Myths about tax reform- an interesting argument

The Center for American Progress has a position paper regarding myths about tax reform. The bottom line of course is the only fair thing to do is raise taxes on the “wealthy” and corporations … but I digress.

IMG_2303What I really found interesting is their argument below about a Value Added Tax (VAT); a type of sales tax common in Europe.  VATs in EU countries range from 17% to 27% with most in the 20-23%.

Why is this interesting? Because the social welfare states so much admired by our friends on the far left … Old Bernie comes to mind (Denmark’s VAT is 25%) … depend on high VATs and high income taxes and payroll taxes to pay for their “free” promises to their citizens. 🤑

So while a VAT is regressive, it doesn’t seem to stop socialist countries from using it in addition to income and other taxes (in all fairness though many countries exempt some basic necessity purchases). 

Does anyone doubt the liberal left is so naive that it is laughable 🙄

Some policymakers argue for repealing the federal income tax and replacing it with a tax based on what people consume. Even some economists say that this approach would free from taxation any income that is saved or invested instead of spent on the purchase of goods and services, thereby increasing the amount of investment associated with economic growth. A national sales tax and a value-added tax—which is like a sales tax collected by businesses at each stage of production—are two consumption taxes most commonly put forth in these proposals. Both proposals are broad-based, potentially applying to just about anything that people buy, and the burden of both would ultimately fall on consumers.

Consumption taxes are regressive; that is, they impose a heavier burden on lower-income taxpayers than higher-income taxpayers for two reasons. The first is that the dollar amount of tax paid on any given item does not vary according to the purchaser’s income or ability to pay. The result is that the tax would hit low-income people harder. Paying $100 of tax on the purchase of a new refrigerator represents a greater relative burden for someone making $10,000 a year than it does for someone making $100,000 a year.

The second reason why consumption taxes are regressive is that, by definition, they do not apply to what is not consumed. In general, people with higher incomes are able to save and invest more of their income and thus spend a smaller share of their income on goods and services that would be subject to a consumption tax. By comparison, low- and moderate-income people must spend all or most of their earnings on goods and services with little left over to save or invest. As a result, they would pay a greater share of their income in consumption tax than a higher-income person.

Replacing the income tax with a consumption tax would cause a massive downward shift in the tax burden from upper-income taxpayers to low- and middle-income taxpayers. The individual income tax currently raises about $1.5 trillion a year. Because the income tax is spread across a broader tax base, including wages, salaries, and investment returns, replacing it with a consumption tax, which has a narrower base, would require a much higher consumption tax rate. Again, the burden from this higher consumption tax would fall more heavily on low- and middle-income people.

The effect of consumption taxes on low-income people could be decreased by exempting or reducing the rate on food, clothing, housing, and other necessities. However, doing so would further reduce the revenue raised and require an even higher tax rate on everything else. Exceptions would also increase the complexity of the consumption tax system. And enacting any new national sales tax or VAT would involve significant start-up and transition costs. Finally, a new consumption tax would be vulnerable to tax avoidance just like any other type of tax.

Source: Who Wins and Who Loses? | Center for American Progress


Categories: Government, Politics

4 replies »

  1. Note the following excerpt: “… a new consumption tax would be vulnerable to tax avoidance just like any other type of tax …”
    And, note also (from Dick): “… The real answer is that to have all that the politician promise, you need high income taxes, payroll taxes and a VAT as well. …”

    I agree and disagree. The biggest risk for America is NOT whether a tax is progressive (relative to income or wealth) or regressive. The biggest risk for America is continuing the status quo – where Congress authorizes substantial benefits and assigns the burden to finance them on generations ineligible to vote or as yet unborn.

    The real answer is that so long as people believe that it is acceptable for Congress to mandate a benefit for me that must be funded by others, particularly future generations, we will always have a situation where people promise stuff in exchange for your support (vote). Obama does it today. Bush II did it with Medicare Part D.

    In fact, depending on who you ask, our unfunded liabilities exceed American household total net worth – Laurence Kotlikoff estimates our unfunded liability at $222 Trillion, while the United Nations estimates American household’s net worth at $118 Trillion.

    This vote buying and its risks are not new. Alex deTocqueville, a visitor and observer of America in the 1800’s wrote that: “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

    My favorite quote comes from Senator Long, of Louisiana: “Don’t tax you, don’t tax me, tax that guy behind the tree”. My other favorite (anonymous): “The best tax is the one I owe and you pay.” Or if you prefer: Ronald Reagan: “You can’t tax business. Business doesn’t pay taxes. It collects taxes.”

    Bottom line, a VAT is collected at every stage, so as the economists say, the incidence does not equal the impact. The impact on all of these taxes falls to the individual taxpayer (current, or future generations).


  2. I agree that a VAT tax is regressive but one could argue that so is any kind of sales tax that we currently have. In theory you buy what you can afford. If you can afford that high tech stainless steel refrigerator for $2000 you buy it and pay the VAT tax or the sale tax without the regard for your income. Or you just get the plane Jane model for $500 and pay the lesser tax. Are they suggesting that when you buy the high tech model you should present proof of income to determine the tax?

    How many of these poor people would complain about a VAT tax on tattoos? A $1000 tattoo still costs $1000 and as a percentage of income will still be much higher for people of lesser incomes but they will still get tattoo.

    In my opinion one of the most unfair taxes are property taxes. Hopefully you buy a house that you can afford knowing what the taxes are for that house. You hope that the value will go up and expect that the taxes will go up relative to the value and that your income will also go about the same. But in New Jersey that has not been the case. Tax rates have gone up unrelated to value. In some areas the value of the house have skyrocketed. In some areas the value has crashed. The house did not change, the income did not change only the perceived value changed of the house but the tax rates still keep going up. In some places the retirees are forced to sell because their income are now reduced but their tax rates continue to climb. In some areas of the country they now freeze the value of a home for seniors to prevent sheriff sales for taxes.

    Overall in theory I am still more in favor of a VAT tax than our current system but I am sure Congress would create so many loopholes and exemptions that it would not be any better than the screwed up system that we now have.

    I would like to know what the real answer is.


    • The real answer is that to have all that the politician promise, you need high income taxes, payroll taxes and a VAT as well. That’s the truth politicians ignore. However, as best I have been able to determine in Europe where they have all that property taxes are reasonable. We shouldn’t be funding schools using property taxes it simply is not fair, especially to people who stay in their home for many years and into retirement.


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