Back to The Undercover Economist homepageBasically, Huckabee’s plan is to eliminate the income tax and replace it with a national sales tax. To a first approximation, that’s not such a radical change. As long as you spend what you earn, a sales tax feels just like an income tax…In the long run, most people, or at least most families, do spend what they earn. (Why earn it if you’re not going to spend it?) …a 20 percent income tax and a 20 percent sales tax are equally painful.
Except for one thing: With an income tax, you pay up front. Earn a dollar in 2008, and you’ll pay 20 cents tax in 2008. (Actually, you’ll pay more, of course; I’m assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It’s exactly what happens when you invest in a traditional IRA!
Landsburg’s piece is a model of clarity but explicitly leaves out some important caveats. Here’s Tom Redburn in the New York Times:
Whatever the rate, critics say, a steep federal retail tax, piled on top of existing state sales taxes, would encourage widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.
“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson, an economist at Harvard who opposes the plan but whose research into problems with the current system is sometimes cited by supporters. “It tries to roll everything into one tax, which simply can’t carry all that weight.”
Pay your money, take your choice.
Tim writes about the economics of everyday life. His 