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When an idea becomes a law, it gets complicated

One of the neat things about a value-added tax is that unlike our current tax code, it's really simple. But then, a lot of things are really simple in theory. Income taxes, for instance, which form the basis for our current tax code. It's when an idea becomes a law that it gets complex. And Pete Davis makes a very good case that a VAT would go through the same process.

By Ezra Klein  |  March 29, 2010; 10:08 AM ET
Categories:  Taxes  
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Also he argues it will hit the "Rust Belt" harder. They've taken to brunt of the brilliant new ideas by economists already.

Posted by: Hopeful9 | March 29, 2010 10:22 AM | Report abuse

The Republicans lost the healthcare debate, and now Obama is showing some cojones and doing recess appointments so he can get some work done. The last week (and a day) have been very bad news for the Republicans.

I expect many Republicans are praying that the Obama administration gets serious about a VAT tax. For the reasons Pete Davis states, and many more, it would be a great (and politically beneficial thing) for the "party of no" to say no to.

Although that's the problem with being the party of no. You are highly dependent on your opposition advancing things like cap-and-tax or a VAT tax or something similarly polarizing. If Obama focuses on jobs and micro-initiatives, what are the Republicans going to do in November?

Posted by: Kevin_Willis | March 29, 2010 10:27 AM | Report abuse

It's just a passing thought, but given that "No Tax or Duty shall be laid on Articles exported from any State", absent agreement by 38 states, wouldn't a value-added tax have to apply only to items manufactured and sold within each state? Of course, one could claim the tax is on the final sale, not the export, or that the tax is on some particular activity of manufacture; in any case, though, it looks like 38 state legislatures might have to agree that a VAT is the right way to pay for federal excesses.

Posted by: rmgregory | March 29, 2010 10:36 AM | Report abuse

@rmgregory: "No Tax or Duty shall be laid on Articles exported from any State" . . . One of the many difficulties, I think, a VAT tax would have, even if it ever made it into law. I tend to think that the current court would likely hold up HCR, but I don't think they'd let a VAT tax stand. I might be wrong about that, but I don't think the VAT tax would make it through a review by the court.

Posted by: Kevin_Willis | March 29, 2010 10:40 AM | Report abuse

A tax is a tax is a tax. Instead of laying out whole new layers of administrative complexity, why not simply work with the mechanisms we have?

The VAT might sound good only in the sense that people think it will be less tax on them and more on someone else. Then, "...it gets complex."

Posted by: Jaycal | March 29, 2010 10:52 AM | Report abuse

For real financial innovation, we have to look to government...taxing services is next on the agenda.

http://www.nytimes.com/2010/03/28/us/28taxes.html

Posted by: staticvars | March 29, 2010 11:04 AM | Report abuse

I just don't see the point of even discussing a VAT. If you thought the healthcare reform debates was demagogued and manipulated by interest groups -- even after the administration neutralized the largest actors with sweeteners in the bill -- can you imagine what the special interests would do with a proposal for a "new tax" that no one understands, and few agree on who it would hit the hardest?

I've got a better idea, if you want to impose a tax to pay for healthcare, use the financial transactions tax as a model. These are originally conceived as a tax on currency exchanges and financial transactions, where a levy of a quarter-percent or less is imposed on stock trades or global exchanges. They are small enough that they can't be accused of introducing market distortions except for the most voluminous of traders. In that sense, the only distortion they threaten is one that no one in their right mind would call a bad thing since it would be to discourage non-productive activity.

So why not consider the same thing on the processing of medical claims? Millions of them are processed every year, and the cost of the actual processing of the claim is already very small -- from very low double-digits to high single digits, depending. A fraction of a percentage could potentially generate large volumes of revenue, go practically unseen, do so progressively, and introduce little-to-no market distortion. What's not to love?

Could anyone really take Mitch McConnell seriously if he tried to argue that a quarter-percent tax on every insurance claim processed through a cube farm in Peoria would be the next step towards socialism/Armageddon?

Posted by: Rick00 | March 29, 2010 11:05 AM | Report abuse

@Rick00: "Could anyone really take Mitch McConnell seriously if he tried to argue that a quarter-percent tax on every insurance claim processed through a cube farm in Peoria would be the next step towards socialism/Armageddon?"

Yes, they could, and would. "And as if HCR wasn't enough, now they are trying to triple-tax you with this. Everytime you make a claim, there is a tax. And who ends up paying the cost of that tax? The insurer? The government, no, you do! Obama wants to put you in the poor house!"

Posted by: Kevin_Willis | March 29, 2010 11:30 AM | Report abuse

NO VAT!!!

Until we get
-a more progressive income tax with far fewer deductions for high (>250K) income earners
-a financial tranactions tax (structured to catch high volume computer trading and multiple day trading)
-a derivative tax (focused on derivatives that are bought and sold by speculators vs say oil companies or farmers)
-a very modest wealth tax. Right now the only wealth taxed is real estate, which BTW, is the main or only asset class that middle class people own (outside of retirement accounts). All other classes of assets (stocks, bonds, CDs, large bank deposits) are overwhelmingly owned by the richest 1-5% of the population, but somehow these assets are not taxed, only the passive income (share value when sold, profits and dividends) is taxed. A very modest 1-5% tax on financial assets would even the asset tax playing field between the vast majority of people and the very rich and oligarchs among us...

there is no way that a regressive VAT should even be introduced until these revenue generators have been implemented.

Posted by: srw3 | March 29, 2010 11:33 AM | Report abuse

Srw3,

A 5% wealth tax isn't modest. It would devastate the economy. What rate would you require the government to pay for you to want to own a 1yr Treasury note under a 3% inflation environment if your wealth was taxed at 5% and your marginal income tax rate was 35%?

By my calculations, you would require a minimum 12.96% rate on that 1yr UST. The $1,000 treasury pays $129.60 in interest, on which you pay $45.36 in taxes, netting $84.24, leaving you with $1,084.24. The government then taxes your wealth at a 5% rate, requiring you to pay $54.21, bringing your total wealth down to $1,030.03. With inflation running at 3%, your purchasing power adjusted for inflation is no different than when you started. If the treasury paid less, you'd be better off jewels/precious metals and not telling the government. Since investors usually want a positive return, it is likely that the actual 1yr treasury rate would be more like 14%. Longer term treasuries would have higher rates, and corporations would pay even more. Stock prices would probably crash harder than they did in 2008.

If the rate was less than 8.10%, you'd be better off simply hoarding cash and not telling the government.

A 5% wealth tax would destroy savings and capital formation in this country. I don't have a lot of wealth, but if we had a 5% wealth tax I would leave immediately because this place would become a basket case.

Posted by: justin84 | March 29, 2010 1:07 PM | Report abuse

@Kevin: Touchez. Your characterization is poignantly accurate, and I never doubted the GOP would try. However, I still doubt it could be taken seriously by any but the choir.

Posted by: Rick00 | March 29, 2010 2:47 PM | Report abuse

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