I have to admit, I don’t understand a lot about the Fair Tax, so I haven’t been either dismissive or supportive of it. Generally, my favorite quote on taxes during the ‘08 campaign has been Ron Paul’s quote about the flat tax. Does he support a flat tax? “Yeah, like zero.” Ahh.

As far as I can tell, Mike Huckabee is the chief proponent of the Fair Tax. What is it exactly? Here’s how Wikipedia describes it:

The Fair Tax Act (HR 25/S 1025) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services.

Essentially, all of your taxes, at least on the federal level, would be taken away and replaced with a big fat tax on all the clothes you buy at Eddie Bauer.

The idea behind this is that removing taxes like payroll taxes and corporate taxes, companies have less costs and prices on most goods would drop. This would keep goods in general more affordable.

For the poor, who probably can’t take a 20-30% hike on their daily cocktail of Marlboro Lights, lottery tickets and alcohol, they would get a rebate AFTER purchases, kind of like a Fair Tax exemption. This isn’t unusual, as even Flat Tax systems have an exemption for people below the poverty level.

This isn’t a supermodern idea. Check out this 1933 political cartoon:

How fair is this? No doubt having no taxes on things like savings, capital gains and being a corporation would stimulate business. There would be a lot of Monopoly Guys happy about it. But for those Independents that might be supporting Huckabee with the Fair Tax, there’s a debate about whether the Fair Tax actually ends up taxing people of different incomes equally.

The more you make, the more you can afford not to spend on goods. If you make 25,000 a year, most of tha ti sprobably going toward goods and services of some kind - keeping you equipped with what you need for a comfortable life. If you make 100,000 a year, and can save 25,000 - guess what? That 25,000 isn’t taxed! In terms of income, the Fair Tax might not be as proportioned as the Flat Tax would be.

This argument is the progressive vs. regressive argument. The Fair Tax is supposed to be progressive - the richer you are, the more you’d pay. Not everyone is certain that’s how it will work. Normally, people view sales taxes as regressive.

It seems like the experts are mixed on it.

A study in 2007 by the Beacon Hill Institute stated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%.

Opponents offer a study commissioned by the National Retail Federation in 2000 that found a national sales tax bill filed by Billy Tauzin, the Individual Tax Freedom Act (HR 2717), would bring a 3 year decline in the economy, a 4 year decline in employment and an 8 year decline in consumer spending.

Which to believe?

Also, what side effects would a Fair Tax have? Some people think that having taxes based on purchases would lead to a huge underground economy of untaxed transactions. This would require the government to regulate sales big-time, which if you’re a conservative isn’t good news.

On the other hand, it’s a lot easier to hire people if you don’t have to pay taxes on employment. And a lot more people would be encouraged to save money since there’s no tax.

Couldn’t you have the benefits of economic growth through a small flat tax AND no sales tax?

Let me know what you think about this.

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