Should The USA Enact a National Sales Tax?

[erislover]

The traditional argument against VAT (for that matter, any sales tax) is that it is distortive by hiding the cost of taxation in the price of goods, meaning that consumers are unaware of their tax burden, unlike income tax (which they file themselves, and so see their burden right there in black and white). Through this, it is theoretically argued, government can raise the tax rate without anyone being really aware of how it changes things. Thus, the ultimate consequence is bigger government.

As I mentioned, kabbes found an empirical study which asks, Is a VAT the Choice of Revenue Maximizing Governments? The data seem to suggest that Big Government isn’t a natural consequence as theory predicts. Significantly, when compared to a general sales tax, the author finds

Estimated coefficients of the VAT variables suggest a negative relationship between VAT and government growth, while the coefficient of GST variables suggest a positive relationship between GST and government growth.

Anyone who feels that a VAT is “really” just a sales tax in a different guise would need to account for this result.

All consumption taxes are regressive, be that VAT or regular sales tax. Most countries that I’m aware of offset this by periodically giving refunds based on income level.

[sailor]

@erislover

The traditional argument against VAT (for that matter, any sales tax) is that it is distortive by hiding the cost of taxation in the price of goods, meaning that consumers are unaware of their tax burden, unlike income tax (which they file themselves, and so see their burden right there in black and white). Through this, it is theoretically argued, government can raise the tax rate without anyone being really aware of how it changes things. Thus, the ultimate consequence is bigger government.

I don’t buy that. When you pay VAT you get it listed right there on the bill separately in black and white (as you put it). It cannot be more obvious and you cannot help but seeing it unless you refuse to look at the bill and just hand out wads of money. I cannot see how that can be “hiding” the tax. As Nathan said, people are well aware f the tax they are paying and when it is as high as 20% (BTW, which country is it? Ireland?) they complain.

As I mentioned, kabbes found an empirical study which asks, Is a VAT the Choice of Revenue Maximizing Governments? The data seem to suggest that Big Government isn’t a natural consequence as theory predicts. Significantly, when compared to a general sales tax, the author findsAnyone who feels that a VAT is “really” just a sales tax in a different guise would need to account for this result.

The factual data doesn’t support it but I am not so sure the theory does either. In any case I believe the level of taxation has much more to do with cultural customs and expectations than with how the money is collected.

All consumption taxes are regressive, be that VAT or regular sales tax.

Agreed. I already mentioned that. Whether that is good, neutral or evil is a matter of personal opinion.

Most countries that I’m aware of offset this by periodically giving refunds based on income level.

Well, I think what they do is use the money for social programs which is about the same thing. Again, whether that is good or bad is a matter of opinion. Personally I would favor lower taxes and lower government spending on social programs but the method of collecting is irrelevant. Europeans expect and want higher taxes and higher government services. But I think it is ludicrous to say that any country which implements VAT will inevitably have high taxes. Europe had high taxes before VAT because that is what Europeans wanted. VAT just changed the collection method.

My view of taxes in general is that no one tax can replace all others. Corporate taxes, income tax, property tax, sales tax (or VAT) are all here to stay and there is no way you can just replace them all with a single tax. No way.

[erislover]

@sailor

I don’t buy that. When you pay VAT you get it listed right there on the bill separately in black and white (as you put it). It cannot be more obvious and you cannot help but seeing it unless you refuse to look at the bill and just hand out wads of money. I cannot see how that can be “hiding” the tax.

Because your yearly tax burden isn’t on that receipt, and 20% of consumption doesn’t tell you what you pay in tax, except on this exchange. It is not literally hidden in that we don’t know what the tax is, but it is figuratively hidden. I mean, how much do you pay in gasoline taxes every year? – it is hidden like that. We are not aware of the total burden.

At any rate, the post was directed more to Nathan than you. We seem in almost complete agreement.

[hawthorne]

Consumption taxes are regressive as measured against income, but they’re proportional if you think consumption is the appropriate proxy for economic position. There are good arguments on both sides of this debate.

