A better consumption tax
By Dylan Matthews
Although I disagree with him entirely on whether the federal government should be instituting new broad-based taxes, Irwin Stelzer is right to argue, as was Pete Davis, that a value-added tax won't be implemented in anything resembling a clean way. Exemptions will be rampant, due to lobbying and the parochial concerns of key representatives and senators, and some of them – like the exemption Stelzer cites in the British VAT for crackers made from tapioca starch, but not other crackers – will be ridiculous and ridiculous-sounding. It will be hard for businesses to keep track of what is and isn't subject to the tax, and the complexity will be periodically bemoaned.
Which is, of course, the case with the personal income tax, the corporate income tax, and plenty of other current federal taxes. This isn't to say that it's fine to make the tax code even more confusing, but insofar as we'll have to find new, large sources of revenue in order to balance the budget in the long run, a new tax of some kind will have to be adopted. And regardless of whether that's a VAT or an income surtax or a far more potent health insurance excise tax, it's going to be complex, hard to follow and full of loopholes. Periodic simplification efforts, like the Tax Reform Act of 1986 or the current Wyden-Gregg tax plan, will pop up and clean things up, but after a few years it'll be back to normal. Unless one can marshal evidence that the VAT will be more resistant to simplification efforts, or more likely to accumulate exemptions, than existing taxes, this hardly seems to be a reason against adopting it.
That said, VAT proponents do tend to hail its simplicity in arguing for it, and the tendency of real world VATs to grow increasingly complex, as Stelzer and Davis explain, undermines this argument. What's more, it undermines a major argument against an alternative consumption tax proposal to the VAT: Robert Frank's progressive consumption tax. While VATs and retail sales taxes are exacted during transactions, the progressive consumption tax works the same way the personal income tax does, except it includes an unlimited exemption for savings. The difference between income and savings is assumed to be a person or family's consumption level. While VATs and sales taxes hit the poor disproportionately, Frank's tax has a number of brackets and a standard deduction, and is thus, as its name suggests, highly progressive. The main advantage of a VAT or sales tax over Frank's proposal is simplicity and ease of compliance, but if one assumes that any new tax will be riddled with exemptions, that isn't much of a benefit.
-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.
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