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%.
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.
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.