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Wednesday, May 29, 2013

Johnson: We Don't Need No Stinkin' VAT

Tax Analysts Calvin H. Johnson (Texas), We Don't Need No Stinkin' VAT, 139 Tax Notes 527 (Apr. 29, 2013):

Johnson argues that a VAT will increase the harm that taxes do by shifting the tax burden from high-income earners to low-income earners and will require a whole new and complicated administrative apparatus in Washington and every business. A cash flow consumption tax entails less added administration and allows easier adjustment to progressive tax rates. Johnson argues that the case for any consumption tax is weak, because taxpayers either do not save more when tax on capital goes down or they save less. He says that to increase revenue, Congress must repair the income tax base — for instance, with Shelf Project proposals.

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Comments

Just send our paychecks to the IRS and everyone can live on welfare.
Isn't that the socialist dream?

Posted by: PacRim Jim | May 29, 2013 3:36:55 PM

If you wish to cement the Welfare State in-place, institute a VAT that will allow the Legislative branch to grab all the money they can.
If you wish to reduce the size and scope of government, repeal the 16th Amendment, and restrict the Feds to a Sales (Excise) Tax on activity (goods AND services).

Posted by: askeptic | May 29, 2013 3:39:07 PM

Maybe you've seen my suggestion; I;d like to see your thoughts.
A ONE PAGE PROPOSAL FOR REFORM OF ALL TRANSFER PAYMENTS

The federal government shall collect no taxes other than provided in this act and make no payment except in return for goods or services rendered to it, or as provided for in this act. There shall be no federal tax any business.

All persons shall come together in “households” to report all income and to receive federal benefits. They need not be related, need not reside together, and a household may consist of as few as one person.

Each year congress shall set a "minimum wage" and a "tax rate", which in turn will be applied to the previous year’s reported incomes to determine the budget of the government.

The following income shall be exempt from taxation:

An amount equal to a year's earnings at the minimum wage rate, for adults (age 20-65), decreasing 10% per year to 50% at age 15 or less, and increasing 10% per year to 150% at age 70 or greater.

Payments for necessary health care including pharmaceuticals prescribed by a recognized health care professional, and vision and hearing aids. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.

Educational expense including day care, that portion of state and local taxes identified as spent on education, that portion of parochial school expenses identified as going for non-sectarian education, and private school education at any level.

Income saved into an account from which investments may be made. All withdrawals from this account for the benefit of any member of the household are taxable. Withdrawals that are not for a member’s benefit are exempt from taxation.

The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount. When deductions exceed income, the government shall make payment to the household equal to the tax rate times that deficiency.

Posted by: Tom Beebe | May 29, 2013 3:58:34 PM

I read the paper. The only surprise was that he doesn't like the VAT. Oh well, the paper is essentially a call for more taxes, taxes on everything and taxes on taxes with a tax sauce and covered with crushed taxpayer nuts - just not a VAT.

Typical Ivory Tower fluff from a crank who will just suck some more cream from the government teat if his insane tax ideas get enacted.

Isn't it time for a special surtax on all civil "servants", with double rates for university profs? Sorry TaxProf, maybe we'll write a "waiver" for you.

Posted by: Fred Z | May 29, 2013 4:16:38 PM

Distortion of the tax code (indeed perversion of feedback mechanisms in general) is the hallmark of the progressive agenda.

Follow the shell game — tax and spend / high rates, targeted deductions / borrowing = deferred tax / unfunded mandates / inequitable insurance scams like Social Security and Obamacare.

Then note the fracturing — federal income tax / federal business tax (falls on individuals but makes corporations the collection agents) / state sales tax (falls on individuals but makes retailers the collection agents) / municipal property taxes (seems different from income taxes) / municipal “school” taxes (seems different from property taxes).

The entire agenda is to hide the grotesque total grab.

The sufficient reason to oppose the VAT is that we must not give politicos yet another teat to suckle, yet another walnut shell under which to hide their evil pea.

Posted by: Robert Arvanitis | May 29, 2013 4:56:12 PM

No we don't need no stinking VAT, but we do need to get rid of the IRS, because every line of the tax code is something that a congress slime sold for personal gain. Kind of like the fact that millionaire atheletes, and movie stars can write off some of their income because their looks and bodies don't last, but some poor sucker digging ditches, or humping hay can't.
We need a national retail sales tax. The collection system is in place,and takes 5 minutes at the end of the day to calculate, and send in, the tax payer is anonymous, every citizen is treated equally under the law, and suddenly the congress slime is out of the dispensation selling business.
The retail tax is up front and personal to the citizen who I guarandamn tee is not going to be in favor of tax increases. Oh the humanity! The Government might have to go on a real budget.

