Mike Huckabee wants to replace the entire federal tax system with a national retail sales tax of 23 percent. Trouble is, he can't do it and maintain anything like the government that Americans have come to expect.
In the real world, the actual tax rate would be at least one-third higher than the 23 percent the former Arkansas Governor claims. To put it another way, Huckabee's proposed 23 percent rate would produce about $7 trillion less revenue than the feds expect to collect over the next decade. That would result either in a staggering increase in the national debt or a massive 25 percent reduction in government.
Huckabee is surging in the GOP presidential polls, and his ideas are generating a lot more attention. Among the most controversial is his national retail sales tax, which would eliminate all federal individual and corporate income taxes, estate taxes, and payroll taxes for Social Security and Medicare. He would also abolish the Internal Revenue System. At first glance, it sounds pretty attractive, especially for Republican primary voters.
But look a little more closely. In theory, the sales tax would be imposed on every retail transaction, including home mortgages, car purchases, health care, education, and food. No exceptions. Even government purchases would be taxed. Because relatively poor people spend more of their income than rich people, Huckabee includes a rebate to partially offset the impact of the levy.
That's the theory. The reality is that long before such a tax becomes law, lobbyists would convince politicians to exempt many goods and services. Imagine the firestorm when Congress tries to impose a 30 percent tax on health care or nursing home costs.
If this tax ever did become law, it would induce staggering sticker shock among consumers and massive evasion would follow. "Paper or plastic" would be replaced with a new question at the checkout line: "How much for cash?"
Even without the lobbying and cheating, policy experts say the rate could never get close to 23 percent. Don't take my word for it. In 2005, President Bush's Tax Reform Commission figured the rate would be at least 34%. The Tax Policy Center's Bill Gale estimates it would be at least 44% and probably lots higher.
A word about the rates: While Huckabee says his sales tax rate is 23 percent, he'd actually add 30 cents in tax to the price of something that costs $1. To understand why, you should know that economists measure taxes in two ways—the tax-inclusive rate and the tax-exclusive rate. The tax-inclusive rate, which is the way we figure income taxes, is the percentage of something's total cost, including the tax itself. That's how Huckabee gets a 23% rate. But when most people talk about sales taxes, they are thinking about the tax exclusive rate. By that measure, Huckabee's tax rate isn’t 23 percent at all. It is 30%.
When it comes to economic policy, Huckabee is usually a pretty serious guy. But a national sales tax just doesn't add up.
