[lbo-talk] taxation (was: cruise report

Wojtek Sokolowski sokol at jhu.edu
Wed Aug 1 12:05:38 PDT 2007


Max:

Gravel spoke up for a particular type of consumption tax -- the so-called "FairTax," really a retail sales tax and the favorite of wingnuts.

[WS:] Yes, but let's for the sake of argument focus on the VAT proper. Unlike sales tax, VAT taxes only the value added rather than the sale price i.e. sale price less intermediate consumption (i.e. value of the input used in the production process.) That means that items with high value added i.e. high profit margin (or high compensation of employees for that matter) are taxed more heavily than those with low value added. That itself is a tax on profits and high executive salaries.

Furthermore, VAT rate varies by kind of goods, luxury items being taxed at a higher rate (up to 22% in EU). By implication, certain goods, like basic necessities can be taxed at lower rate (7% in EU if memory serves) or exempt from VAT altogether.

For these reasons, VAT has features that may prevent it from being regressive and, at the same time, can provide disincentive for wasteful consumption. What is wrong with that?

Moreover, sales tax is collected by the merchant at the point of sale, therefore all internet out of state sales evade it - which makes it by implication more regressive (on the assumption that low income buyers have limited internet access.) VAT, by contrast, is already built into the retail price of the good, i.e. paid by the merchant before the good is sold. Therefore, the potential of evasion seems lower for VAT than for sales tax.

With that in mind, VAT in principle should be preferable to any tax scheme that exists in the US, no? Therefore, if the likes of Mr. Gravel limited themselves to proposing VAT instead of the current taxation, it should be a good thing from a progressive point of view, no?

Wojtek



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