Free Markets, Free People


Gabriel Malor makes me sad

One of the interesting things about Twitter is that it can provoke some interesting policy debates, at least in my geeked out poli-sci time-line. The frustrating thing is that it’s impossible to debate these things on twitter, 140 characters at a time. So, after a brief discussion with Gabriel Malor concerning the Value-Added Tax, I’m going to have to transfer the debate to here and Ace’s place. Gabriel hates the VAT, apparently, and has, in the past, made three main objections to it:

Whatever its merits, they are outweighed by its key features: the VAT obscures for the taxpayer just how much money is being sucked up by the government; it is prone to Congressional abuse; and it is, in the words of economists, "efficient."

We’ll take these objections one at a time, but first, let’s review the liberty-damaging implications of the income tax itself.

First and foremost, it requires that you provide the government with intensely private details about your financial life—every corner of it. How much income you make, who pays you, how much you save and invest, how much interest you make from savings, etc., etc. This is information you wouldn’t willingly share with anyone, yet the government forces you to divulge it to unknown bureaucrats on pain of imprisonment. Once the government has that information, it can always be used against you in any sort of civil or criminal proceeding the government wishes to implement against you. And that’s the best-case scenario. Some worker at the IRS could illegally access your income tax records. If you come to the negative attention of a powerful politician they might decide to have you audited.

Nor is this an unreasonable fear, considering the intricacies of the 3.7 million word US Tax code. Anyone with a minimally complex tax return could probably be found to be in violation of the code. Especially since it’s almost impossible in some cases to even know what the tax code means. It’s so far from clear and concise that even the IRS doesn’t seem to know what it means . And yet, you are legally required to provide the government with the means to make your life unpleasant at the very least, and destroy it at the very worst, every time you submit a 1040, quite apart from the possibility of skullduggery by unscrupulous individuals. And if you ask the IRS for tax advice, there’s a 1 in 5 chance they’ll get it wrong. And you get a nice new lien on your house. Or a completely new house, with bars on the windows.

Next, in order to provide this information, you must spend an inordinate amount of time and/or money to ensure that the information is accurate.

The average cost for the preparation of an itemized Form 1040 and state return is $229 nationally.  An “s-corp” is in the neighborhood of $665 whereas filing an Estates Form 706 could cost up to an average of $2,044…

The most recent estimates available purport to contend that individuals, businesses and nonprofits “spend an estimated 6 billion hours complying with the federal income tax code.”…

The high estimates then yield a total of tax cost to society (not including actual taxes paid) of approximately $1.165 trillion dollars 2010, relatively using 2008 GDP data.

Maybe it’s just me, but that seems…unreasonable. $1.165 trillion in compliance costs, on top of the actual tax cost is just…insane. I suspect that some portion of that money might be used to create, you know, wealth, if it wasn’t sucked up by regulatory compliance.

Whatever criticisms may be leveled at the VAT, one thing it doesn’t do is place your personal liberty at risk—at great cost to yourself—when you submit your annual tax return. Indeed, you don’t submit an individual tax return at all. Under a VAT, your income is your business, and your personal finances are completely removed from government concern. That seems like an increased measure of liberty, by which, I mean a removal of a portion of government interest in your personal life.

Gabriel Malor, alas, seems to disagree. Indeed, he seems offended by those of us who think replacing the income tax with a VAT might be a good idea.

It’s disappointing to see conservatives using the Obama-spawned budget crisis as an excuse to propose a tax scheme. Shame on them.

Now I’m sad.

But, what is it that makes the VAT so "fundamentally awful", and why should I feel shame for advocating it? Let’s start with his first objection:

Yes, you can put VAT on each and every sales receipt. But unless the taxpayer keeps and diligently tallies every receipt, he will have no idea what he’s ended up handing over to Uncle Sam.

This feature of the VAT is a tax-and-spend liberal’s wet dream because it keeps the taxpayer-voter in ignorance of how much of his property the government is appropriating over time.

Prior to 1913, this pretty much described the entire US Tax code. The Federal government was funded entirely by customs duties, tariffs, and excise taxes. All of those, of course, are hidden taxes, so, from 1789 until 1913, no one knew what they were paying in Federal taxes unless they kept and diligently tallied every receipt. Or, you know, cared. It seems to have worked out pretty well. It doesn’t seem people really worried all that much about how much of the purchase price of goods went to the Feds back in Oldy Days. Part of that, of course, was that the Federal government was pretty remote from the citizenry back then. But, I suspect part of it was also because knowing how big a cut the Federal government was taking didn’t have any relation to being sent to prison for getting it wrong.

