Huckabee's Flat Tax Plan

[Darth Fanboy]

linky

Huckabee tax plan raises eyebrows in U.S.
Sun Jan 6, 2008 10:08pm EST


By Ed Stoddard

MANCHESTER, New Hampshire (Reuters) - Republican presidential candidate Mike Huckabee's plan to eliminate all income taxes and replace them with a flat consumption tax has the support of martial arts guru Chuck Norris but few economic analysts.

The former Arkansas governor's victory in the Iowa caucus, which kicked off the presidential nomination process for the November 2008 White House race, will bring his policy proposals under closer scrutiny as the candidates do battle in the New Hampshire primary on Tuesday.

Much of the focus has been on the social conservatism of Huckabee, an ordained Baptist preacher who has connected solidly with his party's influential evangelical base.

But some of his supporters have been attracted by his populist tax plan, which calls for an end to all income and payroll taxes. It is the key plank of his economic platform.

"Putting the IRS out of business" has been a common refrain in his speeches in both Iowa and New Hampshire and it always draws some of the most enthusiastic applause.

Huckabee says taxing income is a tax on productivity that stifles economic growth and hits the middle class and small businesses the hardest.

"The FairTax will replace the Internal Revenue Code with a consumption tax ... All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line ... That means people below the poverty line won't be taxed at all," says his Web site.

"All our headaches and heartburn from tax stress will vanish. Instead we will have the FairTax, a simple tax based on wealth. When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness," it says.

Analysts see some sleight of hand here.

"To truly equal today's federal revenue take, to be revenue neutral, the flat tax has to be quite high -- usually higher than is advertised up front," said Richard DeKaser, chief economist at National City Corp in Cleveland.

UNDERGROUND TRANSACTIONS?

"And the complication that comes with that is it encourages underground economic activity. People will increasingly try to circumvent the tax system by doing transactions under the table," he said.

Analysts also see it as regressive -- as it is the same rate across the board regardless of income -- even if Huckabee's plan does make provisions to exempt the poor.

On Sunday, Huckabee was asked about Bush administration criticism that his plan would reduce taxes for those making less than $30,000 a year or more than $200,000 but raise them for everyone else.

"Of course they don't like the fair tax," he said on Fox News. "These are the guys that are going to go out of business. Thirty-five thousand lobbyists in Washington -- do you think they like the idea that a tax would be so simple that they couldn't really go in there and tinker with the congressmen?"

Given the U.S. government's massive revenue needs, Huckabee's plan is not seen as feasible, although abolishing the Internal Revenue Service appeals to many Americans.

"I think the fair tax is a great idea. It would be great to get rid of income tax ... it really stops people from growing businesses," said Bruce Weinfeld, 41, who went from New York to Londonderry, New Hampshire, to attend a Huckabee rally.

It is a policy proposal that also could resonate in New Hampshire, which has no state income tax and where evangelicals are less numerous than in Iowa.

The speeches that Huckabee has given in New Hampshire since his Thursday Iowa victory have put more emphasis on his tax plan and less on his opposition to abortion and gay rights.

Huckabee's "FairTax" idea caught the attention of action movie actor Chuck Norris, who has been traveling with him in what has been dubbed the "Huck and Chuck" show.

Norris tells crowds that young conservative bloggers sent him e-mails about Huckabee's tax plan, selling him on the man.

(Additional reporting by Andrea Hopkins in Cincinnati; Editing by Bill Trott)

I don't think i'd want this guy to be president, but I am taking an eerie delight watching the current GOP frontrunner scare the crap out of his own party. I think this could be the part where Republicans that don't make sixty bazillion dollars a year separate themselves from the ones who do.

[Durandal]

I'm actually in favor of something similar. However much money you make in a year, all of it is taxed as income. No capital gains, no tax shelters, no clever loopholes, no filling out complicated forms and best of all, a greatly shrunken (or completely eliminated) IRS. Just one tax on one amount that goes up as you make more money.

I'm no accountant, so I don't really know what the implementation problems would be, specifically. I imagine that cash would become very popular under such a system, as would off-book transactions and various ways of hiding money. But I can't see it being any worse than the bloated, complicated and costly system we have today which allows our wealthiest citizens to pay lower taxes (because they take their income as capital gains) than the middle class.

