Mike Huckabee and the FairTax: 23 percent or 30 percent?
FairTax Proposal Gets Unfair Reporting on CNN’s “Your $$$$$”
If it’s a new, popular GOP idea – it must be ‘spin’
Your Business Blogger is amused that differing opinions of the FairTax depend, as economics often does, on the point of view — and what number goes into the dominator.
“The first thing that I’d get rid of is the Internal Revenue Service,” said Mike Huckabee at the recent CNN YouTube GOP presidential debate. “Wild applause for axing the IRS,” said Christine Romans, co-host of CNN’s “Your $$$$$.” The Huckabee clip was the lede on the December first edition. Most people are thrilled at the thought of ending the IRS and making April 15th an ordinary spring day.
But perhaps not Pat Regnier, Senior Editor of Money Magazine who was interviewed on the IRS-ending proposal. Money Magazine is a sister company to CNN.
Huckabee is a champion of the FairTax plan where taxpayers would receive their entire paycheck – with no deductions. The Federal government would collect taxes on a percentage of sales and not on a percentage of income.
When CNN host Romans asked guest Regnier, “Wow, the Republicans in the crowd certainly liked the idea getting rid of the IRS and making a more simple tax system. What is the Fair Tax?”
It seemed that guest Regnier didn’t care for the tax reform title, ‘FairTax.’ “Let’s un-spin it,” he said, “And let’s just say what it actually is: It’s a national retail sales tax.” Pat Regnier implied that “Fair” coming from a conservative presidential candidate was simply spin. The segment was titled with a question mark: FAIR TAX?
Regnier continued on the FairTax, “It’s a 30 percent mark-up on basically every thing you buy.”
No, it is not.
FairTax proponents at FairTax.org use 23 percent per transaction rather than the 30 percent number. The two different percentages is a common mistake produced by using a different base number in calculating the tax rate.
The current federal tax rate and the FairTax proposal use a ‘tax-inclusive’ calculation, where the tax is included in the base. A simplified chart from FairTax.org, demonstrates the fallacy of multiplying percentages on two difference numbers.
For example, a worker earns $100 and pays $23 in taxes and is left with $77 in discretionary income. The tax-inclusive rate is 23 percent. (23 divided by 100.)
CNN guest Pat Regnier used a ‘tax-exclusive’ calculation, where the tax is not included in the base. Here the $23 for taxes is figured in the equation with the discretionary income spent on consumption, $77 and not on the total income of $100. In this example, the tax-exclusion rate is 30 percent. (23 divided by 77.)
This makes the percentage higher, on the smaller denominator.
The difference is one of calculating the tax as a percent of total income, vs. calculating the tax as a percent of spending or consumption.
Mr. Spear Lancaster is the Maryland State Director for Americans for Fair Taxation and says that this (mis)calculation is deliberate by the detractors. “The feds use the inclusive [formulation] to make people think they are paying less taxes.” The FairTax proposal uses the inclusive equation for an entirely different reason. The FairTax rate is applied to the cost of goods and services, not on income.
FairTax proponents use 23 percent number because the calculation more “correctly represents the tax burden compared to the current system” — not because the 23 percent number happens to be lower than the 30 percent number cited by cynics.
23 or 30 percent, abolishing the IRS is a truly progressive policy initiative. The only radical new ideas this election cycle may be coming from the Grand Old Party.
Thank you (foot)notes:
Jack Yoest, has written for National Review OnLine, the Business Monthly and is a freelancer for the Business & Media Institute. He is president of Management Training of DC, LLC and teaches business at the Northern Virginia Community College.
Full Disclosure: His wife is a paid senior adviser with the Mike Huckabee presidential campaign.