Two interesting tax proposals from Republican contenders...

So, I was watching the WSJ Editorial Report on Sunday morning while eating my traditional toast slathered with nutella, and they had an interesting look at tax proposals from two of the contenders for the Republican nomination. The transcript is here, the discussion on taxes is about halfway down.

The first proposal is Mike Huckabee's. More detail can be found here. His proposal is to get rid of the income tax and replace it with a "fair tax" - essentially a 23% sales tax.

I hate this idea. There are some arguments for it's legitimacy - earning income is good, and taxing it thus provides a disincentive to do something good. But spending money can also be good, because one one person buys something, someone else sells it, and usually makes a profit and employs some people in it's creation and sale.

The reason I hate this idea is that I buy a lot of stuff. I enjoy stuff, and tend to buy a lot of electronics and other items. I also pick up a little money on the side buying stuff cheap and reselling it on eBay and at hamfests. This side business would be shot with this tax - I couldn't afford to buy inventory, and feds would be a lot more likely to make me collect it when I sell stuff.

But there is another reason to hate this. The thing about the current tax system is it encourages people to do certain things because they avoid taxes - things like buy a house, fund retirement funds like 401k's, take out student loans where the interest is tax-deductible, ect. Switching tax systems to a sales tax means that homes will be worth a whole lot less because the mortgage interest deduction is no longer part of the advantages of the buy side of the rent vs. buy calculation - and tons of homeowners in a market that already is in bad shape thanks to subprime borrowers and a fall from peak prices will be royally screwed.

Which is what is appealing about the other proposal, from Law and Order actor Fred Thompson. He's backing Steve Forbes' baby, the flat tax. Instead of a complicated series of deductions and different tax rates for different levels of income, there would be one tax rate for everyone, no deductions.

But wait, you are probably thinking - if there are no deductions, then doesn't this have much of the same problems as the "fair" tax? Well, Thompson has an escape clause - people can pick which system they want - so those who are better off under the old system, or have made financial choices based on the expectation of the old system, can still file under it. I like the idea of a flat tax, but think that I would be worse off without my mortgage interest deduction, so this proposal seems like a good compromise.

I'm not sure either will get anywhere though. Taxes are something that everyone complains about, but that still doesn't manage to resonate with people. I tend to feel a little sad every time I look at a paystub and see how much of my (somewhat) hard-earned income went to taxes, but most people seem to put other issues ahead of taxes when it comes to picking a candidate.