ScareTax, Not FairTax, Is Name for Huckabee Plan: Amity Shlaes

Commentary by Amity Shlaes

Dec. 12 (Bloomberg) -- Every presidential primary has a tax gimmick.

In the 1990s, it was the flat tax. This time it's the so- called FairTax. As far back as last summer, a FairTax Bus was rolling around Iowa. Supporting the FairTax has boosted Mike Huckabee to such an extent that Rudy Giuliani has felt the need to go around preaching the sanctity of the home mortgage- interest deduction.

Even Ron Paul is playing catch-up. One pro-Paul Web site, http://www.dailypaul.com , gave Paul supporters an explicit script for challenging the FairTax: ``people need to know that we can get rid of the IRS, and have no new Tax.''

All this energy is remarkable since the FairTax is a bad idea, so bad you could call it the ScareTax. For voters to like it tells us a lot about their mood as 2008 dawns.

Start with the mechanics. The FairTax does away with the income tax, corporate taxes, estate taxes and just about any other federal levy. It also kills off the Internal Revenue Service. Under the FairTax, Washington would apply a single national sales tax on purchases, whether a DVD player, or a new house. To take the edge off the pain for lower earners, the FairTax offers them a monthly rebate.

Exporters, who now pay more taxes than their foreign equivalents, love the FairTax. It cuts their overall tax burden and puts them on a level playing field with those German companies that are doing so well in China. The FairTax campaigners offer something else: a plan to amend the 16th Amendment, which gave the federal government the power to collect income taxes, to make their change irreversible.

`Inclusive' Rate

But notice that this catalog of features doesn't mention one thing: the rate. That's because a national sales that captures the sort of revenue Washington needs requires a 30 percent rate.

To be sure, FairTax advocates tout the plan with a 23 percent rate. But this is beyond disingenuous. The 23 percent rate is ``inclusive,'' meaning that for every dollar you pay, 23 cents is tax. That translates to a 30 percent tax on a 77-cent expenditure.

Other warts include a problem of civics. Americans generally pay the taxes they owe, a fact that has long astounded Europeans, who live to evade.

Implement the FairTax, though, and the U.S. will find its tax-scape taking on a certain sleaziness. Vendors will materialize on street corners selling that DVD player without tax.

Even citizens who never thought of breaking the law will snatch up those DVDS. Thirty percent is simply too great a take to ignore. Especially vulnerable will be younger people, who already view property rights as an option, not a given. Think Napster -- if you don't pay for downloads, you certainly won't feel the need to pay a sales tax six times the one your state charges.

Dual System

A third and significant FairTax problem also has to do with Europe. Europeans introduced their own version of the Fairtax, the value-added tax, while they talked of curtailing the income tax. But when the time came, they retained that levy, generating the double-tax burden that corrupted Europe in the first place.

To avoid such a dual system the U.S. really has to pass that constitutional amendment, and the chances of that are, well, real low. What else? Even the FairTax needs enforcers, so while the IRS may go, another form of tax police will emerge.

So why all the FairTax talk, and why now? The FairTax's popularity can't all be written off to financial backing by Texan exporters. Voters today display a fiscal desperation that goes beyond the housing problem.

Two answers, one having to do with the past, and one with the future.

Resisting Dilution

The simple 1986 tax revision got close to some of the goals that the FairTax aims for. While lowering the top income-tax rate to 28 percent, the 1986 law promised a simpler, less-taxed future. Yet ``everyone knows what that became,'' says David Tuerck, an economist at the Beacon Hill Institute in Boston.

Lawmakers, led by the current president's father, were raising rates within half a decade. Tuerck has done contract work for the FairTax movement and says he is convinced that it ``will resist dilution by big government.''

The other source of the FairTax's appeal is more subtle. Tax increases are coming one way or another. Medicare Part D, as well as Social Security, will simply require those increases, not only because of statutes but also because Americans expect ever-greater entitlements.

Even a construct as sturdy as the FairTax can't withstand those expectations. Put the federal tax beast in the FairTax cage, and you'll find the states are the ones raising rates. Or that the bill for it is postponed and shifted to younger generations, as the Social Security burden has been.

So the choice is simple. The country can start thinking about reforming entitlements soon, starting with ratcheting down those expectations. Or it can cheer the Fairtax Bus through November and into law. What happens after that is anyone's guess, but one thing is sure. It will not be fair.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Amity Shlaes at ashlaes@bloomberg.net .

Last Updated: December 12, 2007 00:20 EST

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