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.
Mary Katherine Ham reports that the CBO is being hit with a lot of questions about the Value Added Tax (VAT) by Congress. Taking Paul Volker at his word, they’re obviously in the beginning stages of trying to make the VAT “not as toxic an idea” as it has been in the past. As the title implies, the masters at gaming the CBO are probably already hard at work.
Said CBO chief, Douglass Elmendorf:
“Many people in Congress are interested in it,” he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it’s been implemented. “We’ve had conversations with a number of members and their staffs.”
You don’t say?! I know, dear reader, you’re as shocked as I am, aren’t you?
A couple of points – this is going to be constantly misrepresented as a “national sales tax”. It’s not a national sales tax. VAT is a tax levied against every step in the production process rendering any retail good 10 to 20% higher than it would have been without the tax. No one is going to add 10 or 20% at the register – instead everything you purchase will have that additional cost of taxation already added to its final purchase price. It’s a nicely hidden tax (thus very attractive for the looters in DC) that saves you being reminded of it at the register everytime you buy something. You’ll just see your overall purchasing power erodeded by whatever the VAT percentage is.
Oh, and that will be in addition to the income tax. You didn’t think the IRS was going away, did you? Finally, it certainly isn’t a progressive tax as it will lower the purchasing power of the poor much more than that of the rich. And we all know what that means – somewhere there’s going to be a subsidy or a kick-back to consumers of certain levels of income. And yes, you’ll pay for that as well. Trust me, this will only end up being fully levied on the despised “rich”, as usual in t.
Revenue, folks, revenue – the beast is hungry and insatiable. And it has a very serious problem looming the future. It wants no part of lean and mean. Instead, it wants to be fat, happy and expanding – and VAT would do that. And you, dear wage earner, are the means to its dreams.
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There is no one out there that won’t agree that government has gotten us into a debt-ridden fiscal mess. Note I said government, meaning both Republicans and Democrats. And now, on a spending binge from hell, we’re starting to see how this particular administration plans to address the growing concern over the debt. Given some choices -cut spending, cut the size and cost of government or increase taxes – it appears it will choose the taxation route. And Paul Volker is just one of many who will be making the case. Reuters reports:
The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.
Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.
Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.
Should we? Or should we approach it from a different direction – such as the first two choices. But the expansion of government is an ideological choice of the party in power. Don’t believe it, check out this article about hiring. The government is seeking to add 193,000 new jobs in the next two years. So, uh, it’s up to you to pay off the deficit and get those entitlement costs under control. And, of course, notice that Volker points to both a VAT and a tax like cap-and-trade as “necessary”. Note too that neither tax is a direct income tax although both would directly and expensively impact income of all consumers by making virtually everything cost more. However, the charade of “95% of you won’t see your taxes go up by a dime” will be maintained.
What voters need to do this November is make the Congressional races about the difference between the choices I’ve laid out. And, unlike Volker’s conjecture, we need to make the VAT and cap-and-trade as electorally toxic as possible to those that support them while rewarding those who take the alternative approach. There is no reason that increasing taxes should or must be the only solution to the unchecked profligacy of government. Perhaps, instead, it is time to limit government’s ability to spend us into oblivion and put the people in office who can start that process rolling.
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Charles Krauthammer seems to think so. Looking down the road, with trillions and trillions of dollars in deficit spending by government building the debt to unprecedented heights, common sense says we, as a country, have got to either cut spending drastically, increase taxes drastically or a combination of both. But the word “drastically” remains common to any solution. Krauthammer describes a national sales tax as a VAT (a VAT isn’t the same as a national sales tax, but for the purposes of this discussion, understand that’s what he’s actually talking about – a consumption tax). He calls it the “ultimate cash cow” and Democrats are hungrily eyeing it – in fact they’re hungrily eyeing every potential revenue source. When Nancy Pelosi was asked about a consumption tax, she replied “everything is on the table.” They understand how fiscally unsustainable their present course is, but are committed to it for a reason – and it has to do with a matter of philosophy as Krauthammer lays out:
Obama set out to be a consequential president, one on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes; then, ultimately, you have to reduce government spending.
Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.
