The differernce between an expanded business income tax and a value added tax
Anyone familiar with my tax plan knows that I advocate an expanded business income tax (BIT) - which means that every business pays, regardless of the form of ownership, and that payroll and salaries are included in the base. I also advocate a value added tax (VAT), which essentially taxes all value added to a product by the firm. The question soon arises, aren't these the same thing?
The answer is no. Here is the difference.
To enact a VAT, gross wages do not go down and ideally net wages go up just a tad while income taxes go down by as much. Additionally, VATs are sales based - they are determined by what is received in revenue.
To enact a BIT, gross wages go down, but not necessarily net wages, as such a tax would simply shift tax burdens from the employee to the employer (who already collects income and payroll taxes).
The advantage of a BIT is that it can include deductions, exclusions and credits for such items as health insurance, and the distribution of a Child Tax Credit. The Child Tax credit could be expanded to not only hold the poor harmless for the VAT, but also to transfer housing subsidies from the rich to families and to redirect income supplements from spending programs to tax benefits and distribute them more broadly. In other words, the credit could be used to provide a living wage without making small business go broke.
While I do not advocate doing so, mortgage interest credits could be included in a BIT - although this may be necessary if there is less will to expand the Child Tax Credit as broadly as it should be to get to living wage levels.
Credits can also be included to provide education in all its forms, from higher education for young workers to remedial education for illiterate workers to a state-based credit for elementary and secondary education provided by private schools to employee families.
Net wages won't go down for the average worker, however they might for some - especially childless, higher income workers depending upon how generous the Child Credit is and whether the mortgage interest credit is included or capped.
Adoption of this tax would likely necessitate a change to most payroll systems - although if it did not, net incomes might not go down for the rich, although they would certainly go up for the poor.
If solving the demographic crisis is a part of this reform (and it should be), making the childless feel a bit more pain might not be bad public policy. Retirement taxes could also come out of the BIT, (or be retained as a separate wage tax) although these could be offset - either wholly or partially - by personal retirement accounts (preferably in employer voting stock with an insurance pool provision among all such funds).
So, to recap, the similarity between the taxes is the tax base (total revenue minus purchases, leaving wages and profit to be taxed) while the difference is whether income or prices are effected - with a BIT leading to income adjustments and the VAT leading to price adjustments. The other difference (at least as I propose it) is in expenditures funded. I would fund discretionary expenditures - both civil and domestic military - with the VAT and family support with the BIT.
In the end, of course, the same amount of government must be purchased and revenue must ultimately equal expenditure - although other taxes, such as a residual income surtax on higher income individuals and families will also enter the mix to fund interest, military deployments and debt repayment. The key is to take the same money from the same people while sensitizing them to government spending and debt but also by reducing their paperwork burdens.
The answer is no. Here is the difference.
To enact a VAT, gross wages do not go down and ideally net wages go up just a tad while income taxes go down by as much. Additionally, VATs are sales based - they are determined by what is received in revenue.
To enact a BIT, gross wages go down, but not necessarily net wages, as such a tax would simply shift tax burdens from the employee to the employer (who already collects income and payroll taxes).
The advantage of a BIT is that it can include deductions, exclusions and credits for such items as health insurance, and the distribution of a Child Tax Credit. The Child Tax credit could be expanded to not only hold the poor harmless for the VAT, but also to transfer housing subsidies from the rich to families and to redirect income supplements from spending programs to tax benefits and distribute them more broadly. In other words, the credit could be used to provide a living wage without making small business go broke.
While I do not advocate doing so, mortgage interest credits could be included in a BIT - although this may be necessary if there is less will to expand the Child Tax Credit as broadly as it should be to get to living wage levels.
Credits can also be included to provide education in all its forms, from higher education for young workers to remedial education for illiterate workers to a state-based credit for elementary and secondary education provided by private schools to employee families.
Net wages won't go down for the average worker, however they might for some - especially childless, higher income workers depending upon how generous the Child Credit is and whether the mortgage interest credit is included or capped.
Adoption of this tax would likely necessitate a change to most payroll systems - although if it did not, net incomes might not go down for the rich, although they would certainly go up for the poor.
If solving the demographic crisis is a part of this reform (and it should be), making the childless feel a bit more pain might not be bad public policy. Retirement taxes could also come out of the BIT, (or be retained as a separate wage tax) although these could be offset - either wholly or partially - by personal retirement accounts (preferably in employer voting stock with an insurance pool provision among all such funds).
So, to recap, the similarity between the taxes is the tax base (total revenue minus purchases, leaving wages and profit to be taxed) while the difference is whether income or prices are effected - with a BIT leading to income adjustments and the VAT leading to price adjustments. The other difference (at least as I propose it) is in expenditures funded. I would fund discretionary expenditures - both civil and domestic military - with the VAT and family support with the BIT.
In the end, of course, the same amount of government must be purchased and revenue must ultimately equal expenditure - although other taxes, such as a residual income surtax on higher income individuals and families will also enter the mix to fund interest, military deployments and debt repayment. The key is to take the same money from the same people while sensitizing them to government spending and debt but also by reducing their paperwork burdens.
posted by Michael Bindner at 3:28 PM
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