[Zwinmar]

I like the idea of a flat tax, say 10 cents on every dollar, it would only work, however, if every dollar was taxed, as Durandal said.


However, Huckabee is an idiot. I dont care how good his ideas are on some subjects he's too much of an ignorant fundy.

[SCRawl]

Yes, a tax return that would fit on a postcard is a great idea. I recall that it was Steve Forbes' favourite drum, back when he was taking a kick at the presidential can. I think the number was around 17%, with extremely minimal deductions allowable. It sure sounds better than the arcane and bloated tax code.

[SCRawl]

Ghetto edit: Just in case anyone isn't clear about my position, if getting a workable flat tax system in place includes a Huckabee presidency as part of the package, then no way would I make that deal.

[Ghost Rider]

Huckabee is still a scarier moron then Bush, but a flat tax is a good idea. Too bad it stands as much a chance in hell as a blizzard does.

The largest obstacle in a flat tax? Congress. The sheer amount of income they make from our income tax would be severly cut unless the flat tax was nearly 30~31%, and that would be sheer rape to anyone making less then 100K yearly.

Course this would make taxes sane again, and we can't have that as well, given Congress needs something to do while it sits there.

[brianeyci]

I'm not a tax man, yet, and Ghost Rider is I think.

But I'm not in favor of flat tax. People like simple solutions to problems, but life is not simple and all the exemptions are necessary since everyone's personal situation is different. If the problem is people clicking away on laptops and trading and not doing any physical work to get money, then fully tax dividends and stocks. If the problem is the very rich, then raise the power of the IRS. You can only deduct so many textbooks, office supplies and so on until there's no more. All these deductions can benefit the poor far more than the rich -- don't give deductions for buying houses if that's the problem, or buying boats or planes, but give them for others. If tax was not a problem for the rich, they wouldn't be whining about it for 30 years. There just needs to be more enforcement of existing tax laws. I think it was Bill, U235 who said the IRS was deliberately gimped to never have enough manpower or resources to get rich guy.

And I don't say this lightly; I have to fucking memorize eighteen different deductions for my exam in two weeks and I am not happy about it. But I look at those deductions, education, child, age, rent, and I think to myself how fucking fucked the poor and average citizen would be if there was a flat tax. Flat tax is about as regressive a tax as you can get, unless you have different tax rates for different income brackets. And if you have that, there's not much difference in that and putting in deductions requiring documentation.

I think it would cause a huge surge in cash, and illegal immigrant labor too. Huge sectors of the economy, food service, construction, could go underground. Income tax is workable because there is deduction at source, or at least there is supposed to be in a progressive tax system, and businesses cannot evade deductions at source as easily as a person can avoid reporting his tax or income, due to the involvement necessary with the government to run a business.

All this hoopla about small business getting stifled I don't buy either. A lot of small business owners start with insufficient capital, and that is the number one reason why small businesses fail in their first years. Getting rid of income tax just moves the line to allow more businesses to come up, but just as many businesses would fail since many more people want to go into business than can afford to. No, FairTax is a help to big business, who wouldn't have to hire huge payroll departments and less accountants.

FairTax: Ministry of Fairness, War is Peace, Freedom is Slavery, Ignorance is Strength.

[acesand8s]

The problem with Huckabee's FairTax is the sales tax rate that would have to be imposed to make it revenue neutral: 30%. On top of that, we need to add state and local sales taxes. Here in Providence, RI, that works out to 38%. For me, it would be better than the current system, but I'm single and living rather frugally, so I invest a large chunk of my paycheck (and thus get to look forward to capital gains taxes [I suddenly understand people who get pissed about "double taxation"]). I imagine, however, that I'm in the minority and that this will hit people hard. In particular, many people will find their food bills going up by 30% overnight (in RI, like many states, food is exempt from sales tax).

In regards to a flat income tax, I'd also argue that a person make $25K a year and someone making $100K a year shouldn't both be taxed at the same rate. As a more minor concern, you also look the automatic stabilizer effect (if there's a boom or a bust with a progressive tax system, tax rates adjust with incomes providing an automatic speedbump in good times and some help in the bad times).

