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Tax Lunacy

America's tax system may be complex. But Mike Huckabee's plan to institute a flat tax is sheer madness

Tim Watkin

I've been waiting and waiting. For several weeks now Mike Huckabee has been the rocket man on the Republican side of the presidential race, and critics and journalists have been digging around in his policies and past to see if the poll surge is backed by substance. As a result, stories have broken about the former Arkansas governor's desire in the early 1990s to isolate Aids sufferers and his belief that wives should submit to their husband. We already knew he doesn't believe in evolution, so these hicksville beliefs, while concerning, were hardly surprising. Indeed, these beliefs and the fundamentalist Christian worldview they stem from are exactly why Huckabee has been climbing the poll ladder in states such as Iowa and South Carolina.

However, in the midst of Huckabee's platform is a policy that will charm the good farmers of Iowa about as much as a cloud of locusts. Huckabee, the supposed friend of the poor and all-round nice guy, supports a flat tax - in his case a flat tax on consumption, as opposed to one on income, that its supporters call the Fair Tax. A more ironic name is hard to imagine. His scheme would be about as fair to average working Americans and their hard-earned income as that flock of locusts would be to a field of corn.

In any other western democracy, being a flat-taxer would put Huckabee at the outer limits of political sanity. The detail is complicated, but the concept is as simple as the name suggests: an end to a progressive income tax, an end to the consensus that those who can afford to contribute more to the good order and running of society should pay more than those struggling to get by. Outside of the former Soviet states, a flat tax system is a political non-starter for the simple reason that asking you, me and Bill Gates to pay the same tax rate on either our income or the goods and services we buy, would destabilise a country's economy, government spending and social cohesion.

So when Huckabee says, "When the Fair Tax becomes law, it will be like waving a magic wand releasing us from pain and unfairness," why isn't he laughed all the way back to Little Rock? Why have I waited in vain for the media to start reporting the lunacy of huckster Huckabee's plan? (With the exception of Rich Lowry in the New York Post). Because on the Republican side of the ticket he's far from alone. It's one of the unwritten stories of the campaign thus far - incredibly, most of the Republican contenders support some kind of flat tax.

Having called the idea a "disaster" in the 1990s, Rudy Giuliani has gone all Mitt Romney-esque and now likes the idea in some unspecified form. Fred Thompson wants a voluntary flat tax. And even old John McCain has spoken admiringly of it, although his latest economic policies seem to assume an ongoing income tax. Only Romney has called flat taxes "unfair". It's hardly surprising to see Republican politicians revelling in the opportunity to claim they could close down the IRS, but it's surprising no-one's looking into the details of what such a radical claims would mean in practice.

The idea of a one-size-fits-all tax rate first got mainstream attention in the US when mega-millionaire Steve Forbes (who has endorsed Giuliani this time) ran for president as a flat-tax reformer in the 1990s. Like school vouchers, it was a new right cause celebre for a while, but when the Republicans were finally in a position to push through major tax reform in the early 2000s they backed away from it. Now, it seems to be back in vogue. Just without any media scrutiny.

There are any number of practical reasons why a flat tax is a bad idea in practice. For one, switching to the Fair Tax - that is, an effective 30% tax rate on every purchase, with rebates paid in advance on purchases up to the poverty level - would mean repealing the 16th amendment of the US constitution, which empowers Congress to "collect taxes on incomes", but not consumption. Huckabee's as likely to get the constitution amended for tax reform as he is to walk on water. (Some commentators, such as Dean Baker in Comment is Free earlier this week, point out that in reality the rate could climb as high as 40%.) For another, government services would depend on people continually increasing their spending at a time in history when we need to learn to live sustainably and save more.

Flat taxes also mean an end to tax deductions, which in the US means an end to deductions on household mortgages and the whole array of deductions businesses claim each year. If you've every wondered if the current mortgage crisis could get worse, or asked what it could take to tip America over the edge and into, not just a recession, but a full-on stock market crash, there's your answer.

Without doubt it would increase inequality in a country that is already as dangerously skewed as it was in the Gilded Age of the 1920s. Averaged across the 1920s, the richest 10% of Americans grabbed 43.6% of total income (excluding capital gains), and the richest 1% a whopping 17.3%. In 2005 the comparable figures were 44.3% and 17.4%. The richest Americans already have a much greater slice of the pie than they have had for several generations and are doing very nicely indeed under a graduated tax rate (complete with Bush's tax cuts). A flat tax would destroy the system that seeks to redistribute some of the country's finite wealth amongst its people in the form of schools, roads and other public goods. And before the whining begins, this isn't a cry of class warfare, it's economic common sense. Even if you reject arguments around fairness and moral obligations to those less fortunate, by and large economies with more equality are more prosperous and the countries more stable.

None other than President Bush's 2005 advisory panel on federal tax reform rejected a Fair Tax-like retail sales tax, saying it "would increase the tax burden on the lower 80% of American families, as ranked by cash income, by approximately $250bn per year. Such families would pay 34.9% of all federal retail sales taxes, more than double the 15.8% of federal income taxes they pay today."

They offered some specific examples of just how unfair a Fair Tax would be: the Treasury Department estimates that a hypothetical single mother with one child making $20,000 per year currently pays $723 in total federal taxes (including both the employee and employer shares of the social security and Medicare taxes). Under the stand-alone retail sales tax, her tax bill would go up to $6,186 - a tax increase of over 750%. A hypothetical married couple with two children making $40,000 per year would pay an additional $6,553 in taxes, an increase of more than 110% of total federal tax liability.

So much for Mike Huckabee, friend of the poor. Huckabee has scored points in Republican debates by appealing to America's better nature. Yet a flat tax system would be a great example of its greed over-coming its better self. Core to the American mindset is the idea of individual liberty - and with it, the dream of individual prosperity. Anyone should be able to live - and prosper - on his own terms, rewarded for hard work and talent. Fair enough. But on its own, that's a recipe for a cruel, winner-take-all society.

Thankfully, Americans also have a great community spirit and deeply value care and respect for your neighbour. A flat tax abandons those latter beliefs. It fails to recognise that, like a blossom on the vine, any individual's success stems from the society in which he lives - its public education, its social welfare, its roads and infrastructure, law and order, and a middle class well-off enough to buy the products that made those individuals rich. If the flower sucks all the nutrients from the vine, they both wither and die.

Americans are rightly fed up with their complicated and ever-changing tax system. They spend $150bn every year just complying and having their taxes collected. We can all agree it's nuts and needs substantial reform. But don't fall for the snake oil of flat tax, just because it's simpler. There are any number of ways to achieve tax simplification within the existing progressive tax system. As America's fragile economy once again becomes the number one concern amongst voters, hopefully the media and candidates will start giving tax reform the attention it deserves. Tim Watkin is a freelance journalist in San Francisco.

© 2007 The Guardian

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