Why have a Value Added Tax?
As the debate on how to get out of the current debt crisis goes on, the question of whether a Value Added Tax (VAT) will be part of the solution comes up with more frequency that what was expected even a year ago. It is among the main solutions offered by the Bipartisan Policy Commission in its debt reduction plan, among others. As this discussion goes forward, we need to raise the question of whether the VAT will provide enough value added for this to be a good idea.
One key advantage a VAT has is that it makes everyone conscious of being taxed. This is especially important given conservative objections to the fact that 51% of families pay no income tax at all. While most pay payroll taxes, at the lower end, the Earned Income Tax Credit essentially cancels out that payment, provided the primary wage earner actually files taxes. Instituting a VAT makes everyone conscious of paying taxes, especially if the tax is made visible on the receipt, as if it were a retail sales tax, like the proposed Fair Tax.
The key objection to both the Fair Tax and a VAT is that it forces the poor to pay taxes, to which advocates for both plans counter with a proposed “prebate” to give a direct subsidy to some or all families an amount equal to what they would pay in taxes at a subsistence level. Of course, making households file for a prebate may defeat another purpose of the VAT – the desire to spare families, especially poor, less literate, families from having to file any kind of disclosure – which often requires that they pay a preparer to help them – with preparers often offering refund anticipation loans at rates that more savvy borrowers would not pay. Indeed, if a prebate were enacted, would prebate anticipation loans be far behind?
One reason many are for a VAT is the hope that it will increase revenues. This can be done much easier by literally doing nothing and letting the Clinton era tax rates return for everyone on January 1, 2013. Most forecasters predict that would bring the budget into primary balance (where we merely borrow to cover the interest but not operations). I suspect that, because forecasters tend to estimate conservatively, going back to Clinton era rates may even balance the budget and allow the country to begin paying down the debt (and repatriating American jobs, since without a debt to buy, our trading partners would have to start buying American products).
Another major benefit of a VAT is that it functions as a tariff because it is fully collected on imports and zero-rated for exports. It is an implicit transfer to American workers, who could use a transfer right now – especially because many of our trading partners have a VAT which functions in this way, making our income tax based system a hidden tax which makes our products uncompetitive. Labor should be for this tax in a big way, but so far has not been – probably because organized labor has been converted to a movement for workers into an arm of the Democratic Party establishment. This brings us back to the question of why the left has not embraced it?
The reason tax reform with a VAT has not caught fire on the left is because it deals in half measures. It is not enough to simply increase visibility if the cost of doing so keeps the current paperwork burden largely in place, or to merely hold the poor and the middle class harmless, especially given the transition costs for doing comprehensive tax reform.
In Europe, which has a strong VAT and income tax system, families with children receive a sizeable subsidy that goes farther than offsetting tax liability for the VAT – as Bruce Bartlett reports in his New York Times Economix column of June 7, 2011, it offsets nearly all tax liability for the average family and essentially gives everyone a middle class life style. (http://economix.blogs.nytimes.com/2011/06/07/health-care-costs-and-the-tax-burden/). That level of subsidy is what it would take to make the effort of enacting a VAT worthwhile. It must, in effect, raise all families out of poverty or it is simply changing the tax system for the sake of change.
I propose a three pronged system for doing this:
• a VAT that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.
The parameters of a VAT are well known, so I will not repeat them here, as are the OASI payroll tax. I will primarily focus on the NBRT, which is less discussed. The NBRT will focus just like a VAT as a tax on all wages and profits, but unlike a VAT, it would be receipt invisible because how much is actually paid depends upon the credits available to the business. The NBRT would replace payroll taxes for Hospital Insurance, Disability Insurance, Survivors Insurance for spouses under 60, Unemployment Insurance, the Business Income Taxes, on corporations, business income taxes now collected under the personal income tax system, as well as most of the revenue collected under the personal income and inheritance taxes, less the amount collected under a VAT. The health insurance exclusion now included in the Business Income Tax and other subsidies under the Affordable Care Act. Most importantly, it would fund an expanded and refundable Child Tax Credit.
The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.
The expansion of the child tax credit to $500 per child per month is paid for by ending the tax exemption for children, the home mortgage interest deduction and the property tax deduction. This is more attractive to the housing industry than the alternative proposal, which is to end or limit the credit and use the proceeds to help bring the budget into primary balance. Shifting the benefit in this way holds the housing industry harmless, since studies show that the most expensive cost of adding a child is the need for additional housing.
Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.
The last question is whether the income and inheritance surtax can be incorporated into the NBRT, as proposed by Lawrence B. Lindsey. While it is feasible, I reject it because it will either lead some to be overtaxed while others are under-taxed or will require a personal financial reporting system that many employees and investors would regard as intrusive if it came at the hands of employers or investments. While there is resistance to letting the government know all of one’s financial details, I am quite certain letting your employer into all your business would be considered worse. What bartender wants to work for a lower wage (if he or she could even find a job) if part of being hired was the requirement to disclose family trust fund income to management, who would have to pay taxes on behalf of that employee at a higher rate? Better to leave the personal income tax in place so that only the government knows who is really rich.
