Every Presidential election season, some candidate tries to appeal to the lower- and middle-class voters by suggesting a simpler tax system. This time it’s Huckabee and his “FairTax proposal” where the IRS is abolished and only sales taxes are paid. But it doesn’t make sense.
He’s right that it’s really simple, but it’s a huge tax on the middle-class and a tax cut for the poorest and richest people.The President’s tax reform panel evaluated such a plan and concluded that we’d need a Federal Sales Tax rate of 22% (on top of the current state sales tax rates!) to be a replacement for income tax. So poor people, who buy fewer things, pay less taxes, which is good. But rich people, who buy more expensive things, would have a big tax hike in sales tax, but they’d not pay income taxes, capital gains taxes, dividend taxes or estate taxes at all which would more than make up for the tax hike. So if the poor and the rich pay lower taxes, guess who pays higher taxes? Everyone else: the middle-class.
This chart shows where federal taxes come from today versus the sales tax plan:
The left side shows what percentage of the total US tax bill is paid by each quintile (1/5th) of the population. The richest 20% of the population pays 84.2% of the total tax bill, the lower- and middle-classes pay the remaining 15.8%. But under a sales tax plan, the richest 20% would pay only 65% of the total tax bill, a tax cut, leaving everyone else to pay 35%, a tax increase.
Worse, the wealthier you are, the bigger the tax cut. The right side of the chart shows that the bottom 50% of the US population would have a massive tax hike, while the top 10% would get almost a 30% tax cut, a 36% tax cut for the top 5% and a 42% tax cut for the top 1%.
The other parts that advocates of a Federal sales tax neglect is the incentive the government is giving people with higher sales taxes. People would purchase fewer goods, so employees of companies that produce products, i.e., just about everyone, would be paid less because their employer makes less. It also encourages a black market for goods – who wouldn’t try to buy a product and pay only 10% extra on the black market when the government is charging 22-30%?
Fortunately, such a tax plan would never happen since it makes no sense. But I’m sure it won’t stop Huckabee from talking about how great an idea it is.