The Value Added Tax

For Your Entertainment // Learn Something

Chris is Chair of the Economic Issues Committee. To get involved, email him at econ [at] gomyd [dot] com or come to the meeting tonight (Tuesday the 27th) at 7pm at the Starbucks on 29th Street and Park Avenue.Victoria Jackson at the Online Tax Revolt Rally

For some reason, Saturdays on C-Span seem to be Tea-Party day.  Over the last few months, I’ve been idling flipping channels and suddenly Sarah Palin or Ron Paul will pop up on my screen and I’ll find myself dragged in for an hour of morbid fascination.  Last week, I ran across a Tax Day protest on the mall in DC…  I didn’t catch anyone particularly compelling, although I did enjoy watching former Saturday Night Live star Victoria Jackson crash and burn with a totally nonsensical Obama bashing song (video here).  Who woulda thought that she’d end up a crazy TPer?  And at this point, can she even be defined as B list or C list?  Seems like they were really stretching in the celebrity speaker category.

Another thing popped out, though:  The Value Added Tax (or VAT).  At some point, the moderator was warming up the crowd by accusing Obama of wanting to institute a Value Added Tax like all those commies on the other side of the Atlantic (heh paraphrasing there).  Well, I’d heard the term before, but I had no idea what the tax does, and it was not clear that they knew either.  So I decided to check it out.  One of my general principals is that when a rabble rousing Republican starts using European associations to trash something obscure and wonky, it probably means that someone with a lot of money is afraid.

Well, since Obama  seems to actually be looking into the VAT, I thought I would do the same, and then tell people what I found out.

After the jump:  A quick primer…

Basically, it’s a different way of collecting sales tax – instead of taxing everything we buy at the cash register, you have businesses pay taxes on the value added at each stage of production… so a cabinet maker pays a tax on the wood and the furniture company pays a tax on the cabinet and so on.  Correctly implemented, the cost to the consumer doesn’t change – the tax is just factored into the price of the product rather than tacked on at the end.  The advantage is that tax collection becomes a lot more efficient for the government, since each business in the supply chain is in charge of collecting the tax from the last guy – if they don’t, they have to cover the difference.

And remember – more efficient means less of our tax money spent on the IRS!

There some disadvantages too – it creates more accounting work for businesses in the middle of supply chain, which could be dangerous in a down economy.  It has also been called a regressive tax – I couldn’t figure out exactly why, but apparently, it may dispraportionately effect lower and middle income consumers… something to do with the fact that it shifts more of the total tax burden to consumption, which effects low income people because the spend a higher percentage of their income on tangible goods.  But that can be dealt with in the implementation with offsets in other parts of the tax code.

Most importantly, though, it makes it easier to raise taxes on certain consumer goods – a good thing and a bad thing.  On one hand, it makes it easier for the government to impose taxes without people yelling and screaming about it, since the total tax is not as clearly visible to the consumer.  On the other hand, it makes taxes easier to manage on an individual product basis because it gives us more flexibility and prevents tax evasion.  One of the problems with our current system is that raising taxes past a certain point makes it really tempting to cheat the system:  if the risk of smuggling is less than the reward of your product being cheaper than everyone elses, people will tend to smuggle.  High taxes on things like cigarettes and liquor become progressively less useful because you have to spend all kinds of money keeping bodega owners from popping over to PA to buy a truckload of cartons.  If I’ve got it figured out correctly, the government could get a bunch of that money before the pack of cigarettes ever makes it to a store, so they wouldn’t have to spend all that money on little stamps and undercover cops.

Now, if you hate the government and want to hamstring any ability they have to tax people, or, if you like a really complicated, innefficient tax code because your a big corporation who likes all the fun loopholes (and lets not forget, the corporations and their lobbyists are the ones who have been writing our tax code for years), the VAT is a terrible idea.

However, if you care about how your tax dollars are spent and want to reduce the deficit, you should care the most about making our government more efficient  (I’m looking at you Tea Partiers!).  In that case, yes please, lets have a discussion about any and all ways that we can simplify the tax code and reduce the cost of enforcement.

There are pluses and minuses, but can we at least have an adult discussion about it?

Here are some links with more info:

Value Added Tax – Wikipedia
Value-Added Tax: What You Need to Know – The Atlantic
Value-Added Taxes: A Primer – The New York Times
A Value-Added Tax and the Poor – The New York Times