Yes and No. But it is definitely not a reason to oppose him.
In anticipation of Vertical Day, let me offer some thoughts on an important issue that Huckabee wants to discuss with the American people, while the other candidates avoid it: a pure consumption tax to replace the federal income tax (with features to avoid hardship for the poor and lower-middle class), dubbed the "Fair Tax."
The Fair Tax is fair because it rewards both hard work and savings, no matter where you are on the income scale. It also discourages consumption, because that is what gets taxed. Wall Street would much prefer a flat income tax, which simplifies the system and rewards people who are more financially successful than average, but does not discourage consumption. Wall Street thinks consumption is the number one measure of a healthy economy, because the more you consume (buy) the more profits they make off of you, causing stock prices to rise. But is consumption really a good measure of economic health?
Let's take two scenarios.
- Scenario 1: Joe and Jane each work full time for $40,000 salary each, for total family income of $80,000. They spend $25,000 on day care for their two children, and spend $5,000 a year on commuting costs. Their house payments are $25,000 a year, they spend $8,000 a year on food (eating out frequently and buying pre-packaged food to save time), $3,000 on clothes, and $3,000 on miscellaneous necessities. They pay a 20% flat tax on their income--$16,000. At the end of the year, Joe and Jane have $5,000 more in debt than they did at the beginning of the year, but they consumed $44,000 in goods and services.
- Scenario 2: Jack works full time for $40,000 and Jill stays home with the children and does a little work from home for $10,000, for total family income of $50,000. They spend nothing on day care, and their commuting costs are halved ($2,500). Their house payment is the same ($25,000) but they only spend $5,000 on food because they eat at home more and make more from scratch. They spend the same $3,000 on clothes and $3,000 on miscellaneous. They have only consumed $13,500, far less than Joe and Jane. If they paid a 30% consumption tax on this, that's $4,000 in taxes. At the end of the year, they've put $7,500 in the bank!
Who would you rather be? I think the answer on Main Street would be nearly unanimous (unless you're a woman who really hates staying home with your children -- in which case, why did you have them in the first place?). But Wall Street much prefers Joe and Jane, because they consumed more than 3 times as much as Jack and Jill! There isn't much opportunity for Wall Street to make money off of Jack and Jill because they provide more goods and services for themselves.
This is why the Fair Tax is absolutely right from a philosophical, pro-family and even pro-environment point of view.Now let's talk about practicalities. If Mike Huckabee is elected President, will he be able to make the Fair Tax law? Sorry to disappoint you, but almost certainly No. Here are some reasons why:
- The President can't make law himself under our Constitution. He has to get a bill from Congress to sign. Congress won't enact the Fair Tax because...
- Under our current tax system, there is a big deduction for home mortgage interest. Houses sell for about 15-30% more than they otherwise would because you're buying a big tax deduction with the house. The Fair Tax does not favor home ownership over renting. Without any tax benefit to mortgage payments, housing prices would likely drop drastically, which would enrage homeowners, i.e. the great majority of voters. The homeowners would "punish" Congressmen who vote for the Fair Tax.
- Congressmen rely on big donations from wealthy people who like to consume a lot themselves, and want others to consume even more to improve corporate profits. The donors would "punish" Congressmen who vote for the Fair Tax.
- Remember how I said that stock prices rise when people consume more? With the Fair Tax, people will consume less, causing stock prices to fall.* The media will declare that the sky is falling because the stock prices are falling, and anyone with a 401(k) won't be too happy either (including a lot of y'all on Main Street). The media and investors will "punish" Congressmen who vote for the Fair Tax.
So are the editors of National Review right when they criticize Huckabee for supporting it? Well, I think they are right that this should not be a foundational pillar of his platform, and I agree it won't be enacted. So what's the value?
The value of talking about the Fair Tax is it starts a national conversation about what our priorities should be. Do we really want to measure our economic good by consumption? Or is that an immoral and unsustainable goal for our society? Is the good of Wall Street really aligned with the good of Main Street? If not, what can we do to get Wall Street more aligned with Main Street, instead of the other way around?
The real genius of the Huckabee campaign is not a slogan like "Fair Tax." It is a conversation about what it really means to govern for the "general welfare" of this great Nation.
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* On further reflection, this is an over-generalization. For companies that have a globally diversified market, they will experience a lower cost of capital and demand for consumption in the rest of the world will more than pick up the slack for lower domestic consumption, resulting in higher stock prices. But for companies that sell goods or services primarily or exclusively to Americans, the lower cost of capital is of little help if consumption demand falls, because the main use for capital is for expanding production capacity. If demand falls, increased supply only makes the situation worse by driving down the price (which can wipe out any profit gains from a lower cost of production). Therefore, it is only the companies with primarily domestic markets that are likely to experience lower stock prices. But you can certainly expect these domestic companies to have a substantial and powerful lobbying presence in Congress.
