Paul L. Caron

Friday, December 17, 2010

Campbell: Why Progressives Should Love a VAT

Democracy Democracy: A Journal of Ideas, The 10 Percent Solution: How Progressives Can Stop Worrying and Love a Value-Added Tax, by Andrea Louise Campbell (MIT, Department of Political Science):

The nation’s fiscal situation is bleak. Although current deficits have garnered the most attention, of greater concern is the long-term mismatch between projected revenues and spending–gaps too great to plug with borrowing for fear of triggering a debt crisis. We all agree on the need to restore fiscal balance. But too much of the focus has been on the spending side, from Tea Partiers who rage about the size of government but have difficulty parting with their Social Security and Medicare checks, to more sober outlets like the National Academy of Sciences, whose Choosing the Nation’s Fiscal Future report earlier this year also took an anti-spending tone. The fact is that we need to take a look at the tax side of the ledger as well.

The federal government desperately needs new revenue. To raise revenues, many progressives point to the corporate and individual income tax, urging the closing of loopholes on the corporate side and the raising of top marginal rates on the individual side. I would like nothing better myself. But the prospects for substantial new revenue from these sources are dim. Thirty years of successful conservative attacks have made the idea of raising the individual income tax politically toxic–since, after all, it’s imposed most heavily on the most vocal and organized segment of society. Meanwhile, global competition constrains increases in the corporate income tax.

Instead, we need a new source of revenue, one that can finance a robust public sector for the twenty-first century. The place to get it is a carefully designed value-added tax (VAT). Much discussed in academic circles for decades, a VAT is now on the Washington agenda, the subject of many recent Beltway conferences. Most progressives reflexively oppose a VAT as regressive, and to be sure, it can be that. But properly structured, a VAT’s regressivity can be mitigated. If a VAT is truly under consideration, it is crucial for progressives to engage the debate and bring to the table a VAT designed to achieve not just fiscal balance but progressive goals as well. The plan outlined here would capitalize on the VAT’s attractive features–chiefly its ability to raise a significant amount of revenue with relative political and economic ease–while carefully blunting its regressivity. Linked to a set of strong protections for ordinary citizens, a VAT can be a key component of a progressive package benefiting lower- and middle-income Americans.

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A Swedish friend wants to do one thing when she comes to the US - shop. It costs her less to buy here and ship to Sweden than it does to buy in Sweden. Why do we want to become this?? The only national consumption tax that makes any sense is the FAIR tax, which would replace income taxes.

Posted by: MochaLite | Dec 18, 2010 5:23:07 PM

Umm, aren't most progressives already sold on a VAT?

Posted by: GU | Dec 17, 2010 1:25:31 PM

I have dealt a lot with international clients who face VAT compliance overseas. It is not so simple in operation as many of its proponents claim. See an 10/13/2010 VAT compliance article (unfortunately on the Tax Analysts paid website.)

Also, VAT fraud has been estimated to be a significant problem. VAT exemptions for certain items cause additional problems, i.e., is a 51% fruit juice drink a food or not.

VAT is also essentially invisible tax - European friends complain that when they buy a $20 item in NYC, they pay more than $20. In the UK, they pay 17.5% more but don't know it because the VAT is baked in the price.

The author proposes charging higher VAT rates to high earners or the purchasers of "Luxury" items. Will we all have a swipeable card that tells the seller if we are rich enough to be charged more because we are rich or at least non-poor. Conversely, the author supposes a "poor" card that exempts you from VAT on certain items. And people complain abouta national identity card?

Apparently the author cannot remember the impact of the last luxury tax that pushed shipbuilders, airplane manufacturers, etc. out of business before it was repealed.

I actually have no problem debating whether a VAT or other consumption tax makes sense. But debating includes discussion of the negatives as well as the positives. Magical thinking that wishes away problems does not help.

Unfortunately, the author wishes to support "progressivity" that seems to involve wealth transfers. The main rationale for a VAT that the author presents is that individuals and corporations are too politically resistant to rasing their income taxes.

Posted by: Ed D | Dec 17, 2010 12:53:43 PM