The “stealth tax” argument IMHO really only works when it’s complicated to work out the burden as distinct from the amount of tax paid on the transaction. If people aren’t sufficiently smart to work out how much they’re paying annually in a commodity tax on petrol, they’re probably incapable of working out how much they’re paying from their annual budgets on petrol. I don’t think this is a problem for the bulk of transactions under a broad based commodity tax.

When taxes cascade it’s another matter. Financial services - for reasons I’ve already mentioned - are not amenable to normal VAT treatment, so they’re typically exempt from VATs. It turns out that makes financial services more heavily taxed than other items - I can well believe that people don’t know this, it’s pretty counterintuitive. I think that it’s only where the burden is separated from the legal obligation to pay that the visibilty issue should be taken seriously.

I didn’t get very far on the linked paper, but it’s got some problems. Why is he regressing against growth? Why not size? And FWIW, whilst most tax policy people take public choice theory seriously, that doesn’t mean they swallow the Leviathan fable whole.

[Wesley_Clark]

i didn’t read every reply but what would stop people from buying products from overseas? People do this all the time with cigarettes, they get a carton that costs $28 in the US for $16 in Sweden and have it shipped. i see a huge international market from Canada & Mexico if this happens.

[flickster]

Oh Yes Please - We need more taxation. [/irony]

What we need are elected officials that will quit mandating government programs and spending money like drunken sailors.

[Voodoochile]

@Wesley Clark

i didn’t read every reply but what would stop people from buying products from overseas? People do this all the time with cigarettes, they get a carton that costs $28 in the US for $16 in Sweden and have it shipped. i see a huge international market from Canada & Mexico if this happens.

The same thing that stops them now; youre only allowed to bring x amount into the country. You can get away with it sure, but techically its black market. And youre right, higher taxes usually equal bigger black market, like the increase in black market cigs from Mexico (which allready happens and increases with every cig price hike in Cal), the huge moonshine industry in Sweden, etc.

Thats one of the considerations whenever a consumptive tax is increased; its a given that an increase in black market activity will accompany it. So with any consumptive tax increase of any great size, the increased cost of enforcement and policing of the black market needs to be factored into the projected increase in revenue from the tax increase.

So, there is a certain point beyond which consumptive taxes bring in less revenue, though not all consumptive taxes exist to provide revenue; many exist just to punish perceivedly bad/unnacceptable behavior, such as increased taxes on cigs here or high taxes on alcohol in Sweden.

[Voodoochile]

@sailor

I think you do not understand how VAT works because I do not see the problem. Can you give us an example?

RickJay allready touched on it when he pointed out:

… (For Canadians, that’s how our GST works. Businesses pay full GST for everything they buy, with a few exceptions, and deduct that from the GST they charged on what they sold, and then pay the difference, if there is one.) A national sales tax would almost certainly be VAT-based.

The key phrase there is *and then pay the difference, if there is one.**. This is the same way it works in Sweden as well, by the way; I cant speak for other european countries.

In VAT systems, the VAT is paid by the manufacturer. The manufacturer has allready done the calculations vis a vis VAT and profit margins when they determine pricing - VAT rebates based on pricing vs. VAT expenditure to suppliers is built into profit projections to shareholders. Especially in businesses with a lot of competition and/or slim profit margins, this very practically limits the ability to respond to price wars, or to start them for the purpose of gaining market share, or to get rid of excess inventory, etc. The projected share of the market one gains from a price war would need need to be higher in order to justify the temporary loss in less VAT rebates recouped.

This is (partly) why europeans dont see the same level of Factory Rebate Sales as we do here in the US, or weekends where everything is 50% off, or “prices slashed, everything must go” - because the manufacturers have allready paid a certain level of VAT to their suppliers, and need to recoup a certain amount to avoid having to pay an unnecessary amount of taxation. It can and does happen, but the sale or rebate must needs almost guarentee a large enough increase in long term volume/market share to justify the short term cost in extra VAT paid (or not rebated as the case may be). Some businesses may actually prefer this, but thats not the same as saying its good for consumers.