14 comments:
Thanks for explaining the Fair Tax in a way that's easy to understand. It would be such a blessing for America's families and future families if it were enacted. It makes you mourn for America that it won't happen, but you're right, by promoting the Fair Tax at least Huck is starting the conversation about our priorities.
I just love the optimism everybody's showing about the FairTax. Would the United States have gained independence from the world's strongest British military by stayin' in the pubs bitching and moaning, reconciling themselves to their tax slavery?
Well, then, join FairTax.org, share the message with others, get signatures, and stop mumbling self-defeating babble! Consider what's ahead if you continue moping, and do nothing.
Ian,
You make a great point, the only way to make the Fair Tax a reality is to continue to educate people so that there’s such a popular demand as to force our government to enact it. We’ll need a super majority of the American public because it looks like most of the big money is behind the current system. Making the case with working families, as H as done here, seems to be the way to go. Working families have the most to gain, but also the most to fear because all of our money is in our homes. More stay at home moms = healthier kids, both physically and emotionally, healthier kids = a stronger American future.
You’re right, I shouldn’t have moaned, especially without doing something to help the cause. Thanks for the link to Fair Tax, I did join and I’m now waiting to hear from Senators Martinez and Nelson.
Respectfully, the FairTax is my number one reason for supporting Governor Huckabee. The case you lay out, while supportive, is a little misleading to people who may not be familiar with the FairTax.
Your first point is that the FairTax supposedly discourages consumption. Two scenarios present themselves when the FairTax is passed, one or the other will happen. (Or some combination) In scenario one, as presented by Dale Jorgenson, prices will be able to drop by an average of 23% as the embedded taxes of the current system are removed. Since he included your current withholdings as part of what businesses use to drop prices, your new “gross” income will be the same as your current “net”. However, after the FairTax is applied to any new good (used goods aren’t taxed) the price of a good will be roughly equal to what it is now. Consumption as such shouldn’t be affected because there will be no noticeable increase in prices. Jorgenson failed to include compliance costs in his report, which could yield even further price drops.
In scenario two, as presented by Art Laffer, prices will only drop by roughly 12%, but your new net income will be your current gross. Businesses won’t apply your current withholdings to price drops. Therefore, the after FairTax price will be slightly higher than current, however, with a noticeable increase in take home pay, consumption isn’t likely to diminish.
In fact, over at least the last 30 years, consumption would be a much more stable source of revenue than income. Here is a graph showing such, the blue line is consumption, the red is income. http://www.fairtax.org/images/content/pagebuilder/11763.gif
Your two scenarios of the family also leave out some important facts.
In your first scenario, were the FairTax law, your family would receive (for the sake of argument) their entire $80,000 in income, plus the yearly prebate of $7875 for a total of $87,875 available to spend. Now, since you rightly don’t apply their current house payment to FairTaxable expenditures, you calculated 44k of expenses. Now, continuing to apply the Laffer scenario from above, after the FairTax, that 44k expenditure would actually be $38,720 because of the 12% removed embedded taxes. After the FairTax is applied, the actual amount spent would be $50,336. Now, lets add back the house payment of 25k and you’ll find the family now spending $75,336. They actually now have a $12,539 surplus available to save and invest!
In your second scenario, the family has 50k income, plus the $7875 prebate, for income of $57,875. Their expenditures of $13,500-12%=$11880x1.3=$15444 after FairTax. Add in the house for a total spent of $40444 and the surplus is actually $17431.
In both examples, for consistency, I show the FairTax being “added”, and this is technically incorrect since it is inclusive of the price. The examples are more accurate from the retailer perspective, though not necessarily wrong. Case being, in your second example, you are including the FairTax as an additional $4,000 expense when in reality it is already included in the price of the goods being purchased.
I’ll finish with two minor corrections.
Under the FairTax, who needs the mortgage interest deduction? There is nothing to deduct from! That deduction, which most people don’t even use, essentially means you are paying your interest with pre-tax dollars. Under the FairTax, you are paying your entire mortgage with pre-tax dollars! Furthermore, the FairTax makes saving for a down payment much easier since take home pay is higher and dividends on short-term investments aren’t taxable.
Secondly, the stock market will surge under the FairTax. Corporations are no longer taxed, the cost of capital goes down, compliance costs go down, more people have more money to invest, and as previously stated, consumption won’t be hurt. Investors have a lot to look forward to under the FairTax! Plus no dividends or capital gains taxes!
I hope that answers some of the misconceptions.
Thanks for reading.
The FairTax is right for America!!!
