Rain, Pain and Taxes

It is still wet. And when it rains, it pours. It's tough to see friends, co-workers and family members go through hard times. And lately, it is raining hard times.

Mike Huckabee is touting his "fair tax" in Florida, on the eve of the Republican primary there. His plan is to replace the income tax with an increased sales tax. Now, I personally know people who have a strong and averse reaction to this proposal. And I think their reaction stems from being daunted by the prospect of unimaginably large wholesale change to a massive bureaucracy which directly impacts the private sector. The IRS would be eliminated. Tax lawyers, accountants, bookkeepers and so forth would be largely displaced. So, a foundational question is -- Are the short-term displacements offset by long-term results?

Secondly, naysayers are daunted by the potentially negative consequences of such a tax on the economy. So the additional question is "Would the resultant change be better or worse than what we have now?"

What we have now is a two-fold system. First, your employer is a tax collector, who works on behalf of the government. Second, each individual, married couple and each corporation [and some other business entities] file a tax return to clean up what their employer missed. Meaning, you get some additional deductions or penalties, some in the name of fairness and some that are just there. Under Huckabee's plan, employers would get out of the tax business [as it pertains to the employee]. Companies that sell anything [products and/or services] would now be in the business of collecting very large amounts of tax. So, the first benefit to taxpayer is that you would keep your money for longer. Instead of having it deducted from your check, you'd see the money [all of it? Would the deductions for Medicare, Social Security, Unemployment Insurance and so forth still exist? Or no?]. The second benefit to the taxpayer: no more yearly return ... aside from your state return, if your state has an income tax. And most do.

However, in lieu of the Federal tax filing and a employer deduction, Joe Taxpayer would face the following scenario: the car that cost $19,000 plus sales tax [which used to add about $1,400 to the bill] would now cost another $5,700 [that $1,400 is a state and local tax. The new tax would be incremental.] So your sales tax bill for that purchase would be $7,100. So be prepared to pay $26,100 instead of $20,400. That's about 27% more - not an insignificant amount.

Steve Landsburg, in Slate, argues that that the net result would be small -- that, in effect, the National Sales Tax is really an unlimited IRA in disguise.

What is unstated [or, at a minimum, understated] by Mr. Landsburg is that this plan does three things. First, it encourages saving. You only pay the man when you buy something. Second, necessarily, it discourages spending [duh!]. Intelligent people avoid paying taxes. So, purchases, especially major ones, would be put off as long as possible. Third, it would encourage every sort of underground barter and purchase-evasion economy imaginable.

Now, it appears that I have slammed the Hucka-plan to the mat. Not true. I despise paying taxes. I think our government should be much, much smaller than it is currently. We have far too many stupid regulations, and corporate America has influenced the drafting of laws such that the regulations that do exist are flimsier than Michael Jackson's nose cartilage. So I say that any plan that encourages people to save, and discourages spending - until such time as such spending is a necessity - is a plan that works for me.

Would it grind the economy to a halt? It would slow it down, definitely. Would it cause a depression in prices? In the short term, again, yes [until people adjusted psychologically to the new schema]. Is it regressive? Punitively so! But would the long-term net effect be positive? Hucka-hell yes!