[lbo-talk] taxation (was: cruise report

Max B. Sawicky sawicky at verizon.net
Wed Aug 1 12:27:46 PDT 2007


Economists can be wrong, Lord knows, but the usual view -- with which I concur -- is that the tax base for VAT and retail sales are identical. Retail prices are just accumulated value-added, as far as income accounting goes. There are complications pertaining to border transactions and the Internet. The evasion of state sales taxes via the Internet is irrelevant in the context of national VATs or sales taxes.

There are ways of varying rates under retail sales, as under VAT. State sales taxes are a swiss cheese of exceptions.

I happen to think the regressive extent of VATs is overstated. I'd be in favor of a VAT if it meant an expanded revenue system, since the distributional impact of the spending it finances is likely to offset the tax-side impact. A retail sales tax at levels required to replace current taxes is probably unenforceable, a VAT is somewhat more plausible.

There is a sticker shock issue. Would people pay a 20% VAT on top of the price of a car or house? When you back out stuff that probably could not be taxed, the consumption tax base shrinks by about 50 percent. (Figs available upon request.)

It is our lack of a VAT that distinguishes the U.S. revenue system from social democracies. Our other taxes are roughly similar in size (as % of GDP).

mbs

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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