bureaucracy to play “whack-a-mole” with these schemes, knocking down one only to see it pop up in a dozen other places. All sales taxes presume that the amount of the tax is less then the cost of avoiding the tax, for the most part. People and businesses would rather, for the most part, pay a 6% sales tax then take the trouble to devise schemes to avoid it. But even at the low rates, it happens fairly frequently. When the tax rate rises to 30%, the rewards of tax avoidance go up dramatically, and with it come new and creative ways to avoid the tax. The more likely result of such a tax is not “revenue neutrality,” but wide-spread criminality. Breaking the law will be commonplace, but people will feel it is justified to avoid such an oppressive tax.

In addition to the new whack-a-mole bureaucracy, there will have to be a new wing on the Homeland Security building to track the location of each and every American citizen so that they can receive their prebate check. This bureaucracy will be particularly intrusive, since it will have to verify each citizen and his/her whereabouts, since fraud will be massive. The printing of phony birth certificates and the planting of new new names in public databases will be big business. The Mafia can hardly wait for this law to be passed.

Extremely Regressive

The effect on the rich will be to avoid a lot of taxes that they now must pay. But the FairTax people claim that this will free the poor from taxes. Now, this is actually true, but only for the non-working poor, for whom the prebate will be just another welfare program. But the effects on the working poor will be devastating, because the EITC (Earned Income Tax Credit) will disappear. B. Y. Young at the B-Crat blog computes the effect thusly:

I did some back of the envelope calculations on how this change could impact the poor and for people at the poverty line, people at 2 times the poverty line, and people at 3 times the poverty line, all seemed to better with our current system...even with the prebate. This is based on a family of four without anything but the exemptions for their kids. The EITC helps out the poorest, giving them a $860 advantage with the current system. At 2 times poverty the current system puts $475 more dollars in your pocket at the end of the day. And at 3 times poverty you'd have $940 more in your pocket.

Mike Huckabee might make a great candidate for president—of the Southern Baptist Convention. But alas, as a president of the United States, he seems to be out of his depth. If he cannot do the analysis on such a transparent bit of nonsense, one hesitates to ask what his other intellectual shortcomings might be. We have suffered for seven years with a president who does not seem to understand the world, and particularly the world of business and economics. The results have been disastrous, and we can hardly afford four more years of the same.

10 comments:

Winghunter Saturday, December 8, 2007 at 11:19:00 AM CST  

You're being much too generous John, he's not half the president Bush is.

The Huckster doesn't have a single drop of knowledge let alone experience of foreign leaders or countries. The first thing he'ld try to do is use a joke on a head of state somewhere and we'ld be at war directly because of it.

He'ld find a way to manipulate loopholes for amnesty from his recent and complete flip-flop with his "new" illegal immigration plan.


Look, I could go down the long list of this con artist's record but, people have to give a rip about their responsibility with their vote to know this guy is so outrageously wrong it isn't funny.

Anonymous,  Saturday, December 8, 2007 at 7:39:00 PM CST  

Huckabee is a dangerous man. Another fundamentalist is the last thing this country needs. As if the other Republicans aren't bad enough, this may be the worst. What do we do to get the message out that this man might make a good preacher but he's running for the wrong pulpit?

John Médaille Saturday, December 8, 2007 at 9:01:00 PM CST  

What do we do to get the message out that this man might make a good preacher but he's running for the wrong pulpit?

I'm working on it.

When people understand just how easy it will be to cheat in this system, when they think about how much the prices will rise for those who don't cheat, when they think about the ruin this plan will cause, they will run the other way. And when the Republicans realize that this hare-brained scheme will guarantee a Democratic sweep, they'll find another candidate. Not that most of the others are much better. As far as I can tell, there is only one Republican running for the Republican nomination, and he's a long-shot at best.

Ian Sunday, December 9, 2007 at 12:03:00 AM CST  

Increasingly, Mike Huckabee is what leadership looks like. He's an adroit public speaker, and he communicates his message in life-like, cogent terms, with compelling examples like the story he told (at the Ames Straw Poll) of what his then-11-yo daughter entered into the "Comments" section of a Visitors Book after visiting the Yad Vashem holocaust museum: “Why didn't somebody do something?” Very effective.

Huckabee is all about calling his listeners to "do something," to awaken them to their own empowerment, and summon them to action in order that "Main Street," and not "Wall Street," will prevail in guarding the values and beliefs upon which the Republic was founded.

Huckabee puts his listeners at ease, and reassures them, articulating clear concepts in a natural, easy style (no doubt something well-cultivated as a pastor). He’s not as “mechanically-scripted” as Romney, nor angry or demanding, like a Ron Paul, and his large brown eyes, peering through a humble demeanor, draw a striking contrast to a unconvincing, tired-looking Thompson. One can easily imagine sitting comfortably with Mike over a cup of coffee at the Main Street Cafe.

Most importantly, perhaps, Huckabee is ONE with the FairTax grassroots movement. While many - like Romney, and others, who are invested in the current income tax system - seek to demagog the well-researched FairTax plan, its acceptance in the professional / academic community continues to grow. Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown because of the hidden aspects of the current system that make political accountability impossible.

Romney's recent WEAK response to FairTax questioning on “This Week with Geo. Stephanopoulos” drew a sharper contrast between Huckabee and all other presidential front-runners who will not embrace it. Huckabee understands that what's wrong with the income tax can't be fixed with "a tap of the hammer, nor a twist of the screwdriver." That his opponents cling to the destructive Tax Code, the IRS, preserving political power of granting tax favors at continued cost to - and misery of - American families, invigorates his campaign's raison d'etre.

Of the FairTax, Huckabee asserts that it's...