And the VAT is the only trough in creation large enough.
As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.
Step 1 – expand government. Step 2 – say “you’ve got them (the government programs), you like them (an assumption played large), now you have to pay for them” and expand taxation. One of the utilities of passing this huge new entitlement first is to justify step 2. The reverse Reagan, as Krauthammer points out.
You remember the advocates of the Fair Tax don’t you? They too wanted a national sales tax – but as a replacement for the individual income tax and as a way to abolish the IRS. Unlike that, the new tax would be imposed on top of the individual income tax and, most likely, the IRS would be further expanded (more than just the 16,000 agents to monitor and enforce your health insurance compliance) to oversee the collection of these taxes.
So look for the “crisis” to hit within a few years. Government will continue to build the unsustainability case even while they continue on their purposefully unsustainable course. And, once the “crisis” (blamed, of course, on the previous administration(s)) is at the proper level of manufactured fear and panic, they’ll attempt to push through a nominally small national consumption tax (2 or 3%). If they succeed, game over. Just like the income tax (which history tells us the proponents never thought would rise above 2%), they’ll incrementally raise that tax over the intervening years as they continue the fan the “crisis” flames – a crisis of their own making. The desire would be to raise that tax to the 15 or 20% range (like Europe) to pay for the welfare state they’ll continue to try to expand. And, of course, as is their history, they’d even overspend on that. The fiscal crisis would remain, the GDP would tank, productivity would fall off terribly as more and more money is taken out of the private economy and we’d eventually find ourselves in much the same financial shape we are in now with no way to recover.
Yes, that’s conjecture – but it is based in history and precedent. Name a government entitlement that isn’t in the red or headed into the red. Entitlement spending dwarfs discretionary spending and continues to grow and consume more and more of the government’s budget as a percentage. This health care debacle will be no different. And as that proves out to be a money pit, the government is going to have to find new streams of revenue. Some sort of new taxation is absolutely inevitable, and I’m in agreement that the easiest to implement and immediately collect on is some sort of national consumption tax. And if and when they ever pass that, the road to our fiscal ruin will finally be fully paved.
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Paul Krugman came out today for “border adjustments” (tariffs) on goods from countries who aren’t participating in economy killing CO2 emissions control taxation.
If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.
Actually they’re “entirely legitimate” if you swallow the premise Krugman is pushing here, namely that CO2 is a “pollutant” and its restriction is a “legitimate” reason for imposing taxes on both your own economy and the goods coming from another economy which doesn’t agree with the premise. And, of course, this ignores the probable reaction countries hit with this tariff might have.
Krugman then attempts to justify such a “border adjustment” by claiming such a move is probably legal under “international law”:
The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. It has long been accepted that a VAT is essentially a sales tax — a tax on consumers — which for administrative reasons is collected from producers. Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.
And the same would be true of carbon tariffs.
What he sort of dances around when he claims this will “level the playing field” is all products, regardless of their origin, will see dramatically increased pricing. The point of the tax is to hopefully steer consumers to domestically produced products which are produced under government approved conditions rather than those from countries like China and India which aren’t playing the game the US wants them to play. Not only will the consumer here be asked to pay for the CO2 offsets imposed on domestic industry, but they will have to pay for offsets for foreign producers as well when the VAT cost is passed on in the price of the goods.
The thinking, obviously, is that if prices are the same, US consumers will buy US goods instead of, say, Chinese goods. The problem, of course, is much of what we consume isn’t made here anymore. So the result would be the US consumer would end up paying higher prices for goods produced in China with no change in behavior by China.
Additionally, China will view this as a protectionist measure, whether the WTO thinks it is “legal” or not. China will simply claim that the US, as a rich country and large “polluter”, should be doing more than they are doing in terms of emissions control, and impose its own “WTO legal” VAT in response. Same with any other country targeted by the US for a tariff.
This is, frankly, an invitation to a trade war. Krugman can wrap his protectionist argument in whatever legality he’d like, but the fact remains most countries effected will view it as an attempt to limit trade and react accordingly. And, of course, by Krugman’s own admission, it is you who will be paying the tariff cost for China and India if this is ever passed into law.