Now, as much as doing taxes truly sucks, a lot of those deductions are actually very useful for people. What's needed is education - a number of people who could benefit from itemizing simply take the standard deduction. The IRS could use more funding. I'm reminded of an incident in 2005 where the IRS went to Congress asking for $2B to collect unpaid taxes amounting to $38B. In other words, it's $36B of free money for the government. Congress said no.

[Gerald Tarrant]

This isn't a flat income tax, it's a consumption tax.

"The FairTax will replace the Internal Revenue Code with a consumption tax ... All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line ... That means people below the poverty line won't be taxed at all," says his Web site.

Think of this as higher sales taxes. I have a couple of problems with this:

1) It's less transparent than an income tax, both policy makers and individuals will have a hard time assessing what taxes will be.

2) Very Regressive, even with the rebate. Higher income individuals spend less as a percentage of their income on necessities. So they have more money that can be put aside into savings, essentially escaping the tax.

There are a few minor plusses I could think about this:

1) It encourages savings, by discouraging consumption.

2) It doesn't distort economic impact the same way income taxes do(income taxes are a mild disincentive towards productive activity, compared to a no tax situation.)

3) Remove the IRS

4) Psychic benefit of punishing conspicous consumption, i.e. all those folks on "Lifestyles of the Rich and Famous" will face significant taxes on their extravagence.

5) Harder to rig the system for special interests.

Now about the above, it's unclear if 2 and 3 will actually turn into benefits. We don't know how a huge sales tax will affect the economy, so 2) might replace one economic distortion with another completely harder to understand distortion. 3) is a fake benefit, we'll be replacing the big tax collecting agency with a large agency which dispenses income, trading one massive bureaucracy for another, not worth the trouble in my opinion.

As for number 5), a little discipline on behalf of Congress can eliminate special interest deductions, which is about as realistic as getting Congress to pass this thing.

About the only real affect of this is #1, but most people wouldn't be willing to trade the recognized benefit of increased savings for the weird side effects, and regressivity of the consumption tax. Huckabee is thinking outside the box, but in this case there were very good reasons for thinking inside the box.

[Patrick Degan]

The other problem with the consumption tax is the same as with any sales tax: works fine until the economy crashes and consumption is drastically curtailed. So is the revenue stream to the public coffers.

Bad idea all around.

[Darth Wong]

Income taxes also drop if the economy crashes. The biggest problem with consumption tax is the tendency to create a black market, although that can be mitigated by applying it before products reach the retail level.

Mind you, I don't know what the hell Durandal is talking about when he says they should get rid of capital-gains tax. That's often the only kind of tax that rich people pay.

[The Kernel]

Income taxes also drop if the economy crashes. The biggest problem with consumption tax is the tendency to create a black market, although that can be mitigated by applying it before products reach the retail level.

Mind you, I don't know what the hell Durandal is talking about when he says they should get rid of capital-gains tax. That's often the only kind of tax that rich people pay.

I think he means that he has a problem with the disparity between the capital gains tax (well the long term one anyway) and income tax.

[The Kernel]

Personally with regards to this issue, I'm not really sure how to feel.

Durandal and I are people who are at the point where we are getting squeezed hardest by the tax system. It's extremely tough to be a single, non-homeowner, high wage earner as that puts you in about the worst tax situation imaginable. I've got virtually no deductions to speak of, and I'm taxed at an extremely high rate, so self interest alone would seem to dictate that I want SOME kind of change, especially since people a hell of a lot richer than me are paying much lower taxes.

[Zeond]

One thing that has not been mentioned is that income taxes also serve as an economic and social engineering tool.

Capital gains taxes are lower in order to encourage investment and the economic development that should in theory follow. In the Canadian Income Tax system a distinction is made between active business income and capital gains, where capital gains are income you earn which is not related to your primary source of business or income. So for example if you have a regular job and speculate on real estate on the side, the the real estate gains (proceeds less base cost and transaction fees) are capital gains but if your full time business is to speculate on the real estate market then the Canada Revenue Agency will most likely be of the opinion that the real estate income is business income and should be treated as a business. Of course this leads to the availability of credits for business expenses.