One key advantage a VAT has is that it makes everyone conscious of being taxed. This is especially important given conservative objections to the fact that 51% of families pay no income tax at all. While most pay payroll taxes, at the lower end, the Earned Income Tax Credit essentially cancels out that payment, provided the primary wage earner actually files taxes. Instituting a VAT makes everyone conscious of paying taxes, especially if the tax is made visible on the receipt, as if it were a retail sales tax, like the proposed Fair Tax.
The key objection to both the Fair Tax and a VAT is that it forces the poor to pay taxes, to which advocates for both plans counter with a proposed “prebate” to give a direct subsidy to some or all families an amount equal to what they would pay in taxes at a subsistence level. Of course, making households file for a prebate may defeat another purpose of the VAT – the desire to spare families, especially poor, less literate, families from having to file any kind of disclosure – which often requires that they pay a preparer to help them – with preparers often offering refund anticipation loans at rates that more savvy borrowers would not pay. Indeed, if a prebate were enacted, would prebate anticipation loans be far behind?
One reason many are for a VAT is the hope that it will increase revenues. This can be done much easier by literally doing nothing and letting the Clinton era tax rates return for everyone on January 1, 2013. Most forecasters predict that would bring the budget into primary balance (where we merely borrow to cover the interest but not operations). I suspect that, because forecasters tend to estimate conservatively, going back to Clinton era rates may even balance the budget and allow the country to begin paying down the debt (and repatriating American jobs, since without a debt to buy, our trading partners would have to start buying American products).
Another major benefit of a VAT is that it functions as a tariff because it is fully collected on imports and zero-rated for exports. It is an implicit transfer to American workers, who could use a transfer right now – especially because many of our trading partners have a VAT which functions in this way, making our income tax based system a hidden tax which makes our products uncompetitive. Labor should be for this tax in a big way, but so far has not been – probably because organized labor has been converted to a movement for workers into an arm of the Democratic Party establishment. This brings us back to the question of why the left has not embraced it?
The reason tax reform with a VAT has not caught fire on the left is because it deals in half measures. It is not enough to simply increase visibility if the cost of doing so keeps the current paperwork burden largely in place, or to merely hold the poor and the middle class harmless, especially given the transition costs for doing comprehensive tax reform.
In Europe, which has a strong VAT and income tax system, families with children receive a sizeable subsidy that goes farther than offsetting tax liability for the VAT – as Bruce Bartlett reports in his New York Times Economix column of June 7, 2011, it offsets nearly all tax liability for the average family and essentially gives everyone a middle class life style. (http://economix.blogs.nytimes.com/2011/06/07/health-care-costs-and-the-tax-burden/). That level of subsidy is what it would take to make the effort of enacting a VAT worthwhile. It must, in effect, raise all families out of poverty or it is simply changing the tax system for the sake of change.
I propose a three pronged system for doing this:
• a VAT that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.
The parameters of a VAT are well known, so I will not repeat them here, as are the OASI payroll tax. I will primarily focus on the NBRT, which is less discussed. The NBRT will focus just like a VAT as a tax on all wages and profits, but unlike a VAT, it would be receipt invisible because how much is actually paid depends upon the credits available to the business. The NBRT would replace payroll taxes for Hospital Insurance, Disability Insurance, Survivors Insurance for spouses under 60, Unemployment Insurance, the Business Income Taxes, on corporations, business income taxes now collected under the personal income tax system, as well as most of the revenue collected under the personal income and inheritance taxes, less the amount collected under a VAT. The health insurance exclusion now included in the Business Income Tax and other subsidies under the Affordable Care Act. Most importantly, it would fund an expanded and refundable Child Tax Credit.
The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.
The expansion of the child tax credit to $500 per child per month is paid for by ending the tax exemption for children, the home mortgage interest deduction and the property tax deduction. This is more attractive to the housing industry than the alternative proposal, which is to end or limit the credit and use the proceeds to help bring the budget into primary balance. Shifting the benefit in this way holds the housing industry harmless, since studies show that the most expensive cost of adding a child is the need for additional housing.
Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.
The last question is whether the income and inheritance surtax can be incorporated into the NBRT, as proposed by Lawrence B. Lindsey. While it is feasible, I reject it because it will either lead some to be overtaxed while others are under-taxed or will require a personal financial reporting system that many employees and investors would regard as intrusive if it came at the hands of employers or investments. While there is resistance to letting the government know all of one’s financial details, I am quite certain letting your employer into all your business would be considered worse. What bartender wants to work for a lower wage (if he or she could even find a job) if part of being hired was the requirement to disclose family trust fund income to management, who would have to pay taxes on behalf of that employee at a higher rate? Better to leave the personal income tax in place so that only the government knows who is really rich.
posted by Michael Bindner at 10:54 PM
0 Comments:
Post a Comment
<< Home