What didn’t seem to work out well was an income tax whose top rate rose from 1% in 1913 to 90% in 1943, where it stayed until 1962 or so. Then we got a big tax cut to 70% at the top rate. If you want to look at a tax system that turned into a "liberal’s wet dream", a system whose top rate increased by 990% in 30 years seems like a good place to start. The explosion of big government didn’t start with the pre-1913 tax system. It was the current tax system that fueled the move from a minimalist to a maximalist state.

So, I’m not sure that arguing the post-1913 income taxation system is a better way to go in restraining tax increases is the way you want to go. Because it hasn’t really done a bang-up job of restraining government.

Moreover, even I don’t know what I pay—or even what I might owe—until my CPA tells me at the end of every year. My LLC has to buy all sorts of stuff. I might have to hire a subcontractor. There’s lots happening, so I don’t know what my tax burden is on a day-to-day basis. I may do work for some clients who can make it a charitable deduction instead of paying me in money. So I have to sequester thousands in income to be sure I’ve got the scratch to pay the bill every April 14th. And even then, I don’t really know what I’ve paid until the actual minute I look at my tax return. I’d trade knowing that on one day a year for not worrying about it and giving me my full cash flow to play with to upgrade software, buy new computers, etc.

The thing about a VAT is, that, unlike the income tax, you can pretty directly control how much tax you pay. You just buy less stuff. Maybe save more, since the VAT doesn’t penalize saving. Or investment. Like the income tax does. And avoiding paying the VAT doesn’t require that you forego income. The income tax does. It seems pretty apparent that the individual has a far greater degree of control over how much VAT he pays by altering his purchasing habits, and he can do so without penalizing himself in terms of income. There’s simply no way to exercise that sort of control over income taxation without making less income, or spending an inordinate amount of time burrowing through the tax code for some sort of shelter. Which may, or may not, get you audited, or sent to jail.

But you don’t get sent to jail if you don’t buy enough stuff under a VAT.

But at least that objection contains a colorable argument that makes sense. The remaining two objections are just unreasonable in terms of judging the two systems. First, there’s this:

And there, too, a VAT gives Congress even greater means to target disfavored industries and individuals. Progressive nannies can push for a higher VAT on soda and fast food. Social conservatives can push for a higher VAT on…er, morally questionable commerce. Other major targets: the oil industry (after all, they should pay more for being Gaia-raping capitalists); the pharmaceutical industry (it’s for the children, somehow); and, without a doubt, Big Tobacco (for obvious reasons).

Let’s leave aside the argument that an increase in the VAT would make every product more expensive, so I suspect people would notice that their salaries aren’t going as far as they used to.

Really, the trouble here is that Congress already has the plenary power to tax. Plenary. You can’t make Congress’ power…more plenary. This is not an argument against the VAT as much as it is an argument against, well, taxation. or, at least, the unlimited power of taxation.

There is nothing that prevents congress from slapping an excise tax on soda or fast food now. There’s already an 18.5¢ per gallon excise tax on gasoline, just as there are already massive excise taxes on cigarettes and alcohol. A Congress that wants to tax is going to tax. But I don’t think the solution to that is submit your personal liberty to the IRS. At least, it hasn’t been up ’til now. Nor do I think, in a larger sense, that the solution relies on any particular system of taxation, but rather on a restraint on spending. I think the evidence is pretty clear that a "starve the beast" taxation strategy simply doesn’t work when it comes to spending.

And let’s not kid ourselves that the income tax does not, somewhere in its 3.7 million words, do a perfectly fine job of targeting disfavored individuals. Which is something else the VAT doesn’t do. You can certainly target products with a VAT, if you want to reduce the incentive to buy certain classes of goods and services. But you can’t target individuals, and you can’t dictate economic outcomes for individuals by penalizing those you don’t like. But you can have a 90% income tax rate on successful individuals. We did it.

Our problem is not that revenue drives spending, but quite the opposite. It is the insatiable desire for more money to spend that drives the search for ever larger revenues. That is currently being expressed in the president’s "eat the rich" tax proposals, which would have the unpleasant side effect of penalizing individual success. Which, as I’ve already noted, is something the VAT doesn’t do. Limit the government’s spending to a defined percentage of GDP, and you automatically limit the desire for additional income.

Revenue is not the problem. Spending is.

And, of course, the key factor is the relationship of the individual to the state.

The last objection is equally confusing to me.

Economists laud the VAT because it is a "more efficient" means of collecting taxes. As a conservative, hell as a taxpayer, I am not in favor of more efficiency in letting the government take what’s mine.

So, are you in favor of draining 6 billion man-hours and $1.165 trillion in compliance costs from the productive economy? Are you in favor of having a massively large IRS, paying thousands upon thousands of employees to review and audit 175 million tax returns? I just don’t get this objection.

