The problems with Thompson's and Huckabee's tax plans.

Policy made plain.
Dec. 1 2007 6:40 AM

Simple Gifts

The problems with Thompson's and Huckabee's tax plans.

Mike Huckabee. Click image to expand.
Mike Huckabee

The American tax code is hideously and needlessly complex. People say they want something simpler. Now two Republican presidential candidates are probably committing political suicide by offering people what they say they want.

The central gimmick of Fred Thompson's recently announced tax plan is to offer people a choice. They can pay taxes under the current rules—with some juicy new breaks added from the big and small businesses wish lists—or they can pay a so-called "flat tax," with lower rates and fewer deductions. So, anyone who wants a simpler tax code could have one. But for some of them (people who get a lot of deductions now), the simpler tax will be a higher tax. How many people, do you suppose, would choose simplicity over complexity, even if simplicity will cost them more? My bet: approximately zero.

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Like most flat-tax advocates over the years, Thompson puts a thumb on the scale by combining flatness with a large tax cut. The nonpartisan Tax Policy Center figures that Thompson's plan would fall a mere $2.5 trillion short of revenue over the next decade, compared with the current system. Two and a half trillion to play with makes it easy to arrange for more people to see their taxes go down than up if they choose the flat-tax alternative. But this has nothing to do with simplifying the system. If you don't care how much debt you run up, you can give everyone a tax cut without bothering about simplification. You can stop collecting tax at all! That would be nice and simple.

The real strategy of Thompson's plan is a familiar one from past Republican tax plans: Give large breaks to businesses and the wealthy (by, say, abolishing the estate tax), bribe the middle class to go along by offering smaller breaks to them, and don't worry about paying for it all.

But maintaining your indifference to the size of the bill you are running up requires nerves of steel. You must never waver, never, never express the slightest concern that lost revenue may be a problem, and never, never, never even hint at where you might go to find the money. Thompson followed the script, putting out word that the explosion of economic activity after his tax reform would bring in too much money to even count, yadda, yadda, yadda. Then, unfortunately, he blinked. He revealed that he is a political amateur by making ominous noises about finding some savings through changes in Social Security benefits, which has to mean cuts in Social Security benefits or no money will be saved.

Raise your hand if you would be happy to accept lower Social Security payments in exchange for a simpler tax code.

I thought so.

Mike Huckabee, currently enjoying his 15 minutes, makes a slightly different political mistake, which we might label, for lack of a better term, total honesty. He has endorsed something called the "fair tax," which involves repealing all federal revenue sources—the income tax, Social Security tax, estate tax, everything—and replacing them with a 23 percent sales tax on everything except education. The fair tax propaganda says, frankly, that it is intended to be "revenue-neutral." That is, it would bring in just as much money as the taxes it replaces. No monkey business about explosions of new revenue.

This makes it easy to figure out who would win and who would lose in Huckabee's so-called "fair" tax. It's a zero-sum game: Every dollar someone's taxes go down is a dollar someone else's go up. What you spend every year is the amount you earn minus the amount you save. On average, Americans save practically nothing, but wealthier people save more. Very poor people actually spend more than they earn, while Bill Gates and Warren Buffett couldn't spend more than a small fraction of their income if they tried. So, wealthy people are going to see their taxes go down, which means that poor and middle-class people are going to see their taxes go up.

There's a complicated business in the fair tax about rebating it for spending up to the poverty line, but that doesn't change the basic math of revenue neutrality—that if rich people pay less, poor and middle-class people pay more. And they will feel it more. Including state sales taxes, there would be a governmental surcharge of one-third or more on everything you buy. That's part of the idea: to make people feel the weight of government, in hopes that they will want less of it. Fair enough, if they can sell it. Here, too, though, honesty makes the plan a hard sell.

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