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, FLAT, and FAMILY FRIENDLY, loophole-free, and everyone pays their share
• LOW TAX RATE is achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards - rather than penalizes - work and productivity


A detailed benefits analysis of the plan (from The FairTax Book) explains Huckabee's ardent advocacy:

For individuals:
• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices (due to reduced costs; increased competition)
• 29.9% mark-up yields 23% FairTax portion of prices
• Over the first year, "market-adjusted" FairTax prices comparable to current (Yes, John, I see your point! Revision made!)
• Every household receives a monthly check, or "prebate"
• "Prebate" is "advance tax payback" for monthly consumption to poverty level
• FairTax's "prebate" ensures progressivity, poverty protection
Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates


For businesses:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Global "free (and equitable) trade" becomes possible for currently-disadvanted U.S. exports
• U.S. exports increase their share of foreign markets


For the country:
• 7% - 13% economic growth projected in the first year of the FairTax
Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie" increases
No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow


Passionately supporting FairTax, Huckabee understands that, if elected President, Congress will have to present the bill for his signature. His call to action goes beyond his candidacy: Main Street will have to demand that their legislators deliver the bill.

(Permission is granted to reproduce, in whole or part. - Ian)

Dutchman3 Sunday, December 9, 2007 at 9:11:00 AM CST  

John, great piece with many good points. As for prices, I believe that, on average, prices will rise by 17%, not 30%. Here's why. The magic 22% embedded costs of the income tax system as developed by Dr. Jorgenson back in the mid 1990's, included business costs and employee payroll and income tax withholding. And employee withholding belongs to the employee, not the business owner! Business income,and payroll taxes amounted to only one third of the total 22% embedded costs, or roughly 7.5% Jorgenson didn't include compliance costs, so a reasonable business cost reduction would be 10%. If all of the reduced costs were applied to price reductions, then prices will rise on average by 17%.(1.00 x .9 x 1.3 = 1.17) But, there are many other uses for the cost savings, including business expansion, shareholder payments, increased profit margins, and even employee pay raises. So, a 17% price increase would seem to be the floor with higher price increases likely as you suggest.

I also find it useful to talk about both avoidance and evasion. Yes, there will be a lot of illegal evasion. But tax avoidance by buying "used" (tax previously paid) could be a fairly large number. If the net price of a new car goes up 17%, will I still buy a new car every other year? I might instead choose to keep driving the old one and keep the repair shops busy. On a large scale, what would that do to the auto industry???

Finally, Mr B. Y. Young needs to do another "back of the envelope" analysis. It looks to me like he overlooked the payroll taxes in his calculations. And he may have also assumed that 100% of gross income was spent on taxable goods and services under the Fairtax. Neither is correct.
I did a study last year that compared effective tax rates and purchasing power under current law and under the Fairtax. For the family of four he mentioned with incomes under $30,000, effective tax rates are the same or lower under current law. Over $30,000, the Fairtax effective tax rates are lower. I'd be happy to send anyone a copy of the analysis on request. (vanlinda@comcast.net)

I'd like to deal with my friend Ian's stuff in a later post. This one is already too long.

John Médaille Sunday, December 9, 2007 at 11:10:00 AM CST  

Dutchman, by all means, please send me your analysis; I should like to read it. It seems to be that the FairTax people are spending the same dollar twice, promising it to workers in the form of higher wages and the consumer in the form of reduced costs. But in fact, you can't reduce the costs unless you reduce the wage. Moreover, they overestimate the "cost of compliance." In truth, every business of any complexity must keep a complex set of books for their own internal control reasons and for public reporting purposes, if they are a publicly owned company. The increment to keep the tax books is not that great.

Finally, they are assuming that savings get converted into price reductions, but this is not necessarily true. The Arabs, Hugo Chavez, won't sell us oil any more cheaply because we have a consumption tax. Goods made overseas (a very large part of consumption) will not be affected very much.

However, the truth is this: Nobody can say what the effect on prices will be, because there has never been such a massive interference in the free market pricing structure since the Russian Revolution. There is simply no precedent for such massive tinkering with prices, and the effects cannot be known in advance. This much we can know: when govmint decides to interfere with the market on such a massive scale, the results cannot be good.

distributist,  Monday, December 10, 2007 at 9:34:00 AM CST  

A good review, first time I opened it today.

But how come you have so many links to neocon sites?

A distributist

B. Y. Clark Monday, December 10, 2007 at 3:21:00 PM CST  

I only spent 10 minutes trying to see if there was any face validity to saying this "fair" tax was actually anywhere approaching to be progressive. Yes I assumed all money would be spent on taxable income. Is that reasonable, perhaps not, but I wasn't claiming to be doing a Nobel worthy piece of lit.
Regardless consumption taxes not progressive, even if 100% of your income is not spent on taxable items. John's point of taxes on government spending are quite interesting as well... do we want our property taxes to go up because of federal taxes? Seems to me that is raising our tax burden some more.
Like I said in my original post, I'm not a taxation expert, but I don't see how this could be ever been seen as any thing but regressive. I just doesn't pass the stick test (if it smells like BS, it probably is).
And please Ian or another Fair Tax supporter don't tell me to buy Neal Bootz's book, I cannot fathom supporting that wind bag with the purchase of his book.

Omar Cruz Monday, December 10, 2007 at 5:53:00 PM CST  
This comment has been removed by a blog administrator.
B. Y. Clark Tuesday, December 11, 2007 at 7:11:00 AM CST  

O yeah I forgot to mention that my calculation does include payroll taxes...someone asked about that. Income tax and EITC estimates were done on the IRS's website...payroll taxes have standard percentages, so no challenge there.

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