I thought that a more efficient tax code—in the sense that Gabriel seems to be addressing it here—means that we could reduce compliance costs, eliminate the time spent preparing tax returns, and reducing the size and scope of government. Those seem like pretty conservative/libertarian goals. So does removing the direct relationship of the individual to the IRS. I’m pretty sure efficiency is a feature, not a bug. A more efficient tax code is easier to comply with, and requires a smaller governmental mechanism to ensure compliance. I cannot, for the life of me, see why this would be a bad thing.

Of course, when we speak of tax efficiency, we usually are not referring to how efficiently the government gathers taxes. We are referring instead to the excess burden of taxation, i.e., "the economic loss that society suffers as the result of a tax, over and above the revenue it collects". Increasing efficiency in taxation refers to reducing the economic loss the tax imposes. I can’t really understand why anyone would be against decreasing the economic losses imposed by income taxation, which include moving people out of the work force, or into the underground economy, or reducing savings and investment.

However the term "efficiency" is being used in Gabriel’s quote above, I’m just having a really hard time understanding why it’s bad.

I want what taxes I’m paying to be SCREAMINGLY obvious.

Well…OK. Man up and keep your receipts, if it’s that important to you. Maybe buy a copy of QuickBooks.

My highest priority is not knowing to the cent the amount of taxes I pay. My highest priority is liberating myself from the direct financial supervision of the US government, and the possibility of being sent to jail or losing my house if I get it wrong. Secondarily, I’d like not to have to pay $1,000+ per year to a CPA to prepare my personal and LLC tax returns. I’m pretty sure I can use that thousand bucks for lots of things more fun than a CPA.

If the price of that is more effort tracking my federal taxes down to the penny, I’ll happily pay that to get the Feds off my neck.

~
Dale Franks
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30 Responses to Gabriel Malor makes me sad

  • The real problem I see is the transition.
    I don’t want any new taxes added while the old taxes continue, no matter if the VAT or a tax on a sunny day.
    This Congress made a “temporary” business tax permanent.  They are a taxing “black hole.”

    • It has to be a 100% switch on a date certain, probably 1 Jan. year X we pay the last of the income tax, year Y we start with the VAT.

      • And if people complain that their savings will be double taxed, you can introduce a new currency at the same time…old dollars exchanged at new dollars x 1 + level of VAT.

  • “The high estimates then yield a total of tax cost to society (not including actual taxes paid) of approximately $1.165″ <- typo 1.65 stated elsewhere.

     

  • The objection to not knowing what we’re paying via a VAT is a poor one.  It would be far, far easier to track that than the current system.  Furthermore, and far more importantly, we’d intuitively know that the system is fair relative to our neighbors.  We’d know that they pay the exact same percentage on their spending that we do.  With the current system, who knows? There are so many exceptions and loopholes to the standard tax rates that we have no general sense and any discussion that attempts to compare via marginal rates is fraught with peril. Other than providing money that the federal govt obviously needs to deliver the essential services, there is absolutely nothing good about the current tax system.

    • “We’d know that they pay the exact same percentage on their spending that we do.”

      And with that the left will scream “regressive” and introduce a new system of opaque rules and loopholes to help out “the poor” while still randomly shafting unfortunate individuals who fall foul of those rules. The only way you’re going to have a simple, fair tax system is to make sure politicians cannot vote on it.

      • Except that’s beyond unrealistic.   And, left politicians will have a much harder time gaming a simple, transparent system.  I think the majority of American voters would be happy with something simple and clear and fair. They would be very resistant to those sorts of changes because the system wouldn’t be set up to work that way in the first place.

  • What a great post! The Q&O argument for a VAT seems compelling. So, why hasn’t the Libertarian Party, Republican Party, or Democratic Party not adopted it in their platforms?
    What are their over-riding objections? If none of their objections make economic sense, then why does the well-despised established income tax system continue to thrive?
    What level does the VAT have to be set at to make the conversion revenue neutral to the existing system?

     

  • Another advantage of the VAT is that you don’t export your tax system…VAT is refunded for exports and charged on imports the minute they hit the port…this is how Germany can export so much.

  • The big problem I see is that it will not be what you envision. Any change will have to be implemented by Congress. Anything that comes out of that body cannot be clean and simple. The income tax is awful, but I think the toothpaste is out of the tube.

    Even if the impossible happens and you get an instantaneous switch from income tax to vat, the income tax will not remain dead. The progressives will instantly begin the drumbeat that the rich are not paying their “fair” share, and call for a income tax only on the “richest”. Even a full repeal of the 16th amendment would not stop them agitating for its return. There are too many erbish people out there. (Yes, erbish. I think he deserves an adjective by now. I was there when he first slithered into usenet)

    • Well then, lets do nothing.

      • It’s not the taxation system that is the big problem. It’s the spending.

        • Big problem for what?  All by itself, regardless of what the federal government does with the money, the tax code is a disaster.  It’s a big problem.  See Dale’s points (cost of compliance, intrusion into privacy).

