Friday, January 11, 2008

Huckabee's Sales Tax Proposal

I officially don't know what to think about it. It has the virtue of simplicity. The sudden price jump on goods and services will be jarring, but in the long run it might result in people grumbling less about their taxes: they'll be getting nickeled and dimed all year long, and they won't be in a position of having to pay a lump sum in April — or even to have to examine the bottom line of a 1099 form that tells you, almost sneeringly, what you gave the government this year to spend on objectionable projects. Making the federal tax levy more insidious and less of a cause for annual outrage might have the salutary effect of supporting deliberative democracy. So many people I know vote consistently Republican because they want lower taxes — even though they disagree fundamentally with so much of what the GOP does when it's not slashing tax rates.

Steven E. Landsburg's recent article in Slate points out one other important virtue of Huckabee's proposal: if you're taxed at the point of purchasing goods and services, you're encouraged to save money. Thus we don't have to invent exceptional vehicles for tax-free saving, like IRAs and 401(k)s and all these other accounts that people with the time, money, and initiative to hire tax planners and financial consultants get to have — but many other people don't. All savings are tax-free.

But Mr. Landsburg's argument assumes that the tax rate will simply transfer over: it compares a 20% income tax rate with a 20% sales tax rate. That can't be how it would work in practice. First, we're all paying different tax rates, on the principle that a progressive tax is fairer than a flat tax. I'm not sure how you replicate that fairness in a sales tax paradigm, except perhaps by the clumsy way of making the tax rate higher on luxury items or expensive goods and lower on cheaper goods or necessities. And now we've compromised the simplicity of the sales tax model to make it fair — and it's still arguably not as fair as the progressive income tax model. Some middle-income people want to own BMWs, right? Whenever someone from a formerly lower tax bracket wants to buy an item keyed to a higher sales tax bracket, the tax would be regressive — at least more so than the current income tax system. Remember, too, that the current system provides a lot of tax breaks for people who need them (as well as certain people who don't, admittedly, so maybe that's a wash). It would be hard to carry over the current tax code's many gestures at fairness into a sales tax model.

(Also, having learned what "fair and balanced" apparently means when applied to news coverage, I can't help but be skeptical at the outset of any tax plan that feels the need to call itself "fair.")

I've read, too, that for the government to generate the same amount of revenue as it does now, the sales tax rate will have to be higher than the income tax rates. This is because — as I gather — the income tax rate is guaranteed to be paid. The sales tax rate is linked to a contingency: it's added to the price of goods and services that you may or may not elect to purchase. Remember: we're not talking tax in a vacuum. We pay taxes so that the government can run its (term used loosely) business. It's a means to an end. It's not necessarily the ceteris paribus proposition that Mr. Landsburg suggests. If the sales tax rate is expected to exceed by a significant amount the income tax rate, could a federal sales tax actually overencourage saving? Too much saving isn't good for the IRS or for the economy.

And finally, we seems to have a consumer debt crisis in this country. People spend on credit cards like there's no tomorrow, but unfortunately tomorrow does come — with a bill. AM radio is thick with ad spots promising to negotiate or restructure your credit card debt: those companies are out there for a reason. Banking laws promoted by credit companies are making it more difficult for people to get out from under their consumer debt. If people aren't disciplined enough to spend money they don't have, does it make sense to slap a significant surcharge on what they buy? I guess my point is this: maybe the sales tax will encourage people to save. But maybe it won't. If it doesn't, profligate spenders will screw themselves even worse than before. I guess the trick is to do the analysis and predict as best you can how a sales tax would affect consumer spending/saving habits. You want to encourage saving, but not too much. On the other hand, you don't want to slap a hefty sales tax on, well, everything, and find that nobody saves at all.

Bear in mind that I wrote all the above with a bare-minimum understanding of (and in most instances, interest in) economics and finance. So I'd be interested in having everything I say reviewed and rebutted by someone with a modicum of expertise. There seem to be a lot of complicated questions here. I wonder, too, if it's not just a Fear of the Unknown that undergirds a lot of what I wrote. We shouldn't resist innovation explicitly — nor should we do so instinctively and then rationalize away the resistance. But I do think there are a lot of questions that need answering, and that won't be accomplished in a campaign soundbite/debate answer format.

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