The government wants to reduce the load on the social safety net of retirees with no income so they make provisions that allow you to defer the income taxes when you buy RRSPs.

R&D is seen as beneficial to the society as a whole so they provide tax credits for R&D.

The government wants to encourage parents to go back to work after maternity/paternity leave so they provide childcare credits.

The list can go on an on.

A flat consumption tax will not achieve any of these types of objectives without being nearly as complicated as the current system.

As a social engineering tool, progressive income taxes are supposed to redistribute some of the wealth of the rich to the poor and a flat consumption tax is regressive even if you offer a rebate to exempt people under the poverty line. We have just seen this in Canada with the cut to the GST from 7% to 6% and now to 5% (as of this month) as the people who consume the most taxed goods will benefit the most from the GST cut. At least this time the conservative government did not raise the rate on the lowest income tax bracket at the same time as it cut GST.

[Durandal]

Mind you, I don't know what the hell Durandal is talking about when he says they should get rid of capital-gains tax. That's often the only kind of tax that rich people pay.

Precisely. Instead of having "income" and "capital gains", everything is just "income", period. The reason capital gains are the only taxes rich people pay is because it's a flat 25%, whereas if they got equivalent income in paycheck form, it'd be over 40%. And anything they get outside of capital gains they just deduct away. By the time their accountants are done, these people who live in gigantic mansions have apparently made nothing the entire year.

So, classify all gains as income. If your company grants you 1000 shares of stock valued at $5 a piece, then it's exactly the same thing as if they wrote you a check for $5,000. If you make $250,000 or more, your income is taxed at 40%. That means that, if you make $250,000 per year, you owe the government $100,000 in taxes. Period. No bullshit deductions or fancy accounting. You owe that much.

Then you can relieve the tax burden on the middle class and tax them at something more like 20% or 25% since the rich people will actually be paying their share. That's basically a 10-15% cut in middle class taxes. Then you can afford to increase the tax-exempt ceiling for lower-income families.

[Uraniun235]

I've heard of problems arising because of the "tax brackets", where suddenly someone who creeps over the limit is now paying far more in taxes. Wouldn't it be possible to craft the tax code such that a progressive tax is based on a curve rather than set brackets? (That is, aside from the massive resistance it would face from entrenched interests in Washington.)

[Darth Fanboy]

So, classify all gains as income. If your company grants you 1000 shares of stock valued at $5 a piece, then it's exactly the same thing as if they wrote you a check for $5,000. If you make $250,000 or more, your income is taxed at 40%. That means that, if you make $250,000 per year, you owe the government $100,000 in taxes. Period. No bullshit deductions or fancy accounting. You owe that much.

This sounds good, but what happens in the situation that the $5000 worth of stock crashes and ends up being less valuable the next week, or even the next day?

[alexholker]

If you make $250,000 or more, your income is taxed at 40%. That means that, if you make $250,000 per year, you owe the government $100,000 in taxes. Period. No bullshit deductions or fancy accounting. You owe that much.

This is not how income tax works, and for good reason. For your example the marginal tax rate might be 40% if you earn over $250,000, but this has no effect on the tax rate for the first $250,000. Otherwise, as Uraniun asked, you would have significantly less money at the end of the year for earning $251,000 than you would for earning $249,000.

I've heard of problems arising because of the "tax brackets", where suddenly someone who creeps over the limit is now paying far more in taxes. Wouldn't it be possible to craft the tax code such that a progressive tax is based on a curve rather than set brackets? (That is, aside from the massive resistance it would face from entrenched interests in Washington.)

This is not what bracket creep is, see my explanation above. Bracket creep refers to the problem that as time goes by, inflation means that a person with constant buying power (but a higher income in dollar terms) will pay a higher tax rate over time, as he slowly ascends each tax bracked in turn. This is combated by "stretching" each tax bracket over time, not by making the tax based on a curve.

Also, it wouldn't be a problem of "entrenched interests" which would object to your idea. Would you really want to try to force everyone with a job to have to use continuous integration to work out how much tax they have to pay at the end of the year?

