by Chris Bodenner
A reader writes:
Much as I love Bruce Bartlett for many many things, his VAT hobby horse just drives me up the wall. The implementation of a value-added tax without the wholesale radical changeover to a VAT from the current system of state and local sales/use and income taxes would be insanely complex and beyond impossible to administer for businesses/individuals. Just what a nightmare. (Full disclosure: I’m a sales tax and VAT accountant and his VAT plan would be very much in my personal economic interest; I’m still against it.)
Let me join what will no doubt be a horde of respondents casting doubt on the advisability of swapping income taxes for a sales tax. Such taxes are highly regressive in nature.
The person making 24k a year – basically scraping by month to month – is taxed on all of their purchases while the person with earnings well above their cost of living can bank their savings, allowing their wealth to grow over time. They are also far more likely to be spending outside of the country and bypassing US consumer taxes altogether. A 10% increase in the cost of milk is a much bigger deal for a single mother of three than for an investment banker.
The same host of lobbyists who have made the US tax code such a byzantine mess will descend on any sales tax measure with glee, arguing for exemptions based on whether or not a good is "essential" or not. I live in Canada, where federal and provincial taxes are relied upon heavily and there all sorts of elaborate rules concerning how they are applied. Peanuts and salt are not taxed because they are "food". Salted peanuts are taxed as a "snack". Bread isn't taxed, but tampons are.
People are given "refunds" of sales tax based on their declared income as a means of mitigating the regressive nature of the tax, but again, how these refunds are calculated and applied varies by province and administration year to year. The suggestion that a tax system based on sales taxes ends the complicated and interminable dance of politicians and lobbyists is naive in the extreme.
Sorry, but the Graetz plan will have essentially no effect on the real complexity of the tax code. Probably 99% of the tax code is built around dealing with problems caused by people who make more than $100,000 and on figuring out exactly how much money someone makes. None of that would go away. In fact, I'm not sure I can think of a provision other than the rates for people with less than $100,000 in income and, apparently, the earned income credit that would go away.
Take my wife as an example. She runs her own business. The annual gross is significantly above $100,000, but that's before expenses and deductions for health insurance and her IRA. To figure out whether she owed taxes, under the Graetz plan, she'd have to do exactly what she does today. This would be true for any business that grossed at least $100,000.
What the Graetz plan would do (which is no small thing) is eliminate the complexity of compliance for a large segment of the population. Although the 1040EZ and 1040A are very simple forms, many people are scared of them, and there would be a real benefit to eliminating the obligation to file for so many people. The issue is whether the benefits would be worth the tradeoff from adopting a VAT, which is, after all, a regressive tax that would hit the people who are supposed to benefit from the plan much more heavily than the people who would continue paying income taxes. For someone in the current 10, 15 or maybe even 25 percent bracket, the VAT might well cost more than the income tax.