Paul L. Caron

Monday, April 5, 2010

WSJ: Small Bras and the VAT

Wall Street Journal op-ed, Small Bras and the Value-Added Tax, by Irwin Stelzer (Hudson Institute):

Taxing consumption sounds easy. Wait until government starts to carve out the political exceptions.

o we are to have a European-style value-added tax (VAT). That's the emerging consensus in Washington as people come to recognize the reality of the deep financial hole into which the Obama administration has dug us.

The CBO reckons we will be Greece by the end of the decade, owing the world—mostly the Chinese—a sum equal to 90% of our gross domestic product. The rating agencies are warning that our AAA rating is at risk. The bond vigilantes are saddling up.

No surprise the administration's first step has been to soak the rich, using the health bill to increase taxes on capital gains, interest and dividends by high-income earners, to be followed by an increase in their marginal income tax rates to 39.6% from 35% (and their long-term capital gains rate to 20% from 15%) by year's end.

Every percentage point in tax would bring in $100 billion per year. European-level rates of 20% would net the U.S. Treasury $2 trillion, more than enough to cover the deficit—other things being equal, which they probably won't be, since higher, tax-inclusive prices will dampen spending and some products will be exempt.

The tax sounds simple, but don't be fooled. Because both upper- and lower-income families pay the tax at an equal rate, the VAT is considered regressive; that is, it hits the poor harder than the better-off. So it is the practice in countries such as Britain to exempt food, which lower-income families spend a greater proportion of their income on. The technical term is "zero rating," meaning that exempt items are taxed at a "zero rate."

However, wait until the folks at the IRS get their hands on the regulations for the application of the new tax. They will undoubtedly turn to their more experienced British counterparts for guidance. ...

Clothing also presents a problem for the British tax man. Two problems, actually.

First, what is clothing? Well, sailors' lifejackets are clothing because they "have the form and function of clothing," but "buoyancy aids" are not. Second, since children's clothing is zero-rated, what fits into that category?

Bras up to and including size 34B; body stockings that measure no more than 27½ inches shoulder to crotch; babies' shawls but not "mother-and-baby shawls intended to wrap around both mother and child." There's more, lots more, but you get the idea.

[L]liberals love VAT: It is easy to raise the rate, a bit at a time, unnoticed by the voters—just as a frog put into a pot of boiling water will immediately try to jump out, but placed in cold water that is only gradually heated it may not notice until it's too late.

So there is a VAT in our future, and like other taxes, it will have unfortunate consequences. Since there is world-wide experience with this tax, none of those consequences can be deemed "unintended"—they are already out there for all to see.

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This was one of the silliest articles I have read in a long time. Starting at the top with just the highlights:

The author implies Obama is the reason the US will owe China vast sums, whereas anyone who has done 5 minutes of research into our national debt knows that it has been a political talking point for decades with the recent large increases owing to the past 9 years of war.

Secondly, I like lower taxes, 0% would be nice, but everyone knows that if your costs go up, your income must go up to match... tax and spend or don't spend at all. I must ask then, why does the author seem aghast at the tax increase on cap gains and high income ("soak the rich"). Remember, these "new" rates are just about the same as the rates we had in the 90's when the deficit was being reduced. Pick a side Mr. Stelzer, is the deficit out of control or are we raising revenue too quickly?

Then in a complete 180, the author criticizes a theoretical VAT because it would be regressive, i.e. not "soak the rich." Why is soaking the rich with <5% increases a bad thing in the beginning of the article, but not soaking them a bad thing at the end of the article?

Then to flip back again, the author concludes by saying that liberals love VAT, but didn't he just point out that it was regressive? and wasn't that a bad thing?

I could go on...

Posted by: A.Saunders | Apr 6, 2010 7:00:32 PM

I liked the VAT better when it was called "FairTax."

Posted by: Frank Gerratana | Apr 5, 2010 7:23:51 PM