Thursday, March 24, 2005

Jumping into the VAT

O.k., no one liked it when the Phantom Menace started with a discussion of taxes. But this article is very interesting. Apparently, there has been some discussion amongst the Bushies about creating a Valued Added Tax like they have in Europe. Here’s the idea:

Graetz's idea, in its simplest form, is to exempt all households with less than $100,000 a year from paying income taxes. Income over $100,000 would be taxed at 25 percent.

To replace the revenue lost by the large exemption and lower tax rate, Graetz would institute a value-added tax on most goods and services at a rate of 10 percent to 14 percent.

Take, for instance, an SUV with a sticker price of $30,000 and a value-added rate of 10 percent.

Ford might buy its steel and other materials for $8,000 plus $800 in sales tax. Then, for the finished SUV, a dealer might pay $25,000 plus $2,500 in tax. Ford would take an $800 credit for tax already paid and send $1,700 to the government.

A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer collects the $3,000, takes a credit for the $2,500 worth of taxes already paid, and sends $500 to tax authorities.

The government takes in a total of $3,000 in tax -- the same amount, by the way, it would under a 10 percent retail sales tax. One big difference is that every step of the manufacturing process has been documented.

O.k., I like the no income tax for anyone making under $100,000. It gives people more control over their own money and makes luxury purchases less desirable for people who can’t afford them (but blow their money on anyway). But it also makes necessary goods that much more expensive. Still, I’d think the impetus to save would outweigh the negative impact of expensive toothpaste.

What worries me (scares me, really) is that a VAT is an incredibly easy tax to raise. As every city in the country has learned, you can almost always vote through a 1/8th or 1/4th percent sales tax increase—you know, to pay for those important things like new baseball stadiums.

Because people don’t see the chunk coming out of their paycheck, they don’t put up as big of a fight. A 10% VAT could easily balloon to pay for all kinds of special interest subsidies and other poorly considered government plans. Sure, it could be used to pay for healthcare, but does anyone think it wouldn’t also be used for a big ole’ barrel of stinking pork?

Think about it, if all the government has to do is click up the VAT by a 1/16th or so, what impetus do legislators and bureaucrats have to budget wisely and contain spending? It’s a very interesting idea this VAT, but boy would it need a lot of safeguards.


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