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December 08, 2004



Ramesh Ponuru has a good broadside against VAT-type sales tax reform in the current issue of NR. His argument is political rather than economic, but among other things he notes the "stealth tax" effect (like the frog being boiled in a pot, you don't see how much sales tax you pay).

I know Kevin Drum's pet argument is that we should fix Social Security by (surprise!) raising taxes on the "rich," specifically removing the caps on the payroll tax and stop pretending that we're doing anything but taxing to support transfer payments.


The Germans attacked Pearl Harbor? When did that happen?!


As I understand it, the VAT is not going anywhere, both for the idea of replacing the current complicated tax system with another complicated system--the VAT (also for some of the same Ramesh Ponuru reasons).

Though there are some in Congress that want a national sales tax (Sen-elect DeMint, for one), so that the pain of a ~20% sales tax is seen on every purchase as a way to keep presure on the Congress to keep spending down.

The view I've heard from Larry Kudlow regarding the Administration's thinking is moving to lower, and perhaps zero, tax rates on savings and investment income, while moving to a broader overall tax base with a simplified exemption and deduction scheme.

Apparently the biggest tax compliance complaints (other than the overall cost of compliance) have to do with record keeping regarding investment income and capital gains, the failure of any indexing for capital gains, and the phase-in and phase-out of various exemptions and deductions. The politics of swapping a zero tax on investment income/capital gains for simplifying the exemption and deductions should be straightforward. Net effect should be simplification with an income tax system that is consumption oriented at the end of the day.


Dear John:

In Animal House it happened, you moron.


I like your proposal because it also solves the problem of workers getting paid under the table (or at least take away some of the benefits of this) and also allows for some of the tax to be paid by tourists (assuming the sales tax model).

Robert S. in Boston

See http://www.fairtax.org/ for a description of the consumption based tax plan.


"(OK, phase out if you must) the payroll tax, and replace it with a sales tax, or VAT."

I never knew a tax a politician didn't like. Do you honestly believe that there could be any real social contract between the rulers and the ruled which would actually swap one tax for another? Oh, we'll lower [for now] this one, if you allow us to start gearing up this new one! I've got a bridge to sell you. Ghad, both a payroll tax and a VAT. Two, two for price of two. Shipping and handling not included.


Incidentally John, the "you moron" was itself an Animal house reference not directed to you personally. Sorry for any confusion.


A revenue-neutral consumption tax would probably involve raising taxes on the poorer end of the income distribution.


The biggest problem with a phased out tax system is the fact the 16th Amendment is still on the books allowing for the progressive income tax. Which is has all of the founding fathers rolling in their graves.

And this is the biggest problem with any sort of consumption tax proposed. Until the 16th amendment is repealed, highly unlikely since no one has created the "sound bite" for the masses, any movement to create a different tax system will only place us in the same boat the UK is in, i.e. VAT AND Income Tax and both are really high - VAT at something like 17% and Progressive income tax which combined with National Health Service borders on the 50% range for highest earners.

The best proposal I have heard so far is a flat tax proposal that has floated around the Hill. The idea is taxpayers choose the tax system they want to pay under for the next 3 years.

The first system is the mess we currently flounder through on an annual basis.

The second is a straight flat tax. NO deductions, exemptions the same as we have now. Years one and two I think were pegged at 19% and year 3 was 17%. Sorry don't have a URL on this or more details, just know it went vote sometime in the last two years.

The best site to research the consumption tax is the folks over at FairTax.org. This appears to be the sanest scheme out there. But the biggest hurdles to this are the 16th amendment and the 23% number. The other problem is income information will still be required in order to send the monthly refund checks.

A final, final thought, the income tax has the political bonus of keeping the actual amount of money being "hidden". The sales/consumption tax is so in your face. How long would it be before there is a full tax revolt if everyone saw EVERY purchase increase 23%!!

Jabba the Tutt

Get rid of the tax on work, switch it to a tax on consumption - this should reduce dis-incentives to both work and savings.

The purpose of work and savings is in the end to consume. So, if you raise the cost of consumption, it dis-incentivizes work and saving. The real problem is that government is way, way too big. If the total tax burden were 10%, not 50%+, it really wouldn't matter much HOW we were taxed. Unless we cut the size and scope of government, we're going to end up like Germany, where pensions, unemployment, healthcare are all being cut (by the SPD btw) and the German economy hasn't produced a new job for 20 years. All pain and no gain.

Jim Elbe

You want a tax system that is simpler, more fair? Possibly lower taxes as well? You'll neeed to get the people involved. How can this be done (getting people involved)? Simple. Eliminate employers withholding of income taxes. Make all employees pay estimates instead. This will bring home to folks just how much the gummint is taking from them. Hell will be raised. System will be simplified/reformed.


I have no problem with a VAT, but what happens to state sales tax under a national VAT?

California for example allows counties to target sales tax to fund local public infrastructure such as bridges by setting their own percentages above the mandated percentage with ballot approval. In the SF BAy area we have 3-4 different rates, my county is 8.75.

The Feds would have to credit back local sales tax or replace the funding wouldn't it?

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