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  • Slicing the Bagel Reveals VAT Flaws

    Washington think tanks and commentators continue to spin out impressive reams attempting to explain the necessity and virtues of adding a value-added tax (VAT) on top of all the taxes the federal government already collects. The fiscal policy problem is real enough—thanks to the Obama spending surge, federal budget deficits are unsustainable and a course correction is inevitable. What most VAT-istas refuse to acknowledge is that the problem is due to new spending, not a sudden collapse in the ability of the federal tax system to raise revenues. Even so, it’s not always easy to explain why the VAT is the wrong answer. In this the city of New York has rendered notable if unintended assistance.

    Under the tax laws extant in the Big Apple, if a bagel is sold whole, then it is, well, a bagel. But if the bagel is sliced before it is sold, then it falls under the category of “processed foods.” And processed foods are subject to a higher tax—a nine cent higher tax, to be specific. Since New York City has already spent its way to fiscal oblivion while driving taxpayers out of the city with punitive taxes, this nine cents of tax is suddenly critical to the city’s financial survival. And so the New York Department of Taxation and Finance wants its nine extra cents, hold the lox.

    This might be a funny story of the absurd, but it’s not a rare story to anyone who’s dealt with European VATs. These VATs, in effect national retail sales taxes, have been around for decades. From the beginning and over the years all manner of special rates and exemptions have been added to massage the costs and purchases of the nation’s consumers. Want a biscuit with your soup? The tax is one amount. Buy the biscuit wrapped separately and you pay a different amount. All times millions of products times millions of transactions daily.

    It’s not that the income tax is pure. On the contrary, it’s a mess. But those who are pushing a pure VAT are living in a fantasy land if they think the United States Congress is going to enact a nice, clean VAT, free of special tinkerings, rates, and exemptions for such things as food, medicine, education, shelter, telephone service, electricity, heating oil, and on and on. The VAT would offer a whole new realm for Congress to play with other people’s money—and a whole new opportunity for lobbyists to ply Washington to manipulate those rules. New York’s silly bagel rule is just a slice of what would be to come.

    Posted in Economics [slideshow_deploy]

    7 Responses to Slicing the Bagel Reveals VAT Flaws

    1. Billie says:

      This country use to have leadership that respected basic necessities of survival, to be tax exempt! LOOK AT THESE PIGS! PUNISHING THE SURVIVAL OF THE LIVING!

    2. Pingback: Virginia Right! News Hound for 8/26/2010 | Virginia Right!

    3. Steve Abramson, Sout says:

      VAT would be a stimulus, if a revenue-neutral substitute for the Corporate Income Tax, but you are right that it must be a broad tax without exceptions because the first exception will be the "camels nose under the tent."

      Eliminate the CIT with a no-exceptions VAT, and gone would be the lobbyists' reason-for-being in seeking loopholes for corporate clients. Gone would be the double-taxation of dividends. Gone would be the incentive for multi-nationals to use transfer pricing to park profits in lower-taxed countries. Gone would be the disadvantage to U.S. products in world trade, as imports are taxed equally with domestic production.

    4. Richard, New Orleans says:

      While a pure VAT in place of the current tax morass has some appeal, I suspect the show stopper will be exempting corporations. While there are some valid double taxation arguments for it, it would likely lead to massive cheating as "everyone" would incorporate or push as many personal expenses on to their corporate expense reports as possible.

      The examples of the accounting for the VAT paid and refunded published elsewhere make it sound like a Faustian bargain at best.

      How about an actual federal sales taxes in place of the income tax? Would that not be a cleaner and fair way to go?

    5. Bill, Kansas City, M says:

      We need a VAT only if the income tax is eliminated. Those crooks in Washington get enough of my money to play with, and they don't do a very good job with what I give them.

    6. Drew Page, IL says:

      There are a number of reasons that our tax-and-spend politicians would love the VAT. First and foremost, it's invisable. This tax isn't identified on receipts like sales tax is. When the price of something goes up, the government will tell you it the fault of the retailer, or wholesaler, or distributor, or manufacturer, or all of them. they wouldn't kid us about something like that.

      Similarly, when the government increases the VAT tax percentage you won't be able to see that either. And once it's in, it's in forever.

      Think how much more money our politicians will have to spend and how much less you will have. I'm thinking right now about the lyrics of an old song, Roll Over Beethoven, "as long as you got a dime, the music don't ever stop."

    7. Robert, Salt Lake Ci says:

      Steve's comment needs a reply. I favor a VAT over ALL income taxes, but a VAT instead of only the Corporate Income Tax (my interpretation of CIT) would be a mistake because it would allow total taxation to increase to even more excessive levels than today, and would still facilitate income redistribution . If all income taxes were replaced by a VAT, it would increase the cost of imports while lowering the cost of exports which would improve the balance of payments and slow the transfer of jobs overseas. It would also make income distribution more difficult because people could reduce taxes simply by reducing consumption, and all people would participate in tax payment instead of just the wealthiest 50% as is now the case.

      I also agree that a "clean" VAT would be best, but I would take a VAT with exceptions over the present income tax. I doubt it is possible to pass a VAT more convoluted and confusing than the present income tax, no matter how many exceptions the VAT has.

      Bottom line: Any VAT is better than the present mess, but only if all income taxes are abolished. Otherwise no VAT is acceptable.

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