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Time for VAT or Sales Tax?

© October 2008 Anthony Lawrence

I was watching Newt Gingrich and George Will on "This Week with George Stephanopoulos". They were discussing the implications of an Obama presidency and his ideas to raise taxes on the wealthy.

As expected, these staunch Republicans hate the idea of the wealthy paying any more than they already do. I forget the exact figures, but some claim was made that the wealthiest one or two percent already pay 38% of collected taxes. Your reaction to that is supposed to be sympathy and gratitude.. my reaction is more like "So why not 76%?"

However, they were also quick to point out that any wealth slanted tax increases would probably quickly be countered by armies of tax accountants devising complicated schemes so that the tax burden would be lessened or eliminated. Although they never said this, the undercurrent is that legislatures would immediately pass more loophole legislation to make the job of those weary accountants even easier. In other words, don't bother trying to tax the rich because it ain't gonna happen and if somehow it did happen, those affected would just move somewhere more friendly.

I'm sure they are right. I also think a VAT (value added tax) and a national sales tax can fix that problem.

Yes, there are problems with VAT and sales taxes. The biggest problem is that the tax would be very visible: we'd all know what percentage we are paying and it wouldn't be small. That would make it very difficult to get in place to start with. The public wouldn't like it because they wouldn't trust that the rate would be set fairly. Never mind that income taxes are confusing and obviously riddled with unfairness; change is always suspect.

There's a problem with spending money outside of the country to avoid taxes. Canada and Mexico would see a big increase in U.S. tourists and U.S. tourist dollars. This could actually weaken the U.S. dollar even more.

There's a potential inequity for the very poor. These people escape income taxes by having little income, but they'd still need to buy goods and services. The only reasonable way to deal with that is to return a base amount to all citizens - an automatic monthly "dole" that would be sized to cover the taxes paid on basic necessities of life. Note that would be to cover taxes, not to cover those necessities.. we aren't talking about a socialist state here. If the bare poverty line is X, then the kickback would be only the tax added to X, nothing more. The poor would still starve and suffer as usual - you wouldn't want to go messing with that. We'd just make sure they weren't made worse off by this tax. Otherwise, we can put them out of our minds as we always do.

We could also exempt medical expenses and non-restaurant food. Luxury items could be taxed higher. However, balancing the tax rate, the "dole", the luxury add-ons and the exemptions to arrive at a "fair" taxation that everyone could accept wouldn't be easy and would probably need constant adjustment. There is a big advantage there though: any adjustments would have immediate effect. Tightening or loosening the economy, moving money to sociably desirable areas - these are all things that our horribly complex tax code tries to do now; it would be no different with VAT and sales taxes. It would just be easier and perhaps more transparent. We could even make geographic adjustments when necessary - that's much harder to do with precision now.

I don't think this will ever happen. Arguments against sales taxes will confuse and frighten people. It's obvious that a sales tax system COULD be made fair, but I don't think people would trust that it actually WOULD be made so.

However, as long as we are taking a walk in fantasy land, let's imagine how it could be done. The "This Week" panel, both conservative and liberal, all seemed to agree that some form of economic stimulus will be necessary soon. So let's take that opportunity to kill the Federal income tax. There's a giant stimulus. Of course we'd replace it with a sales tax, but we could wait a month or so for that. While waiting, everyone finds that their paychecks just got fatter and most will also be expecting a big refund come April 15th. Joy and jubilation.

Of course everyone has been told that the big sales tax is just around the corner and that prices will be going up due to the VAT. So don't go hoarding that extra money: spend it now before costs go up! Big economic boost, except from those who think they'll be paying more effective taxes later. Those folks will be saving.

Then the new taxes go into effect and we figure out what they really mean. Did the middle class get whacked too hard? Make adjustments. Do we need to discourage gasoline usage? Raise the tax. Ooops, that hurts the middle class too much? Cut it back..

Too complicated? I don't think it is when compared to income taxes. It has benefits: if you had extreme medical expenses that caused you to forget that new SUV purchase, you wouldn't have to wait till April 15th to get back your tax dollars: you never would have spent them. Need to pay for a stupid war we never should have gotten involved in? Raise 'em up till the war is over (might hasten things a bit).

But it's never going to happen. Change is just too hard.

Got something to add? Send me email.

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Mon Oct 20 07:56:45 2008: 4661   donal

Tony, your comments on taxing the rich made me think of this old economics lecture.....

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers, he said, I'm going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would
get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% Savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20, 'declared the sixth man.
He pointed to the tenth man, 'but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too.
It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man.
'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all.
The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important.
They didn't have enough money between all of them for even half of the bill!
(The 10th man was originally paying $59 of $100, then $49 of $80)

And that, boys and girls, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed.

For those who do not understand, no explanation is

Mon Oct 20 11:09:36 2008: 4662   TonyLawrence

Yes, that's one of the most common arguments (pedantically overdrawn, though).

ANY tax system can cause the rich to go drink elsewhere or to make special deals with the bartender (Old Turkey Bourbon gets taxed less than beer).

ANY tax system can be adjusted to spread money in any direction you want. Putting up straw men doesn't change that.

A VAT and sales tax system is simpler than income tax. Of course it has problems - cheating is still very possible, for example. But it has advantages when compared to the current morass.

Mon Oct 20 11:31:14 2008: 4663   TonyLawrence

By the way, that must be a VERY old lecture to gave the 10th man paying $59.00 :-)

When was it that the 60% (or was it 70%?) maximum tax rate was dropped? Late 70's, early 70's? I think I remember it very vaguely - wasn't old enough to pay much taxes.. let's look it up:


Gosh, looky what the rich did for themselves.. of course that chart doesn't show all the loopholes and dodges, does it? Which is why it's nearly impossible to say what a random "10th" man would pay..

Mon Oct 20 14:32:42 2008: 4666   BigDumbDinosaur

I also think a VAT (value added tax) and a national sales tax can fix that problem.

I think you're wrong. Why does there have to be any such tax like that? So the bleeding hearts in the government can steal my money to hand out to the SOBs and welfare queens who don't work for a living?

Mon Oct 20 16:34:04 2008: 4667   TonyLawrence

Oh, those awful welfare queens again :-)

Why would you assume you'd be paying more?

Mon Oct 20 18:20:27 2008: 4669   Donal

VAT is a wonderful idea, but if you lived in Europe where we have to pay on average about 20% VAT then you may change your mind on it.
You get a but pieved paying tax to enjoy spending your hard earned (and already fully taxed) money. The average Joe spends most of his income each month and is hence taxed an additional 20% in addition to income tax.
The rich spend a much smaller proportion of their disposable income so VAT has little effect on them. VAT is a very disproportional tax on the working class.

Mon Oct 20 18:24:56 2008: 4670   TonyLawrence

Again, ANY tax scheme can be structured to reward or punish any class. Specific implementations are not an argument against concepts.


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