Wednesday, August 11, 2004

 

A VAT is not Phat.

Would a national sales tax be a good idea?

The elephant pays a lot in taxes. In fact, I paid more in federal taxes last year than my annual income just 7 years ago. We all want lower taxes, but here's a dirty little secret...if we want a strong national defense, roads, water, health care and such, we will always have to pay some level of taxes. That's why I find myself, yet again, scratching my head over the latest campaign gimmick by my GOP colleagues over the establishment of a Value Added Tax (VAT) or a National Sales Tax.

By some estimates, a national sales tax would have to be in the range of 30% or more to make up for the loss of the income tax. Granted, instead of paying 35% or whatever I pay in federal income tax, I'd take home more money, but do I really want to be paying a 30% plus sales tax every time I buy something? I'm not sure.

What really gets my goat is that Denny Hastert and company claim they could do away with the IRS. Now, I know there are a bunch of states that don't have state income taxes, and to my knowledge, every one of them has a department of revenue. Also, we're talking about collecting trillions of dollars in sales tax, which would probably be delegated to retailers to collect, but you'd still have to have a some agency to enforce collection.

I've got other questions too. What about the mortgage interest deduction? If you eliminate that, it would likely have an negative impact of home prices, which are the largest asset most people own. And speaking of that, what of the tax credits for having children, those would evaporate too.

What scares me most is that our country is running nearly 1/2 a trillion dollar deficits on an annual basis. As such a likely outcome would be a national sales tax and some type of income tax. (Tax increase disguised as tax reform-it's an old trick).

Yes, our system could encourage more savings and we need to eliminate double taxation of income where it exists, but with consumption the largest component of our economy, shifting the tax burden to target purchases versus income will not be without its consequences. This proposal has been floating around Washington since I was watching Land of the Lost and playing with my Star Wars figures, it is not new and probably not that revolutionary anyway. Here's some background information and commentary if you're interested.


GAO Report: States and a Federal Consumption Tax (1990)

http://161.203.16.4/d24t8/140996.pdf

GAO Report: Choosing Among the Consumption Taxes (1986)

http://161.203.16.4/d4t4/131062.pdf

National Review: The Case Against Tax-Reform Leadership
http://www.nationalreview.com/ponnuru/ponnuru200408100843.asp

Comments:
Elephant,

Just a thought about the effect of the elemination of the home mortgage interest deduction:

It would probably have a "negative" impact on home prices, but that's only depending on whom you are asking. Also, the negative dip is probably only going to be very slight and short lived.

The home mortgage interest deduction is nice for those of us who are mortgaged to the ying-yang, but a lower tax burden to begin with would be even better! Remember, it NEVER pays to buy a deduction! (So says my dad's accountant.) Also, with as low as interest has been lately, the deduction isn't helping all that much right now.

The home mortgage interest deduction effectively reduces the interest rate paid on the mortgage by the amount of the marginal tax rate. It doesn't reduce the selling price of the home. In fact, the biggest impact that the deduction probably has is to encourage people to NOT pay off their homes as quickly as possible. There are a lot of people who think that the home mortgage interest deduction is some sort of Holy Grail and actually get themselves overextended in a quest to maximize that deduction.

Now... to the more general question of whether a national sales tax is a good idea... I don't particularly like it. It's especially regressive making lower-middle income families pay tax on a huge portion of their earnings since they consume with a huge portion of their incomes. I prefer a flat income-tax RATE with a generous personal deduction for each person supported by whatever income. (Say... 10K per adult and 5K or so per child.) I would also demand that there be no loop-holes and all income from all sources be taxed at the flat rate. The rich shouldn't be able to hide income, and the poor and middle-class shouldn't be punished for working to better themselves.

People always say, "What about corporations?" I would generally shy away from taxing corporations heavily if all personal income (including personal perks and dividends) are taxed at the flat rate, but since businesses do utilize public resources (roads, police, fire dept., etc.) I would be open to a low tax rate (maybe 5%) on gross profits.

There ya go... bask in the beauty of my wisdom for as long as you like. ;-)

(BTW, with the personal financial success that you are currently experiencing, I would like to renew my inquiry about potential employment... For what it's worth, I just found out that my ranking improved dramatically and is now well into the single digits in my class. I'll be graduating in December '05, so if you want to snatch me up, you'll need to do so soon!)
 
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