Is the Fair Tax really fair?

By Jeff Schnepper

Let's be fair. Our current tax code is a disgrace. It often makes no sense. It's tough on taxpayers trying to fill out their returns. It penalizes some people who should not be penalized.

Some people hate it so much that they want to get rid of it.

That's what Republican presidential candidate Mike Huckabee wants to do. The former Arkansas governor wants to junk personal and corporate income taxes and federal payroll taxes and replace them with a national sales tax called the Fair Tax.

I should note that the idea isn't actually Huckabee's. It comes from Atlanta radio talk-show host Neal Boortz, U.S. Rep. John Linder, R-Ga., and the Americans for Fair Taxation. The group is chaired by Leo Linbeck, who runs a big Houston construction company and is prominent in Republican circles in Texas.

How the Fair Tax would work

We now have an income tax -- a tax on what the courts have called an accession to wealth, clearly realized, over which you have dominion. Generate the income, and you're taxed immediately. It really doesn't matter what you do with the income. Unless it's exempt by statute, such as employer-provided health insurance premiums, or under the Constitution, like municipal-bond interest, it's part of your taxable base.

Our income tax system is also progressive. At certain break points, you pay a higher marginal rate on additional income. The more money you make, the greater the percentage you pay on additional income. For 2008, a married couple pays 10% on the first $16,050 in taxable income. But the couple pays 35% on all taxable income in excess of $357,700.

The Fair Tax is a whole different game. Instead of taxing income, this tax would hit consumption. Its proponents want to substitute what's often described as a flat 23% national sales tax on nearly all goods and services. But that 23% figure is a mirage. You'd actually pay 30% at the cash register, according to the proponents' Web site.

Think of it as a tax on your buying power. Fair Tax proponents say income taxes now make up about 23% of the cost of goods sold. Take away that tax and the cost of a $100 good, they say, would drop to $77. The Fair Tax would collect that $23 discount as a straight sales tax, which works out to 30% added to the price of goods and services. State and city taxes could be added on top of that.

• Video: Why politicians meddle with the tax system

The Fair Tax would include a complicated rebate system to shield the poor. According to Huckabee, "All of us would get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line." By "us," he means you, me, Bill Gates and Oprah Winfrey.

What the Fair Tax might do for the economy

Would the Fair Tax make for a better economy? The Huckabee team says yes, and here are the arguments:

• Retail prices could fall. Fair Tax supporters say 20% of all prices today represent the hidden income and payroll taxes embedded in the price of everything we buy.

• Eliminating corporate income taxes and capital-gains taxes would make the United States a more desirable place to do business. Cut transaction costs, and you encourage more people to get into the game.

• There would be reduced losses of tax revenue from the underground economy.

• Illegal immigrants, many of whom do not report income or pay taxes, would be forced to pay their share of the Fair Tax. So would the 40 million foreign tourists who visit the U.S. each year.

• Social Security and Medicare taxes could be eliminated. These regressive taxes are probably the largest tax burdens on lower-income taxpayers. The Social Security Administration will get 6.2% of all wages and salaries up to $102,000 in 2008. Medicare gets an additional 1.45% from all wages and salaries.

• The Fair Tax would minimize the congressional tinkering and behavioral manipulation that permeates our current tax code. Special benefit provisions and lobbyist-generated deductions and exclusions would be gone.

• Substituting the Fair Tax could mean that the Internal Revenue Service could be disbanded. (That might sell the deal.)

Savers and investors would win big

The biggest winners under the Huckabee plan would be most savers and investors. A consumption tax gives savers something like an unlimited-deductible individual retirement account. There would be no tax hit until the dollars were actually spent. While the money was saved or invested, it would grow fully tax-free.

Financial companies would get an enormous windfall. Most of their expenses are payroll-related, and, relatively speaking, they spend little on goods and services. Much of their profit is generated by investments. That wouldn't be taxed until spent.

Continued: Plan has a list of problems

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