Never was when I expected to be asked to comment on one Fox News TV star interviewing another Fox News TV star. Last week, Chris Wallace interviewed Mike Huckabee -- on Fox News, of course. During that interview, Rev. Huckabee laid out his proposed tax plan to eliminate the overly-complicated Internal Revenue Code and replace it with a 30% consumption tax or national retail sales tax.
Critics immediately howled that this was "regressive," which means poor people pay a higher percentage of their income into taxes than rich people. Those critics are correct! If a person only makes $20,000 per year, it is likely the whole $20,000 would be subject to this 30% consumption tax, creating a $6,000 tax bill. However, if a person is taking is making a million dollars a year and investing $800 thousand a year, then only the $200 thousand that he is spending on consumption would be subject to the 30% consumption tax. The poor person would pay $6,000 in taxes each year, whereas the rich person would pay $60,000 in taxes or ten times as much as the poor person. That is not regressive. But, the tax rate on the rich person is only 6% while the poor person pays 30%. The poor person pays a larger share of his income in taxes but the rich person pay a larger number of dollars. That is regressive.
Is this fair? Personally, I don't think so . . . but Huckabee offers a solution, called prebates, which is a repayment that occurs before purchase -- unlike rebates, which are repaid after purchase. So, if we give our $20,000-a-year person $6,000 in prebates each year, then their effective tax rates become zero. Some call that the largest welfare handout in history.
Without prebates, Huckabee's plan is definitely regressive and unfair. With prebates, it could be an efficient and effective tax system. The critical unknown is whether the prebates will actually be large enough to offset the regressiveness of consumption taxes. Without that information, I do not know if Huckabee's plan is fair or not.
To coin a phrase, the devil will be hiding in the details . . .
Critics immediately howled that this was "regressive," which means poor people pay a higher percentage of their income into taxes than rich people. Those critics are correct! If a person only makes $20,000 per year, it is likely the whole $20,000 would be subject to this 30% consumption tax, creating a $6,000 tax bill. However, if a person is taking is making a million dollars a year and investing $800 thousand a year, then only the $200 thousand that he is spending on consumption would be subject to the 30% consumption tax. The poor person would pay $6,000 in taxes each year, whereas the rich person would pay $60,000 in taxes or ten times as much as the poor person. That is not regressive. But, the tax rate on the rich person is only 6% while the poor person pays 30%. The poor person pays a larger share of his income in taxes but the rich person pay a larger number of dollars. That is regressive.
Is this fair? Personally, I don't think so . . . but Huckabee offers a solution, called prebates, which is a repayment that occurs before purchase -- unlike rebates, which are repaid after purchase. So, if we give our $20,000-a-year person $6,000 in prebates each year, then their effective tax rates become zero. Some call that the largest welfare handout in history.
Without prebates, Huckabee's plan is definitely regressive and unfair. With prebates, it could be an efficient and effective tax system. The critical unknown is whether the prebates will actually be large enough to offset the regressiveness of consumption taxes. Without that information, I do not know if Huckabee's plan is fair or not.
To coin a phrase, the devil will be hiding in the details . . .