  • Can anyone explain the advantage of a VAT over a point of purchase Sales Tax?  At least other than make work for some accountants?

    • Excellent question.
      I am ADAMANTLY OPPOSED to a VAT, while supporting a plain sales tax on NEW GOODS and services (excluding medical, dental, and vision).

      • High-rate sales taxes have failed in every single country they’ve been tried, and they’ve been tried in every OECD country since the 1950s at one time or another. It’s too easy to avoid, so everyone has switched to the VAT, because evasion is so much harder.
        I never understand people who keep supporting a tax system that has been a proven failure in every case where it’s been implemented. It’s just silly.

        • “High-rate”, huh.
          Funny, sales taxes work just fine everywhere I know they are used, which includes both states and cities in the U.S.
          I have written that taxes SHOULD be avoidable (not easily), as a means of sending a message to government.
          I can’t see a Federal sales tax being EASILY avoided in the U.S.

          • *sigh*
            Even states have learned that a sales tax at any rate above 12% is essentially unenforceable. There’s like a billion peer-reviewed studies on point of sale taxes that show evasion is rampant at anything above moderate rates. NO ONE has ever made a high-rate sales tax work. Arguing otherwise, in the face of massive empirical evidence to the contrary, is simply foolish. Sorry, but reality is what it is.
            There’s simply no way a 20%-30% federal sales tax will ever work.
            Every time it’s been tried, it has failed. How is this difficult to understand?
            The reason a VAT works where a point of sale tax doesn’t is that there are two records of every tax transaction. It requires massive–and fairly obvious–collusion to make evading a VAT work.

          • Well, Dale, you committed just about every fallacy in that post that you could.
            Here, try this…THINK about making a Federal sales tax work.
            Your thesis seems to ASSume that a 20-30% tax is REQUIRED.  Why?
            Next, how does one avoid a FEDERAL sales tax?  We can’t drive to Canada or Mexico to avoid it “easily”.  We can’t buy everything on the interwebs, and those can be policed for avoidance, too, right?

          • Your thesis seems to ASSume that a 20-30% tax is REQUIRED. Why?

            Math.

            Next, how does one avoid a FEDERAL sales tax?

            The same way one avoids a state sales tax.

            Here, try this…THINK about making a Federal sales tax work.

            Well, that’s certainly good advice for one of us, anyway.

        • I don’t understand how a ‘sales tax’ rate would by much different from a VAT tax rate.  I can see descretizing the taxes makes evasion less tempting. 

          But documenting the flow of goods in a VAT would be as serious an effort as policing the sales tax.  Possibly more since not everyone needs to be policed, but a VAT process forces everyone to engage in documentation.  You punishing everyone for the bad behavior of others. 

          The other issue I have with a VAT is that if I’m a newcomer needing captical to invest in my new business, I need to borrow to cover the VAT expense while under a sales tax, I can use revenue almost directly to pay that tax.  So if the rat is 20-30%, I have to go in debt by at least that much more.  Increasing the risk for investors and their creditors.  That would discourage new investment. 

    • Presumably it is mostly to ensure compliance and that no goods or services leak out of the tax system as they are passed through various producers, manufacturers, resellers, etc on their way to the final sucker who pays the tax. If the tax is paid every step along the way then it is a bit more bookkeeping (although not much, since you’re already generating the transaction entries its just another line), extra declarations to the tax department to either pay or get your refund but most importantly the government is surer it’ll get what it “deserves”.

  • The Federal government was funded entirely by customs duties, tariffs, and excise taxes. All of those, of course, are hidden taxes, so, from 1789 until 1913, no one knew what they were paying in income taxes unless they kept and diligently tallied every receipt.
    Sorry, Dale, but that is just dumb.
    1. those are not income taxes
    2. people certainly COULD know with precision what they paid in Federal taxes
    3. MOST of the Federal gov’t was paid for by taxes on ALCOHOL, which were known with precision

  • If the VAT is applied at each stage of production, what is the inflated cost of the finished good? From raw materials to maufacturer to wholesaler to retailer, how much is the finished good prices increased by a VAT, and is this cost any greater or lesser than the sales tax on the finished good to the consumer?

    • The inflated cost to the final purchaser is whatever the VAT rate is. See the Value Added Tax link in the first paragraph of the post for an explanation of how the VAT works.

  • Check out the chart over at Heritage to find out what an awful tax VAT is for all the reasons that Gabriel Malor cites.  It is the liberals ultimate wet dream.http://www.heritage.org/research/reports/2005/05/beware-the-value-added-tax 

    • Well, as Dan wrote in the article you cited, it WOULD be acceptable as a replacement for the income tax. Which is the point of my post. Since that is so, the majority of the objections he raises are not applicable.

      Obviously, a VAT and and income tax at the same time would be bad. But that doesn’t have any relationship to what either Dan or I wrote.

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