[alexholker]

Ghetto Edit:
Actually, it wouldn't be too bad if you publicised the forumula for the total tax vs. income instead of the deriviative of total tax vs. income (as is currently the case), but I'd imagine you'd get more mathematically-ignorant kooks claiming that the government is ripping them off.

[Jaepheth]

I like that under this system criminals (such as drug dealers) start paying taxes because of all the "bling" they are prone to buying. (Hopefully there'd be a larger sales tax on luxury items) Maybe even shifting the weight of national tax revenue to the wealthy who want to live opulently.

The IRS would still be around to make sure companies are sending in the right amount of sales tax, and hunting for evidence of large black market operations.

Unfortunately, a lot of people in the tax industry would find themselves downsized.
Fortunately, that means I wouldn't have to see anymore H&R Block commercials.

[Uraniun235]

Also, it wouldn't be a problem of "entrenched interests" which would object to your idea. Would you really want to try to force everyone with a job to have to use continuous integration to work out how much tax they have to pay at the end of the year?

Lots of people pay someone to "do their taxes" for them every year anyway, so I doubt it would be that big a deal; the IRS could even throw an app on the web where you plug in a number and it spits back how much you should be paying in taxes, along with the math operations it took to arrive at that number so as to be able to verify that the app was functioning correctly.

I admit I hadn't thought about the people who are both bad at math and convinced the gubmint is out to steal their pennies, though. That could be a problem.

[Darth Wong]

Ghetto Edit:
Actually, it wouldn't be too bad if you publicised the forumula for the total tax vs. income instead of the deriviative of total tax vs. income (as is currently the case), but I'd imagine you'd get more mathematically-ignorant kooks claiming that the government is ripping them off.

Those guys already claim the government is ripping them off. People like that honestly don't understand why you can't simultaneously demand lower taxes and massively increased program spending on stuff you happen to use. You can't tailor social policy to these idiots; one might as well ask what the dogs and cats think.

[Durandal]

This sounds good, but what happens in the situation that the $5000 worth of stock crashes and ends up being less valuable the next week, or even the next day?

That's the risk you take when playing the stock market. If a casino gives a guy $5,000 in chips, taxes are still assessed on that gift. It doesn't matter if the guy turns around and blows it at the roulette table. Nothing's stopping you from selling the chips the moment you get them, and the shares the moment they're granted at that value.

This is not how income tax works, and for good reason. For your example the marginal tax rate might be 40% if you earn over $250,000, but this has no effect on the tax rate for the first $250,000. Otherwise, as Uraniun asked, you would have significantly less money at the end of the year for earning $251,000 than you would for earning $249,000.

Okay, then plug the income into an asymptotic function that plateaus at some arbitrary maximum percentage, like 45% or something.

[Darth Wong]

This sounds good, but what happens in the situation that the $5000 worth of stock crashes and ends up being less valuable the next week, or even the next day?

That's the risk you take when playing the stock market. If a casino gives a guy $5,000 in chips, taxes are still assessed on that gift. It doesn't matter if the guy turns around and blows it at the roulette table. Nothing's stopping you from selling the chips the moment you get them, and the shares the moment they're granted at that value.

That doesn't make any sense. If you can tax on positive income, you should be able to recover taxes from negative income. Countless businesses actually have negative income in their first year or two of operation, which are often considered a startup period. Many successful businesses lost money in the first 1-2 years. Without tax incentives to keep them afloat during that startup period, they would simply fold.

If casino winnings are taxed, then casino losses should be deductible. Here in Canada, for example, we don't allow tax deductions for lottery tickets. But we don't tax lottery winnings either. Anything else would be quite inconsistent.

[Darth Fanboy]

That's the risk you take when playing the stock market. If a casino gives a guy $5,000 in chips, taxes are still assessed on that gift. It doesn't matter if the guy turns around and blows it at the roulette table. Nothing's stopping you from selling the chips the moment you get them, and the shares the moment they're granted at that value.

Even in situations where someone who recieves the stock can't always sell them immediately? I was under the impression that people who recieve stock options upon leaving a company couldn't just sell off their stock right away all the time.

This doesn't keep me from entirely disagreeing with you though. There isn't enough being done to cut into that widening gap between upper and lower classes.