Today’s Daily Caller has an article by Wayne Crews and I making the case against the VAT, which is becoming a popular idea in this age of trillion-dollar deficits. Our main points:
-It would require roughly doubling the size of the IRS. Enough said
-VATs are untransparent. Sales taxes show up on receipts. VATs don’t. Knowing how much we are taxed is a fundamental right that preserves our ability to challenge excess government in a constitutional republic. A VAT would take that away.
-VATs increase over time. At least they have in 20 of 29 OECD countries that have VATs.
-VATs are prone to special-interest abuse. Politically incorrect goods are easily hit with punitive rates. In Denmark, people pay roughly triple sticker price for cars, for example.
From yesterday’s WSJ.com Political Diary (subscription required):
The same day President Obama called for another $50 billion to $100 billion stimulus plan (and concomitant increase in the deficit), he also appointed the chairmen of his Deficit Reduction Commission. It says a lot about Washington that almost no one got the irony of those paired announcements.
Indeed it does. Fortunately, the Commission’s job is pretty simple. There are only two ways to cut the deficit. One is to cut spending. The other is to raise taxes. Cutting spending is the right thing to do. But it is also politically difficult. There is a lot of fat to trim from the budget. But government has little incentive to put itself on a diet.
That’s why the Commission is expected to recommend a tax increase, probably in the form of a VAT. A prestigious bipartisan Commission can provide the political cover that Congress and the administration need to avoid the embarrassment of backtracking on their policies.
Wayne Crews and I recently warned why a VAT is a bad idea in Investors’ Business Daily. Hopefully some of the arguments will find themselves into the debate.
Over at Investor’s Business Daily, Wayne Crews and I make the case against a Value Added Tax. Policy makers have been flirting with the idea as a way to reduce the $1,400,000,000,000 budget deficit.
We argue that a VAT is:
-Complex; it would require roughly doubling the size of the IRS.
-Untransparent; most VATs don’t show up on receipts the way sales taxes do. Taxpayers are clueless as to how much tax they actually pay.
-Vulnerable to special-interest tinkering; politically incorrect goods are routinely penalized with higher rates. Politically favored goods are granted exemptions.
-Prone to increases; 20 out of 29 OECD countries with a VAT have increased their rates since implementing a VAT.
A point we didn’t make is that VATs affect industrial organization. VATs are applied at each stage of the production process. That gives companies an incentive to reduce the number of taxable steps. That means more vertical integration than would otherwise occur. This can decrease the efficiency of the manufacturing process. Which means higher prices and fewer goods. Plus the tax.
It’s not fully clear what president-elect Obama plans to do on tax policy other than “redistribute” and make those families making over $250,000 pay their “fair share.” But I was intrigued by his platform pledge to:
Dramatically simplify taxes by consolidating existing tax credits…enabling as many as 40 million middle-class Americans to do their own taxes in less than five minutes without an accountant.
I don’t think for a minute that real tax simplification and genuine transparency (to make protest and revolt easier) are imminent; but one can fantasize.
The heyday of the simple “flat tax” idea was back in the ‘90s. Dick Armey’s flat tax on a postcard was a simplified income tax. Meanwhile, two prominent consumption tax proposals (according to my hazy memory) were a sales type tax, and a “savings exempt” version that would apply a tax rate to income not saved. The first is collected at the point of sale, and the second is computed by the individual. If we ever reach the stage of actually debating Mr. Obama’s brand of simplification, the pros and cons of a consumption tax are worth keeping in mind. (Presumably any flat(er) or simpler tax would generate calls to move the base increasingly toward a consumption tax rather than an income tax). Some thoughts:
Consumption tax: what’s good, or might be:
- It gets the IRS out of the public’s pocket
- As long as it’s not like a value-added tax (applied at every level of production), a consumption tax could reduce bureaucracy. (I wrote an angry riff against a value-added tax back then).
- Americans now spend billions of hours filling out gov’t paperwork, most of it tax forms. That’s the equivalent of millions of Americans working full-time all year.
- Taxing consumption rather than income can increased production and wealth-creating incentives.
Consumption tax: what’s bad:
(I’m assuming a “point of sale” type of tax that exempts no one: however this can be modified to help avoid these “bads.”)
- No one is exempt, as many would be with a flat tax paid by filing a simple return.
- May hit poor and middle class hardest, who spend a higher percentage of their budget on necessities.
- Since the tax is so broad based, vast amounts of money can be raised with very tiny, almost imperceptible rate increases, and since no return is filed people may lose track of just how much they are paying.
- Might encourage black market transactions (But if you know anything about me I’m more tempted to put this in the “what’s good” category).
- The tax must replace the current income tax, not supplement it. This is probably the greatest threat.
- Since a consumption tax might hit the poor hardest, it may provide a built-in excuse to expand social welfare programs. (This has happened in European countries that have adopted VATs. One economist argued that a VAT could be made fairer in the U.S. by expanding Food Stamps rather than by staggering rates.)
- Since exempting necessities to protect the poor will decrease revenue potential, higher rates may come to be imposed on politically incorrect categories of luxury goods.
Let the debates begin.
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