Mason City Globe Gazette,. IA
12-23-07
The fairest tax of them all?
By Dan Gearino, Globe Des Moines Bureau
DES MOINES — Four months ago at the Ames straw poll, a man walked down
the line of reporters’ desks like a door-to-door salesman.
Ken Hoagland, a spokesman and strategist for Americans for Fair Taxation,
didn’t find many takers for his stacks of literature about a national sales tax — a
plan his group calls the “FairTax.”
“It was pretty much, ‘Don’t let the door bump you on the way out,’ ” he said,
speaking from his office in Houston, Texas.
Hoagland didn’t know he was a few hours away from his group’s defining
moment in the presidential campaign. That night, former Arkansas Gov. Mike
Huckabee came in a surprising second place in the straw poll. His strong
showing, with 2,587 votes, was at least partly because of support from the 400
voters bussed in by Hoagland’s group.
From there, Huckabee rose to the top of the Republican field in Iowa and across
the country. His connection with Americans for Fair Taxation has helped insulate
him from critics of his tax record in Arkansas.
But the tax plan, a radical rewrite of current law, has gotten little scrutiny.
In addition to Huckabee, two candidates have said they would sign the tax into
law: U.S. Reps. Ron Paul of Texas and Duncan Hunter of California. Former U.S.
Sen. Fred Thompson of Tennessee has said he supports a consumption tax in
principle, though he has shied away from endorsing a specific plan.
So what is the FairTax, and how might it change the way Americans pay for their
government?
The following are the basics:
* The current federal tax system would be thrown out in favor of a 23 percent
consumption tax, or sales tax, on new goods or services. The only exceptions to
the tax are for sales of previously-sold items, such as used cars, or on businessto-business transactions. All other taxes on corporations and individuals would
vanish.
* Households would get an automatic monthly check from the government, called
a “prebate.” While the money is intended to reduce the tax burden for low-income
families, all households would get a check. The important variable is family size,
with every family of the same size getting the same amount, regardless of
income.
* Internal Revenue Service would be shut down, with its functions replaced by a
much smaller workforce in other agencies.
For taxpayers, the question is simple: Would I pay more?
FactCheck.org, a nonpartisan research group at the Annenberg Public Policy
Center in the University of Pennsylvania, looked at how the FairTax would
change the distribution of the tax burden among income levels. The analysis
shows a decrease in the share of the overall tax burden for people with incomes
from $0 to $24,156, an increase for people earning $24,156 to $75,223, and then
a decrease for those at $75,223 and up.
The largest change for any income level is for people earning $42,436 to
$75,223, whose share of the tax burden would rise 3.5 percent.
Supporters of the FairTax disagree with the FactCheck.org study. They say it
paints the tax in an unfavorable light by focusing the distribution of taxation,
rather than the economic growth that would occur in a more efficient tax system.
Going for broke
American for Fair Taxation was founded in 1995. The seed money came from
few big donors in the Houston area, including Bob McNair, principal owner of the
Houston Texans football franchise.
Hoagland, who has a background in issue advocacy in Texas and in Washington,
came on board a year and a half ago. He said the group has moved beyond the
reliance on big donors and now gets an average donation of $25, usually through
its web site, FairTax.org.
Regardless of practical questions about the FairTax, the plan has clearly played
a role in the Republican presidential race.
Huckabee is the only candidate who has made the FairTax a regular part of his
stump speech. His support for the tax has given him a rebuttal to critics who say
he was too eager to raise taxes as governor of Arkansas.
“Whatever a person’s record was or is, anyone who advocates for the FairTax is
a tax cutter and a tax reformer. It’s just that simple,” Hoagland said.
The connections between Huckabee’s campaign and Americans for Fair
Taxation go beyond the issues. David Polyansky, a top policy adviser for
Huckabee, was chief operating officer of the tax group until just over a month
ago.
Hoagland said he hardly ever talks to his former colleague, and when they do
talk, they take great pains not to talk about strategy. As a non-profit company,
Americans for Fair Taxation cannot endorse a candidate or coordinate with a
presidential campaign.
The group is most visible at Huckabee events, where volunteers travel in a
FairTax bus and hands out hats and literature.
But Huckabee’s rise has coincided with financial turmoil at American for Fair
Taxation. The group spent $2.5 million this year in states with early nominating
contests, emptying its bank account in an attempt to gain traction. The group’s
payroll has gone from a peak of about 40, down to about 15.
So, while Huckabee carries on the message, the group no longer has the
resources to do much more than hand out those hats.
“We went for broke to get the FairTax on the national stage,” Hoagland said. “We
achieved getting it on the national stage and almost did go broke.”
‘We’re not there yet’
Iowa State University economist Peter Orazem said the FairTax runs out of
gas when it comes to actual implementation. He thinks the transition to the new
system would be a disaster, marked by plummeting retail sales, stagnant wages
and uncertainty about the solvency of the federal government.
“It’s going to take the economy a while to adjust to that. Obviously, nobody’s
going to get a raise for a long time,” he said.
The underlying problem, Orazem said, is that the economy doesn’t respond well
to sudden changes.
An economist who helped draft the FairTax plan, Laurence Kotlikoff of Boston
University, disagrees with the idea that the transition would be rough.
“The economy should really surge because of this,” Kotlikoff said.
He thinks the sudden end of corporate taxes would give the economy a burst of
energy. Also, he thinks the increase in take-home pay will counteract the
increase in retail prices.
However, he concedes that such a major change to the tax system is bound to
have unforeseen ramifications that may be good or bad. For instance, he said
there will be thorny questions about how to tax 401K accounts that would
otherwise be subject to income taxes.
But Orazem thinks all the what-ifs are less important than the underlying political
reality: The FairTax has almost no chance of becoming law.
Supporters of the tax need to do more than get a bill through Congress. They
need to get three quarters of the states to approve the repeal the 16th
Amendment of the Constitution, the amendment that deals with the income tax.
Because of this high threshold, Orazem sees the FairTax as an interesting
discussion point rather than a viable proposal.
Hoagland said there may not be enough support for the tax today, but support is
growing.
“What is required to make it come true and repeal the 16th amendment is the
kind of voice from the citizenry that simply can’t be ignored by elected officials.
We’re not there yet,” he said.
Dan Gearino can be reached at 515-243-0138 and dan.gearino@lee.net.