Many people were surprised that Congress listened to their constituents and did not pass the Immigration Bill this Summer.
If we want Congress to pass the Fair Tax, more people need to write to their Congressmen and tell them to help get the bill out onto the floor for a vote and to vote for it. And we know that Mike Huckabee will sign it. So, it is very possible that we will have the Fair Tax. I hope it's soon!
Lisa
There is a very basic truism about taxes: if you tax something, you get less of it. Ergo, you tax consumption, you get less of it (at least less of the types of consumption that are taxed). Yes, prices will go down when you eliminate other taxes, so you can buy more for less. But you're still even BETTER off if you find ways to avoid the consumption tax, such as buying used, growing your own vegetables, providing services to your own family instead of hiring someone else to do it, etc. And I'm saying, these are all GOOD things, which is why the Fair Tax is GOOD. But these things DON'T get reflected in the stock market.
Granted, Laffer's report on the Fair Tax website predicts that consumption will increase but he assumes that people will work more because of removing the tax on labor. It's probably impossible to definitively predict which will be stronger: increased incentive to work because of removing the labor tax, or reduced incentive to consume because of the increased consumption tax. But considering that Americans are already the most over-worked people in the world, spending the most hours working, least time vacationing, and lowest unemployment, I strongly doubt that labor will increase significantly under a consumption tax. There just isn't much room to grow within the limits of human capacity! Rather, I think more labor will shift toward activities that avoid the consumption tax, i.e. producing goods and services for personal use.
I also agree that the Fair Tax will make it easier to save to buy a house and pay for it. But you can't deny a significant tax value is built into the current price tag on homes. So when the tax regime changes, there will be a one-time substantial drop in the value of homes. Since the majority of voters are homeowners, the Fair Tax will never fly unless it includes a bail-out for current homeowner who take this hit.
I want a Fair Tax as much as you do. But it's my job to interact with Congress, understand how things get done or don't get done, and find the method of achieving policy goals that is most likely to get through the Congressional obstacle course. If we're not honest about the hard consequences of the Fair Tax and prepare solutions for them (like how to compensate homeowners for the hit or keep people from panicking over the effect on the stock market)then it will never happen.
It is much easier to stop change (such as the "comprehensive immigration reform" bill) than it is to effect change, especially sweeping tax and economic change. The Fair Tax will be a generation-long battle, if we're lucky, and we have to train ourselves to run a marathon on this one.
K,
Thanks for responding. I believe you are failing to see the forest for the trees.
We are taxed now on our consumption. It is hidden in the prices of what we buy, and visible in the lack of a full check we take home. People avoid paying taxes now either by purposefully cheating the system or simply not understanding the rules. The tax gap is huge. Will some people change some behaviour under the FairTax to avoid paying it? Sure. But no more than do now. My guess is fewer.
I certainly understand that taxing certain behaviour creates less of it, but I don't think that logic applies to the FairTax. There is no "new" tax persay. The FairTax is revenue neutral and simply creates a more efficient system of collection. Without any noticeable difference in after FairTax spending power, the disincentive to spend you are assuming will happen won't materialize. Plus, since it is across the board, no specific behaviour is being targeted. Trust me, I'm not going to get into farming to avoid paying the FairTax on my lettuce when my ability to purchase lettuce hasn't even been altered.
Furthermore, as has occured in other countries that simplify their tax structure, compliance goes up.
Your home ownership information is also incorrect. After the FairTax, there will be no drop in price for current homes. In fact, with the increase in the overall economy and more people being able to purchase homes, the market values are likely to increase.
The drop occurs in the production cost of new homes built post fairtax. These homes alone will have the FairTax added, and thus the sales price will end virtually similar to current homes, where no FairTax will be charged at sale. There are three white papers on the FairTax website that deal specifically with your question on real estate. They can describe better than I in the limited space I have. Sheesh, I've already written half a book!
Cheers,
Go Huckabee!
Christian
Christian,
Your statements about the effect of the Fair Tax on the housing market are contradictory. What the Fair Tax research papers show is that the Fair Tax will reduce the cost of housing, making it more affordable, which is great for people who do not yet own. But the flip side of that coin is that people who already do own will not be able to charge as much to sell their home! Granted, if they sold their house their lower profits would go further in a cheaper market. But many people don't have any significant equity in their homes now, so selling would put them in the hole to mortgage company. And for people with no intention of moving, there is still a huge psychological blow when your house is estimated to be worth less than you previously thought it was, creating a tendancy to panic and call for a government bail-out.
The Fair Tax research papers never deny that there will be a one-time drop in the value of homes when the mortgage interest deduction is taken away as one factor in the current value of existing homes. (They simply avoid the issue.) All of the benefits of the Fair Tax that make up for the loss of the mortgage interest deduction are prospective, not retrospective, so they don't make up for the fact that people were willing to pay more for a house in the past in order to get a bigger deduction, but that benefit no longer exists.
