A fair tax?

January 11, 2008

Politics and economics are not my usual purview,  I generally leave them to experts such as our own political commentator, L.P. Mandrake.  However, since logic and the preservation of the liberal society generally fall under my blogging aegis, I had to comment on the recent brouhaha over Mike Huckabee’s “fair-tax” plan, which has been agitating the economics-blogging community.  While there had been piecemeal criticism and praise of this sales-tax plan thus far, when noted econo-contrarian Steven Landsburg wrote a fawning piece about it for Slate yesterday, things began to get a bit ugly. Without giving a full catalog of the back and forth blogging over the article, I refer you to this excellent summary of arguments against the Huckabee plan by Jonathan Chait.

You might ask why I bring this up in the first place. If you bother to read Yesterday’s Salad, you’re probably no stranger to blogging, and since L.P. Mandrake has been on hiatus, you’re even less likely to turn to us for analysis of emergent political issues.  However, there seems to be a logical issue with the plan that no one has mentioned yet, so here’s my brief attempt to suss it out (in non-syllogism form):

In brief, the Huckabee plan replaces the income tax with a nation-wide sales tax. To please the supply-siders, this encourages savings and particularly investment, because by not *spending* your money, it isn’t taxed (equivalent to an unlimited IRA).  To please the personal-responsibility proselytizers out there (that is to say, the folks who believe that economic misfortune comes only at the hands of irresponsibility and consuming beyond one’s means), the system actually penalizes consumption with taxes.  The TNR article linked above does a great job of dismantling the plan, giving solid reasons for why it is likely to cause more economic inequality, rather than less. However, from the two aforementioned perspectives (and countless others in the Conservative ideological rainbow) an increase in economic inequality isn’t the sort of thing that keeps you up at night, so the arguments will remain unconvincing, no matter how sound they may be.

So, here’s an argument that should appeal both to those seeking both a stronger economy and a more equal one: If we dramatically increase the sales tax, we would essentially be siphoning funds out of the economy.  One of the few upsides to the suffering dollar is that Europeans are visiting the U.S. in record numbers, and they are buying tremendous amounts of consumer goods. Apart from dramatically increasing the amount of German heard on Michigan Avenue, this provides a boost to our economy, essentially increasing the pie (or pot, depending on your preferred metaphor) from which we draw our unequal shares.  If their purchases were slapped with a dramatic sales tax (and to replace the income tax, it would have to be downright epic), visiting America and buying American would lose its appeal, even if the dollar remained weak.

Furthermore, a significant sales tax would also encourage wealthier Americans to spend outside of the country.  Save for some sort of extremely invasive customs process, this would both hurt our overall economy (by removing money from the system) and increase the amount of inequality in it (as traveling would allow the rich to sidestep the tax altogether).

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