Posted by: Sherry | May 29, 2013 5:07:29 PM

Sorry folks. Abolition of the IRS is a fantasy.

Let us suppose that I ran the circus (the US Government). Clearly, getting the financial house of cards in order would be my first order of business. The only way to do that is to shut down the unconstitutional departments (Education, HHS, HUD, CPB) and brutally cut back the rest. Even if we did that The Federal Government would still need to raise enough money to run the Defense Department, the State Department, DoJ, and some of the other miscellany that are within the constitutional scope of its activities.

Those functions would need about 5% of current GDP (4% for defense and 1% for everything else including the pensions of the hundreds of thousands of federal employees we just laid off).

Further, we would need to deal with at least two types of debt overhang. The first is the conventional bonded indebtedness of the federal government (not including the amount owed to Social Security that is a different and bigger problem) including, however, the outstanding bonds and guarantees of Fannie Mae and Freddie Mac, which have been improperly excluded from the Federal Budget and the debt limit. The net is about 100% of GDP.

Amortizing that debt over 30 years would require about 5.1% of GDP. We could be honest and pay it. Or we could expressly default on it, or implicitly default on it by paying it off in hyper-inflated dollars. I believe that Hamilton was right and the best thing to do is to pay our debts in honest currency. But, do not for a second believe the Administration’s bu11$#;+ that the US has never defaulted. FDR paid off the WWI debt in debased non convertible money that represented a 43% haircut for creditors.

So far just these two items would require the Federal Government to collect about 10% of the GDP in tax revenues. That is more than it collects from the individual income tax.

The second debt is is not legally a debt, but there would be millions of pissed-off voters if it were not paid in full, and that is social security and medicare benefits. It is not a debt because the courts have held that Congress can change or remove benefits at any time. None the less, there is no way that current vested benefits could be eliminated without serious upset. Paying them takes about 8% of GDP.

We are therefore at 18% of GDP even after we have eliminated a huge chunk of the monster. We will have to pay taxes to take care of it and stiff taxes at that somebody will have to collect the taxes. That somebody will be as thoroughly detested as the IRS currently is.

Posted by: Walter Sobchak | May 29, 2013 8:17:45 PM

I had to hunt about for what this author meant by a "cash flow consumption tax". When I hit the words "could be run off the form 1040 tax return", my interest ceased.

One of the strengths of the VAT system is that it is generally simpler and can run almost or entirely outside an income tax system, and looking at what the IRS is doing in the US, this seems a feature not without merit. (Before I get lawyers telling me how complex VAT is -- fair enough -- please note that I ran a small business for some years with a VAT system in operation. Given modern software, it was fine, and the single audit we went through in a decade was done in under 15 minutes without requiring a lawyer)

The GST (a VAT) has, for Canada, been excellent. Granted, it replaced an unbelievably bad tax, the Manufacturer's Sales Tax (MST), aka the Mostly Stupid Tax, but it has over the years harmonized [sales] tax treatment across most of Canada, and has a degree of progressivity given fully refundable tax credits.

The author's amusing extremes of Scrooge McDuck and Little Matchstick Girl could reasonably effectively be dealt with by such a progressive system. (Granted, one would need a very basic monitoring of income for those who asserted they fell below the poverty level.)

I do not suggest such a creature for the US, since the US political system is strangely different from the Canadian (socially very liberal but fiscally conservative); my guess is the Democrats would simply use a VAT to massively expand taxes, and many Republicans would supinely go along with them while the Tea Party raged, raged, against the dying of the light.

That said, were it possible to come to a grand bargain of terminating all income taxes, including corporate, a VAT might be interesting. Add in requiring a public signature for working poor, welfare, etc to receive a progressive rebate, and you've got something interesting.

In any event, I boggle that so many tax proposals are made by lawyers rather than engineers or businessmen. No offense. Perhaps it is all that is possible.

Posted by: Holmwood | May 29, 2013 8:17:53 PM

Holmwood, your final paragraph hits the nail on the head:
"In any event, I boggle that so many tax proposals are made by lawyers rather than engineers or businessmen. No offense. Perhaps it is all that is possible."

So true!! This is precisely why we should be giving a national consumption tax (aka the FairTax), implemented as a complete replacement for our arcane income tax Goliath, a good hard look.

Posted by: Robert | May 30, 2013 4:28:33 AM

> . I believe that Hamilton was right and the best thing to do is to pay our debts in honest currency.

Hamilton was wrong.

Govts should default regularly because people who loan money to govt are enabling significant social harm. They should lose that money.

"They" say that taxes are the price that we pay for civilization. That's true of only a small fraction of the taxes that we pay.

Posted by: Andy Freeman | May 31, 2013 9:32:38 AM