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.
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.