The Fair Tax has its moment in the sun. Could there be more to come?

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Mike Huckabee’s victory in Iowa Thursday was a big victory also for the “Fair Tax,” the radical revamping of the federal tax code that he endorses. And while Huckabee’s Iowa win may be a one-off, one gets the feeling that the Fair Tax campaign will be with us for a while. The resurgent John McCain is mildly supportive of it as well. And the legions of Fair Tax fanatics aren’t going anywhere.

The Fair Tax is a proposal to abolish the Internal Revenue Service, throw out all existing federal taxes and replace them with a 30% nationwide retail sales tax that would, it is hoped, raise about as much as income taxes, payroll taxes, excise taxes and the lot do now. You’ll hear a lot of the Fair Taxers saying it’s a 23% tax, which it is, if you think of it like an income tax. (No use getting bogged down in that here; I’ll explain at the bottom of the post.)

Anyway, on the occasion of Huckabee triumph, I called up Leo Linbeck Jr., the Houston businessman who together with two friends launched the Fair Tax movement just over a decade ago. I’m not sure what I expected from the conversation–maybe a little gloating over the Iowa results, I guess. What I got was two hours of mostly fascinating discourse, ranging from tax theory to feudal nature of modern Washington D.C. to the ideas of philosopher/theologian Michael Novak.

The Fair Tax got started like this, Linbeck told me: Three old rich men in Houston talked over lunch in 1995 about what they could do to leave the country better off before they died. They hit on reforming the tax system, and in particular simplifying it, as a worthy goal. “I’ve been a beneficiary of the complexity of the tax code,” is how Linbeck puts it.

Linbeck set out to find economists who had done work on what an optimal tax system might look like and ask them to put together a plan. He ended up with eight, among them such prominences as Harvard’s Marty Feldstein and Dale Jorgenson and Boston University’s Larry Kotlikoff. Economists who care a lot about optimal taxation tend to lean to the political right, and Feldstein is of course a Republican Party eminence. But the plan was to be nonpartisan. Kotlikoff, in fact, has been advising Democratic presidential hopeful Mike Gravel, another Fair Taxer–albeit a far less successful one than Huckabee.

What they came up with, mainly out of their economic studies but with feedback from market research that Ogilvy & Mather was conducting at the behest of Linbeck’s Gang of Three (they ended up spending $23 million on the overall effort) was the national retail sales tax, with rebates for all ($2,348 per adult last year if the tax had been in effect) so that the poor would end up paying little or nothing.

The main idea behind shifting taxation in this direction is to remove the burden on investment and production and place it all on consumption, thereby presumably stimulating long-run growth and exports. Lindbeck also argues that with the payroll tax gone, low-income workers would stand a much better chance of saving up money and rising out of poverty.

One big catch is that the Fair Tax would dramatically lower tax rates on those with the highest incomes. Linbeck had an interesting if not entirely convincing (to me, at least) response when I brought that up. “I don’t know many poor people that buy a G5, and I don’t know that many that buy a Bentley. The best indicator of people’s well-being is what they spend and how they spend it.” This was a reference to the work of W. Michael Cox, chief economist of the Federal Reserve Bank of Dallas. Consumption is wealth, the argument goes, which makes a consumption tax the fairest kind of tax.

All in all, it’s an extremely radical plan–Steve Forbes’ flat tax was a similar attempt to shift taxes onto consumption, but would have left most of the current tax structure intact. It’s fair to object to it as simply too radical for our political system to handle.

But much of the criticism from the Washington wonkosphere is that the Fair Tax is some kind of scam. (The two most-discussed recent critiques have come from conservatives Rich Lowry and Bruce Bartlett). As far as I can tell, it’s not. Those who say that the Fair Tax rate will have to be much higher than 30%/23% (again, I’ll explain that discrepancy in just a bit) are all assuming that Congress will never levy the tax on things like medical services, food, houses, etc. Which may be true, but it seems kind of unfair to blame the Fair Taxers–who want the tax to hit everything–for that.

So, back to Linbeck, a retired construction magnate (this was his company). He’s not endorsing Huckabee, although he does say this: “The thing I observed about Gov. Huckabee as I watched the debates, the interviews, is that he understands it, he gets it.”

Linbeck & Co. didn’t reach out to Huckabee or any other candidate. After a disappointing foray into paying lobbyists in Washington to push the cause in the late 1990s, his group, Americans for Fair Taxation, has been working mostly on the grassroots level–with lots of help from libertarian radio talker Neal Boortz, who has been the most prominent Fair Tax advocate. Or at least was until Mike Huckabee won the Iowa caucuses.

Oh, and as for that 23%/30% thing: If you earn $100 and pay 23% in taxes on that, you’re left with $77. If, however, you buy something and pay a total of $100 for it, of which $23 was taxes, we would usually say you paid a 30% tax on the $77.

Update: An interesting speculation from James Pethokoukis at U.S. News:

As an insurgent candidate, Huckabee didn’t have the dough to hire economists to create an economic plan. So he went with the off-the-shelf FairTax. Not only does it call for abolishing the IRS—a nice populist touch—but it has the added benefit of a built-in constituency. With Huckabee needing to flesh out his policy agenda, don’t be surprised if the sweeping FairTax recedes a bit from sight and becomes more of a policy end goal, as when opponents of abortion talk about banning it after first creating a stronger “culture of life.”

Update: I’ve got another Fair Tax post here.

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