VAT tax. the Green New Deal, UBI and You

Medicare for All, free college, a national job guarantee, paid family and medical leave, and the Green New Deal, are conservatively estimated to cost more than +/-$50t over 10 years.

To fund this monstrosity, new tax schema have been proposed:

A wealth tax, a 70% top tax rate and a financial transactions tax. All of this pain would only raise +/- $300b a year. That is an insurmountable hurdle of red.

If Americans want European-style government services, they should be ready for European-style broad-based taxes like the value-added tax (VAT), high payroll taxes, and relatively flat income taxes, which fall primarily on taxpayers in the middle of the income distribution.

And, they should be ready for painful reforms to their social programs, less state-paid health insurance, more stringent eligibility requirements and so on, all the while new tax body blows are landing on them

Taxes, EU vs U.S.

In Europe, individual income taxes, payroll taxes, and consumption tax called VATs comprise the largest portion of most countries’ tax revenue. Wage taxes make up the single largest share of tax revenue for every EU-OECD country (members of the European Union as well as of the Organization for Economic Co-operation and Development)

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The marginal tax wedge represents how much tax a worker must pay on the next dollar of income earned. If a worker is considering driving for Uber on the weekends for a little additional income, the marginal tax wedge shows how much of that additional income the worker would get to keep.

Looking just at income taxes (excluding payroll taxes), many EU countries apply their top marginal income tax rates to average or close to average income earners. In 11 EU countries, top combined federal and sub-federal income tax rates apply to people with less than two times the average country wage. vat taxes 2

In addition to higher wage tax rates than the U.S., EU countries also have significantly higher consumption tax rates.

  • The average EU rate was 21.8% in 2016 vs
  • The average state and local sales tax in the U.S of 6.4% in the same year.

VAT TAX 

Like the guillotine, the VAT was first invented and implemented in France. VAT is a different taxing system, an additional burden, tacked unto every purchase the government decides is worthy of your punishment.If they deem books, then every book has a new cost.

VATs are collected at each stage of “production”, whereas retail sales taxes are collected only at the point of final sale. (There are different systems and complexities for calculating and collecting VAT so I’m keeping this a 20,000ft view. The ground level view is excruciatingly painful regardless)

It’s a tax conveyor belt, every time a firm buy inputs it has an incentive to make sure that the previous firm paid the VAT that was due at that earlier stage of production. You are your brothers tax keeper

In the U.S

Most of the consumption tax revenue is collected by state governments through a sales tax at the point of sale. We are the only country (thankfully) in the Organization for Economic Co-operation and Development (OECD) that does not use a VAT to raise a majority of consumption tax revenue. .

For tax regimes it’s the best mousetrap they have to raise large amounts of revenue quickly and surreptitiously, because they apply it to a significant proportion of economic activity. If they want to collect more money, they won’t have to wait a day. Its a switch they flip.

In 1967 the U.S. and Europe each collected about $0.27 in taxes for every $1.00 produced. The U.S. is still collecting that much, but Europe’s tax burden has shot up from 27% to over 40%

Since the start of the financial crisis in 2008, worldwide VAT rates have risen rapidly, with the standard rate hitting a high of 27% in Hungary

Yang, who announced his candidacy in late 2017, is proposing a 10% VAT targeting companies like Amazon and Google.”

The problem is that this law was created to target big companies like Amazon who have highly paid accountants and tax advisers. Google’ish companies use extraordinary mechanisms, some legal, some not, some privileged by the State, to avoid their share of taxes. (twitter’ized explainer, here )

Every non Amazon’ian business firm will be burdened by the cost of innumerable record keeping and collection for the government. And that begets new problems, an inexorable push of the business system toward “vertical mergers” and the reduction of competition.

Employment You ever wonder why EU has such horrible UNemployment?

One bigly reason is the generational effect of VAT that lowers demand for labor. Those companies fired employees, which then have to get soaked up by Government as the employer of last resort and that means raising the VAT ever higher. Bad policy is the curse that keeps on cursing

Machinery Any firm that buys machinery, can deduct the embodied VAT from its own tax liability; but if it hires workers, it can make no such deduction. The result will be to spur over-mechanization and more firing of laborers.

VAT is regressive

it is a proportional tax on consumption, and because lower-income households tend to spend a larger proportion of their income than higher-income households, the VAT imposes higher burdens, as a share of current income, on lower-income households

Additionally, increasing the indirect taxes makes consumption more and more costly and therefore has an inflationary effect, which makes the poor to suffer the most.

And there are mechanisms, some legal, some not, that skirt the system such as an incentive to try to hide consumption. If the political solution to this is to make people file for VAT refunds whereby everyone has an incentive to declare everything, we are then back to hiring good accountants and lawyers to lower their tax hit, a privilege of higher incomes

Correcting to make VAT progressive

This creates even more policies that may offset the impact of the VAT on low-income households thru either either refundable income tax credits or outright payments.

For example, if the VAT rate were 10%, a $3k demogrant would equal VAT paid on the first $30k of a household’s consumption. Households that spent exactly $30k on consumption would pay no net tax. Those that spent less on consumption would receive a net subsidy. Those that spent more on consumption would, on net, pay a 10% VAT only on their purchases above $30k.

This will of course create new distortions as many people will be working poor, but above the threshold for subsidies

Flat tax is proposed as a SUBSTITUTE for our current tax system, while as the VAT is often suggested as an ADDITION to it.

If we get rid of all other taxes, and make the VAT highly progressive, and the government carves out things like health care (20% of GDP), you could see rates of 70% or even 100%(100% is possible with a VAT. A 100% VAT generates 50% of GDP as revenue)

Universal Basic Income was a horrible idea when Richard Nixon proposed it. Now, with Andrew Yang at that helm and an army of hipsterdom, prepare for the onslaught of economic fallacies that will be employed to justify their enactment.

In the end

There is no point in talking about tax rates in isolation. If you want lower rates, you need less spending. If we have high spending, we will have high rates.

The End?

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