Dale Franks’ QandO posts
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.
Today’s economic statistical releases:
The NFIB Small Business Optimism Index rose slightly from 88.1 to 88.9.
In retail sales, ICSC-Goldman reports that chain store sales slipped 0.1% last week, to a year-on-year 2.8%. Meanwhile, Redbook reports strong year-on-year same-store sales growth of 4.8%.
Today is a big day for economic numbers:
The Labor department reports that 103,000 new non-farm payroll jobs were added last month, a slightly higher than expected number, while the unemployment rate remained unchanged at 9.1%. The devil is in the details, as always, and the details are not quite as pretty. 322,000 people dropped out of the labor force last month, and the labor force participation rate declined to 64.2%, the third straight monthly decline. On the plus side, the number of people employed continued to increase, rising to 140,502,000, an increase of 3 million employed since January. Also, the broadest measure of labor underutilization, the U-6 unemployment rate, also continued to fall to 15.7%. The picture is decidedly mixed, which is, all things considered, an improvement over the picture a year ago.
Wholesale inventories rose only 0.4% in August, and the stock-to-sales ratio remained unchanged at 1.16.
Consumer credit rose to $12.0 billion outstanding in July, mainly on auto sales. This is an old number, so is mainly of academic interest.
Today’s economic statistical releases:
Year-on-year total sales for the chain-store group are looking a little weak at 5%, and many chains are reducing sales and earnings guidance as a result.
Initial unemployment claims were 401,000 for the week, showing little change from the same period last month.
The Bloomberg Consumer Comfort Index rose to -50.2 last week, up from -53.0.
Today’s economic statistical releases:
The Mortgage Bankers Association reports that mortgage applications fell -4.3% for the week, with purchases down -0.8%, and refinance applications falling -5.2%.
The Challenger job cut report indicates there were 115,730 layoffs last month, swollen by 30,000 jobs at Bank of America and a military troop cut of 50,000.
ADP estimates private payrolls rose 91,000 in September. We’ll see how close that estimate is with the release of the Employment Situation on Friday.
ISM Non-Manufacturing Index fell slightly to 53 from 53.3 last month, however, new and backlog orders both rose, giving some hopes for better reports in the future.
Today’s economic statistical releases:
ICSC-Goldman reports stronger chain store sales, rising 0.1% for a 3.7% year-on-year increase, up 1% from last week. Meanwhile Redbook reports a slight drop in sales, to a same-store year-on-year rate of plus 4.1%.
Factory orders fell 0.2% in August, though this is a bad comparison with the previous month due to that reports surge in vehicle orders.
Today’s economic statistical releases:
We await the releases of vehicle sales, which will come from the manufacturers throughout the day.
Increases in employment and production pushed the ISM Manufacturing Index up slightly to 51.6.
Construction spending rose by 1.4% in August, led by a 3.1% increase in public sector construction.
In this podcast, Bruce Michael, and Dale discuss el-Awlaki killing and the Social Contract.
The direct link to the podcast can be found here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.