As for a national sales tax, I have no problem with it. Nor do I have a problem with a flat tax (though I would prefer the flat tax). But then I cant understand why its just taken for granted that poor people shouldnt have to pay taxes. What, they arent protected by the same military, police and fire depts? They dont drive on the same roads, use the same infrastructure? I know when I was dirt poor (which has been most of my life), I used the same public services I use now, in the same amount. Why I have to pay for them now but I didnt then, Ive no idea.

Questioning the logic behind the progressive tax system feels like questioning the existance of God in 16th century Spain. It really boils down to nothing more than a belief; much like marriage is only between a man and a woman.

[DrDeth]

@rjciii

Most NRST proposals do offer credits or rebates to those who are at the bottom of the income pool. They pay the 20% at the time of the purchase, but receive cash back at the end (or beginning) of the year.

Also, though the tax rate would be high, you must remember that everyone will be keeping 100% of their salaries

1. That would be (as sailor said) a nitemare in paperwork to figure and claim- and the poor would get stcuk with it. They’d have to save every freaken reciept. :dubious:

2. Nope- the 20% VAT figure only replaces the INCOME tax- not Social Security, Medicare, etc. And those are the largest part of your withholding. Not to mention - no National Sales tax could replace STATE income taxes or SDI.

As I have said before- no modern major industrialised nation has replced their income tax 100% with a VAT. A VAT of 20% plus a local sales tax of 8% would make for extreme amounts of tax evasion. Everything would be sold out of flea markets & in the black market. It’d be a nitemare of Complaince. And- note the here in CA, the Sales tax agency is the Board of Equalization. As bad as the IRS is reputed to be, these guys make the IRS look like their agents are wearing bunnyslippers in place of the “jack boots”.

The OP seems to talk about replacing only part of the FIT with a NST. And, that could work. Have a HUGE “standard deduction” so that the middle class dudes like me pay no FIT- and have a 10% VAT. I’d likely pay about the same, so I’d be OK with that.

A tax doesn’t have to be “flat” to get rid of all the deductions. It still could be “progressive”. It could be very simple and not be regressive- you just look up your Gross on a table and send in that amount (and the table has a large “std deduction” and a graduated % for higher incomes). The problem with this is that the families who depend heavily on the deduction for the Mort int would be hosed and likely have to sell their homes.

EVERY pure & revenue neutral “flat tax” idea that has been floated has the rich paying much less, and the poor still paying not much. Thus- we- the middle class dudes- MUST pay a lot more. Thereby- us dudes in the middle class should hate & despise “flat tax” as a scam by millionaires.

[Declan]

@Wesley Clark

i didn’t read every reply but what would stop people from buying products from overseas? People do this all the time with cigarettes, they get a carton that costs $28 in the US for $16 in Sweden and have it shipped. i see a huge international market from Canada & Mexico if this happens.

In some cases , the size of the item in question. Should I buy a vehicle in one of the US states and bring it up to Ontario, there is a wad of paper work that gets generated , and you pay the GST and PST on the value of the vehicle, rather than the price you bought it at.

Other things like smokes , generally depend on what kind of firewall the govt has set up for contraband. With Govts setting the price of smokes at the store , should a free market alternative come into play , your darn tootin that I will be buying from the lowest cost supplier, screw the people that tax was supposed to be going to.

You can see this exactly right now in NYC , where Dear leader Bloomberg has increased the taxes on smokes , to obsessive levels, and in the process expands the black market on out of state smokes coming in.

Bottom line , it depends on the cost to personally import whatever repressively taxed items, with the US dollar coversion and the price of smokes overseas , its favourable to buy smokes off the internet. While the same US dollar conversion to Canadian , its not favourable to drive to one of the american border towns, and gas up and buy grocerys.

Declan

[erislover]

@hawthorne

Why is he regressing against growth?

Because the claim he is countering is that broad based consumption taxes make governments grow faster because of the increased revenue. It is the first sentence of the abstract.