Friday, June 18, 2010

About That Value Added Tax (VAT) Idea....

In response to the right-wing push for a VAT, I commented,
Taxes tend to work like leaky faucets. It's really easy to turn them up, but really hard to turn them off. The uber-wealthy thought that they had lobbied their way out of estate taxes, but it turns out not to be so easy. Although exceptions occur, particularly where the wealthy and powerful are concerned, once a tax is implemented its natural tendency is to go up.
I argued that the big picture goal by right-wing advocates involves tax cuts for corporations and the rich, with the difference made up for by a regressive tax that hits the poor and targets the middle class. So let's turn to news from across the pond:
The Schroder forecast was this: whichever party got into power in May, Labour or Tory, would jack up VAT from 17.5% to 19%. Which may just sound like a bunch of numbers (heavens, it is a bunch of numbers) – but economists don't normally put their necks on the block like this, for fear of getting them chopped off.
Does that give you a sense of how high a VAT tax can go, once the money stops flowing? Once implemented, what do you think the odds are that the government will ever back away from a VAT as an ongoing revenue stream?

The author of the piece admits that a VAT "cannot be called progressive" (mainly because it's unambiguously regressive), but defends the tax on the basis that "it is not the most regressive tax I can think of" - identifying VAT exemptions for food and children's clothing as making it less regressive than it might otherwise be, but without actually identifying a tax that is more regressive. The author then argues that because the rich have a lot more money to spend than the poor, "looked at by spending, a rise hurts the richest most". All those poor little rich boys....

It would be interesting, by the author's thesis, to crunch the numbers a different way - would the poor be better off if the exemptions were eliminated and the VAT reached food and children's clothes? It would make the tax, on its face, more regressive - but would it increase the tax burden on the poor to the same degree as the predicted increase "to as much as 20%"? If not, given the author's argument that the rich buy more stuff - certainly, on the whole, more expensive children's clothing and food - he might even be able to argue that "looked at by spending" the elimination of those exemptions is progressive.

Yes, with a VAT we can not only look forward to higher taxes, and VAT increases as a source of revenue that's perhaps the least offensive to the nation's wealthy interests, we can look forward to analysts turning cartwheels to explain how later increases are fair because the rich have so much more money to spend than the poor.

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