It also doesn't matter that the Fair Tax is not a NEW tax so much as a REPLACEMENT tax. People still will engage in behavior to avoid whatever taxes are in effect, to the extent it makes economic sense for them to do so. So no, you may not quit your job and become a farmer, but if you have a family your wife may quit her job to avoid paying for daycare and other costs of working and you'll choose to buy a used car instead of new, which helps you but hurts the auto manufacturers.
H,
Where are you reading that employers owe the Fairtax on wages paid to employees for "consuming" their labor? This isn't true at all. Any component that goes into the cost of the final good or service of a company, including labor, is not charged the FairTax. They are no more charged on employee labor than they are on the plastic used to make the bottles or the aluminum used to make the cans. It's a business expense, and these are not taxed.
I'm also just not really following your housing logic. The market value of my house has absolutely nothing to do with the MID. I can't even take the MID because my interest payments are less than my standard deduction. If the MID allows me to pay my interest with pre-tax dollars (assuming I took it), the FairTax lets me pay my whole mortgage with pre-tax dollars!
If anything, current homeowners should look forward to the boon they will receive if they sell their house without any capital gains exposure!
Christian, whether YOU can use the MID does not change the market value of your house. The question is whether a potential buyer would benefit from the MID. If your interest isn't enough to exceed the standard deduction, then I'd wager you bought your house many years ago, when prices were much lower, and you're paying less in interest now than when you started too. But with the recent run-up in housing prices, almost all NEW buyers will be paying enough interest to get the MID, and they're the ones who determine the value of your house. (And by the way, most home sales have no capital gains exposure already. A married couple can have up to $500,000 in gain and not owe a red cent--another way our current tax code encourages people to over-invest in real estate relative to other types of investment.)
Christian, On closer look you are mostly right about the sales tax on "consuming" labor: on Page 7 of the "Plain English Summary" it clarifies that this tax only applies when the employer is a government agency or a household employing domestic services. This makes sure the same tax is built into paying for nannies as into daycare, for instance.
Let’s look at a simple example, say a person couple finances a house for $250,000 at 6.75%. Their interest payments savings would be about $12000 over the course of a 30 year loan. I mapped it out in excel but it won’t post right.
This takes into account the time value of money. So at first glance it might appear that a home might lose 5% or so of it’s value strictly from a capital budgeting standpoint. However, I doubt that most home buyers do such a detailed analysis. More likely they simply calculate whether or not they can make the payments. I would posit that in most cases the fact they are now taking home the full amount of pay would make up for this deduction. I also do believe that there will be productivity and savings gains because just as taxing consumption might slightly reduce that, not taxing working and savings would probably increase that. IMO, the net effect would most certainly be positive.
Thanks for accepting correction on the labor issue.
Regarding housing, yes, I forgot that since 1997 the exclusion was allowable, but you bring up the good point that that simply amounts to government encouraging people of over invest in one particular form over another. Again, reason to rid us of our current tax code.
Now, I did forget how much better our market in Charlotte is than the rest of the country. I only bought my house last year. It was 4 years old, is a 2 bedroom, 2.5 bath, 1100 sq ft, townhome. I bought it for $92k. (Market value was $105k, but I'm a good negotiator and had a motivated seller!).
Regardless,
Here is what I think the logic flaw is you are making...and why you can't find a rebuttal because no one else is asking the question.
The market value of the house is not set by the availability of the MID. Since only some people can take it, it doesn't make sense that the same house would be valued higher for one person than another. The price of the house is the price of the house. Period. (well, negotiation aside) :-)
With that said, individuals who can take the MID may, in determining the price that they are willing to pay for a house, look at the tax benefit that may befall them. They may decide they can afford a higher priced house than they intended because of the tax benefits. All this does though is adjust the price range of houses that they look at to buy, it doesn't change the values of the houses themselves.
Neighborhoods A, B, and C are all still there, and their prices shouldn't change, but now the family looks at the better neighborhood C instead of lower neighborhood B.
I'm running into a case where I see what I'm trying to say, but can't phrase it right. We may just have to agree to disagree...but again, you are the only person I have ever encountered who wasn't worried about the opposite happening...that houses would cost too much, not shrink in value.
And thinking about it some more...
Although new homes will cost less to build, that drop won’t be enough to offset the sales tax added. Therefore, the only way that a drop in existing home prices could occur would be if the entire home market slumped to a huge extent since higher prices for new homes would exert upward, not downward pressure on existing homes.
I've done all I can!
Thanks for the dialogue.
Go Huckabee.
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