The Club for Growth is advertising heavily against Gov. Huckabee, and, in every other way, opposing his candidacy in the Republican primaries. Yet Huckabee is the one candidate whose tax plan, the FairTax, would promote economic growth.
So why is the Club for Growth so anti-Huckabee? Its official reason is that he raised taxes and spending as governor in Arkansas. But Huckabee had to raise taxes to comply with a court order requiring Arkansas to increase spending on education. We suspect that it really opposes Huckabee because of another issue that they mention: he has dared to call for “fair trade,” not just “free trade.” (The Club for Growth opposes U.S. government attempts to balance trade, but not the foreign government currency manipulations that cause trade to be unbalanced.)
The Club for Growth once had kind words to say about the FairTax, the tax proposal being advocated by Gov. Huckabee. But in its current candidate score cards, it seems to grade the various Republican candidate positions based upon the extent that the candidate supports the Flat Tax (Sen. Thompson comes the closest). At the same time, they are spending huge amounts of money to advertise against Gov. Huckabee, the one candidate who is supporting the FairTax. According to our analysis, Huckabee’s FairTax is far superior to the Flat Tax in every way:
- 1) Lower costs of compliance. The FairTax is a national sales tax that would replace the corporate income tax, the personal income tax, the payroll taxes and the gift and estate taxes. As a sales tax, it is only collected by retail businesses. Under the Flat Tax, however, tax returns are filed by both businesses and households.
2) More savings for businesses to invest. The FairTax is a tax on consumption and so leaves undistributed corporate profits and household net savings untaxed. The Flat Tax is a cash flow tax on corporate profits in that businesses expense their investments. The Flat Tax only increases the amount of savings that businesses have available for investment at first. In succeeding years, businesses would have less and less savings to invest because they would no longer be able to take off depreciation for past investments.
3) Encouragement of business investment. The FairTax is a consumption tax that encourages business investment by not taxing business profits, unless those profits are consumed by shareholders. The Flat Tax discourages business investment by taxing businesses on their profits as well as on their interest payments when they borrow money.
4) Progressivity. Because of its prebate, a monthly rebate given in advance to “un-tax” basic necessities, the FairTax falls most heavily on the rich, less heavily on the middle class and least heavily on the poor. In contrast, because the Flat Tax allows capital gains to go tax free (even when they are not reinvested), it falls more heavily on the middle class than the rich.
5) Border adjustability. The FairTax would be charged on imports into the United States, but not on exports from the United States. It would help level the international playing field for products produced by American workers, while strengthening the dollar. The Flat Tax is not border-adjustable. It would do nothing to level the international playing field.
6) Higher basis. Since the FairTax is border adjustable, it has a higher tax basis for a country like the United States today that has a high trade deficit and low net savings. Specifically, the net imports (which would be taxed by a sales tax) are currently much higher ($760 billion in 2006) than the net savings, including undistributed corporate profits that would be exempt from a sales tax ($245 billion in 2006).
In the primary elections, U.S. voters will need to take the Club for Growth pronouncements about Gov. Huckabee’s record with a grain of salt. When it began advertising against the only candidate supporting the FairTax, the Club for Growth became the Club against Growth.
Dr. Raymond Richman is the president of Ideal Taxes Association. He is professor emeritus of public and international affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago. Dr. Howard Richman is executive director of a non-profit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. They are among the co-authors of Ideal Tax Association’s forthcoming book, due out Feb. 1: “Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it’s Too Late.”