December 18, 2007

Let's Be Fair

James Taranto has provided conservative readers with a must-read feature at Opinion Journal for years in the Best of the Web Today. His incisive commentary regularly skewers the ridiculous and gives a lighter look at the day's stories. Taranto rarely misses a target, and rarely selects a target without reason.

Unfortunately, today he missed the mark on at least the former count. Taranto criticizes Mike Huckabee's support for the Fair Tax initiative, on which the Wall Street Journal has written extensively in the past. Taranto makes some good points, but misses entirely on one:

Fair Tax people respond to this point by saying they would counter the added burden with subsidies, which they call "prebates"--a deviation from the elegant simplicity that is the plan's biggest selling point. Still, no matter how complicated they make the system, there is no escaping simple arithmetic: If some taxpayers pay less, others are going to have to pay more, or else the plan is not revenue-neutral.

As we noted last week, Huckabee acknowledges that a few groups would pay more: "illegals, prostitutes, pimps, gamblers, drug dealers." This radically simple tax is so precisely targeted that only bad people will pay more. The rest of us will save so much, we can pool our resources and buy the Brooklyn Bridge.

Not so fast. This argument doesn't rely on magic or precise targeting. Huckabee actually has a point in why a consumption tax could reliably get these people to pay more -- and it's because they don't usually pay income tax at all, or at least not to the realistic extent of their income.

Because they deal in cash for revenue on illegal activities, they tend not to report the income. That puts the government at a disadvantage; they have to spend a lot of money to collect what little they can from lawbreakers. If the government taxed consumption rather than income, it's perfectly reasonable to conclude that they would pay more -- a lot more than zero, which is what many of them pay now.

One other argument bears rebuttal as well. James says that a consumption tax would force people to spend less, and that the disincentive would be regressive, because people would have less to spend. If the income tax disappears, however, consumers would have much more cash on hand and could spend it as they chose. That may prove negative for the very bottom of the economic scale where income taxes don't apply now (although the clunky rebate system would cushion that), but it would more likely even out for the middle class -- and the rich would have fewer ways to shelter their cash as they spent it.

Overall, I agree with many of James' points. I'd add another issue: providing a strong incentive for a shadow economy. James states that any activity taxed has a disincentive, but it also has a strong incentive for creative avoidance. We see this in jurisdictions with higher cigarette and liquor taxes, even to the point where states attempt to arrest people who buy both in a neighboring state with lower tax burdens. Instead of income tax cheats, the federal government would then have jurisdiction over black markets in every neighborhood, not exactly a federalist Utopia.

The Fair Tax can be fairly criticized without belittling its supporters. James gave us a rare miss today.


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