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.
For a number of reasons actually. Some numbers tell the story:
Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.
Demand has increased enough that business is producing at least as much as it was before the recession, according to the NYT, but businesses aren’t hiring. Why?
Well, in lean times, headcount is the first casualty. Layoffs are the rule. That’s the fastest way to reduce the bottom line and either cut the losses being suffered to a manageable level or eek out a profit.
But, you say, once the recession is over, shouldn’t they rehire? Well, like all markets, not if the cost of the commodity is too high (labor) and an acceptable alternative is available (equipment). In this case that appears to be software in many cases.
So – business cuts back during bad times, finds it can either get along without the extra headcount or finds a technological alternative (equipment) and when a level of prosperity returns, doesn’t hire (although I’m not sure I’d agree a proper level of prosperity has returned at this point, but I think it is clear that much more employment was expected by now, which is why we see the word “unexpected” appended to every down employment report).
Why is this happening? Well in addition to the above, there’s an added problem that is often ignored or not mentioned. Government tax policies. In the case of equipment buying, the government has incentivized such purchases to the detriment of another – namely employment (labor).
With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.
“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”
Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.
There’s your choice as a business – lower prices and tax incentives to purchase software and equipment or higher labor costs for workers. If the machine can do the job, the business doesn’t have to pay healthcare, payroll, payroll taxes, etc. In fact, the machine gives them a bottom line write off on their tax bill. It’s a no-brainer.