Published: December 29, 2007 10:49 pm      

Exploring the Huckabee 'Fair Tax'

EDMOND — As more people support Mike Huckabee’s candidacy for president, more people are examining his policy proposals.As more people support Mike Huckabee’s candidacy for president, more people are examining his policy proposals. On taxes, Huckabee proposes a radical change in the tax structure. While his proposal would generate some positive effects, not all of the changes would be so beneficial.

Huckabee favors a proposal that supporters call the “Fair Tax,” which would replace the current income and payroll taxes with a 30 percent national retail sales tax on all new goods and services. Additionally, the proposal calls for every household to receive a monthly check from the government in order to ensure poor families pay little or no taxes. In 2007, that monthly rebate check would have been $525 for a family of four. Most of Oklahoma’s Congressional delegation also has endorsed this proposal including Sens. Tom Coburn and James Inhofe, along with Reps. Dan Boren, Mary Fallin, Frank Lucas, and Sullivan.

One of the most appealing aspects of the Huckabee proposal is that it would eliminate many of the hidden taxes in the current system — making the tax structure more transparent. For example, today when businesses pay taxes they pass some of those taxes onto consumers in the form of higher prices. Yet, the transaction receipts do not mention how much more consumers are paying as a result of the business tax. Despite this omission, it is important to remember that consumers currently pay some of those business taxes in the form of higher prices. But with the “Fair tax” proposal businesses would not directly pay any taxes, therefore eliminating this hidden tax.

People face hidden taxes at work as well. When businesses pay payroll taxes, economists have found that almost all of that tax is passed on to workers in the form of lower wages. By eliminating the payroll tax, wages will rise.

While the hidden taxes will disappear, they will be replaced by a more visible sales tax. Here is how this would work: a 30 percent sales tax would be applied to the purchase of any new good or service. For example under the “Fair tax” plan endorsed by Huckabee, a $4 gallon of milk would cost $5.20 (plus state and local sales taxes). A $3 gallon of gasoline would cost $3.90.

A $100 prescription would cost $130 (making health care more expensive), and most alarmingly a $200,000 new house would cost $260,000 under the Huckabee plan!

The good news is that people would not have federal taxes withheld from their paychecks. This means that a married couple with two children earning $50,000 per year would see their paycheck increase by $971 every month. A similar couple without children would see their paychecks increase by $1,225 every month. The Huckabee plan eliminates the child tax credit and the additional exemptions for children. Additionally, the family of four would receive their $525 monthly check from the government while the childless couple would receive only $391.

Yet, this raises one of the most troubling aspects of the Huckabee plan, and one that its proponents fail to mention — that middle-class families would see their taxes increase. This is because the Huckabee plan, again endorsed by most of Oklahoma’s Congressional delegation, eliminates much of the favorable tax treatment families currently receive.

There no longer would be a child tax credit, child care tax credit — in fact families would have to pay a 30% tax for the child care services they purchase — or the additional exemptions for children worth a $3,500/per child deduction in 2008.

Furthermore, while raising taxes on middle-class families the Huckabee plan cuts taxes for the wealthiest Americans. According to the Congressional Budget Office, the highest earning 20 percent of all Americans paid 25.0 percent of their income in federal income or payroll taxes in 2005. Under the Huckabee proposal, those individuals would pay no more than 23 percent.

I favor a different approach. Instead of eliminating the child tax credit, I believe we should expand it. Instead of raising taxes on middle-class families, I believe we should provide tax relief. Yet those who support the Huckabee “Fair Tax” apparently disagree.



MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.