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October 13, 2011

VAT Still A Bad Idea

Almost a year ago Mitch Daniels suggested the adoption of a value-added tax. I was not in favor of the VAT when Daniels proposed it and I'm not any more in favor of it now that Herman Cain is proposing one.

What I wrote then holds up pretty well:

The value added tax is back in the news and worse, in the few days since Mitch Daniel's suggestion that the United States adopt a VAT, I'm seeing it proposed more and more from (so-called?) conservative commentators. Often, they pair a VAT with a flat income tax and suggest replacing the existing federal income tax scheme.

It should go without saying that the VAT is an exceptionally bad idea, whether it's paired with a flat tax or a fair tax or any other tax and whether it replaces the federal income tax or not. Whatever its merits, they are outweighed by its key features: the VAT obscures for the taxpayer just how much money is being sucked up by the government; it is prone to Congressional abuse; and it is, in the words of economists, "efficient."

Yes, you can put VAT on each and every sales receipt. But unless the taxpayer keeps and diligently tallies every receipt, he will have no idea what he's ended up handing over to Uncle Sam.

This feature of the VAT is a tax-and-spend liberal's wet dream because it keeps the taxpayer-voter in ignorance of how much of his property the government is appropriating over time. Even under the current complicated income tax scheme, the taxpayer-voter has a pretty good idea of how much of his annual income gets sent off to Washington, D.C. And he can then make reasonable predictions and demands and votes when Congress starts fiddling with tax rates. But for the average American, if Congress were to adjust a VAT, the question "how much does this affect me or my business" becomes difficult to answer. Again, unless the taxpayer-voter has been keeping track of his consumption.

And there, too, a VAT gives Congress even greater means to target disfavored industries and individuals. Progressive nannies can push for a higher VAT on soda and fast food. Social conservatives can push for a higher VAT on...er, morally questionable commerce. Other major targets: the oil industry (after all, they should pay more for being Gaia-raping capitalists); the pharmaceutical industry (it's for the children, somehow); and, without a doubt, Big Tobacco (for obvious reasons).

Economists laud the VAT because it is a "more efficient" means of collecting taxes. As a conservative, hell as a taxpayer, I am not in favor of more efficiency in letting the government take what's mine. I acknowledge the need for a government and the obvious necessity of paying for one. But simultaneous efficiency and obscurity are not on the top of my list for features of a tax scheme. I want what taxes I'm paying to be SCREAMINGLY obvious. And I want to be able to get that information any time I want, but particularly when I'm asked to elect or reelect these jokers in Congress. (In fact, it is for this reason that I support moving Tax Day from April 15 to the first Monday in November. Let's put Tax Day nearer to Election Day.)

In short, the VAT is exactly the type of tax scheme that conservatives shouldn't want. And pairing it with a flat income tax does not alter its key features, that is, its patent deficiencies. It's disappointing to see conservatives using the Obama-spawned budget crisis as an excuse to propose a fundamentally awful tax scheme. Shame on them.

I haven't changed my mind since then. Not when the VAT is suggested as a replacement for the income tax and absolutely not when the VAT is proposed as a supplement to a wage tax, as in Herman Cain's 9-9-9 plan.

Dale Franks over at QandO disagrees with me, but I'm not sure I understand his objections. He starts from the proposition that the income tax is bad and I'm not disagreeing. But that doesn't explain why the VAT is better. To the extent Dale complains that the income tax is bad because the tax code is so complex, that's an argument to reform the tax code, not to simply replace the income tax with a VAT or, worse, to supplement the income tax with a VAT.

Dale goes on to point out that income tax rates at 90 and, later, 70 percent enabled the creation of the federal monstrosity that now intrudes into almost all aspects of American life. True, but again that's an objection to 90 and 70 percent tax rates, not an explanation for why a VAT wouldn't enable the same overbearing national government. As calculated by NRO's Josh Barro, Cain's VAT (the second '9' in '9-9-9') would raise about $600 billion a year, but don't think for a second that future Democratic Congresses and Presidents will leave the 9 percent rate untouched.

Dale has a rather cute argument that "you donít get sent to jail if you donít buy enough stuff under a VAT." However, that's not responsive to the income tax situation either. You don't get sent to jail for failing to have income that can be taxed under the income tax. But you absolutely will be fined or sent to jail if you're caught avoiding the VAT by participating in a black market, just as you will if you attempt to avoid the income tax by falsifying your reported income.

He goes on to suggest that the VAT is superior to an income tax because the VAT only allows the federal government to target disfavored classes of products rather than target disfavored classes of individuals, but that's not the case either. When a Democrat-led Congress decides to target Big Oil with a higher VAT than the national average, you better believe that shareholders, officers, and employees will feel targeted.

In the end, Dale's objections to the income tax are absolutely, one-hundred percent reasonable and I endorse them: we shouldn't have income tax rates at 70 and 90 percent; the tax code should be simpler; and the government shouldn't target individuals for disfavored tax status. But none of these objections explain why the VAT makes an inherently better system of taxation than an income tax.

Dale's remaining objection, a privacy-based argument that he'd just like to "liberate" himself from "the direct financial supervision of the US government" is compelling, but a non-starter even under Cain's 9-9-9 plan. The proposed wage tax (the first '9' in '9-9-9') would require the usual reporting requirements we all know and hate.


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posted by Gabriel Malor at 08:41 AM

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