Wednesday, November 17, 2010

National Sales Taxes, Carts and Horses

Paul Krugman recognizes that a national sales tax or VAT would be a regressive tax, but explains why he's "soft on sales taxes":
Why? Because we know that countries with strong social safety nets generally rely a lot on consumption taxes...
I suspect you'll find that those nations fall into two categories: First, nations that don't have the type of political divisions that would result in state or provincial sales taxes in addition to the national tax, and states that instituted the taxes considerably after they created their strong social safety nets. A national sales tax to support a benefit you have and like is a much easier sell than the idea that you'll get a better social safety net if you approve the tax in advance - it's like playing a substantial fee to play "Let's Make a Deal", but with no guarantee that there's a prize behind any of the doors.
More generally, it does seem that countries with strong welfare states have less progressive tax systems than those with weak safety nets; see this, from the Luxembourg Income Study (pdf).
This actually makes sense, in that you're paying for your health insurance (and paid family leave, and other similar benefits) through a tax instead of through a contribution that for most workers, although not a tax, is deducted from your paycheck in the same manner as a tax. Frankly, that's the way it should be - the goal here should be to create good public policy leading to better health outcomes, not to redistribute wealth or create a new freebie that in fact inflates the budget. In terms of whether the other nations' tax regimes are truly more regressive, it would be interesting to see how the numbers looked if you ran the numbers treating employee contributions to their health insurance premiums as a tax.

Also, we can have a more regressive tax system - what Republicans euphemistically call a "flatter, fairer income tax" - without implementing a national sales tax.

No comments:

Post a Comment