The Tax That France Built

Wall St. Journal ^ | Mar 4, 2005 | editorial

[The Raven]

House Ways and Means Chairman Bill Thomas is ...[snip].. floating the idea of mating President Bush's Social Security proposals with a tax reform featuring a European-style value-added tax --

- snip -

The VAT, for the uninitiated, is essentially a hidden sales tax that originated in France and has become a favorite of legislators around the world because of its ability to stealthily raise large sums of revenue with a minimum of public outcry.

- snip -

VAT proponents may reply that European revenues from general consumption taxes -- which nearly doubled to 7.5% of GDP in 2002 from 4.1% in 1965 -- don't account for the entire rise in government share of GDP. But while true, this is also a reason to doubt the claim by Chairman Thomas that the more efficient VAT could somehow fully replace more economically destructive forms of taxation like the corporate income tax. In most of the world where VATs exist, and certainly in Europe, VATs are levied in addition to, not in place of, other taxes.

VATs may have the perverse effect of actually creating political pressure for other tax increases. Why? Because they place a higher relative burden on lower-income earners who spend a higher percentage of their income on consumption. So VATs have often resulted in calls for income tax rate increases to preserve the overall progressivity of the tax code.

The efficiency of the VAT is exaggerated in any case. It may be less economically distorting than some other kinds of taxes. But since it applies to virtually every transaction in the economy, it requires an army of inspectors to administer. Evasion is easy, especially in service industries. So governments keep jacking up the rate, driving still more economic activity underground in another vicious circle.

- snip -

[The Raven]

[Shane]

You have to wonder if our elected officials, Like Bill Thomas, ever bother to perform a basic economic analysis on the impact that their proposals would have on the economy. Economic reality must supersede political gain, but many in Congress simply don't understand that.

[gridlock]

Can that graph possibly be right? The total tax revenue for the Euro 15 is hovering around 40% of GDP? They are doomed! Even a slight recession will push that number well over 50%, and then it's "GAME OVER" time.

I wonder if the US will come to the rescue to save them from themselves yet again...

[Malesherbes]

Visitors to Britain notice that everything is half as big and costs twice as much. The second part is due to socialism and the VAT. Same in Germany with their Wehrwertsteuer - and throughout Europe, not just France.

As for Bill Thomas, I rather like the guy, mainly because the Dims hate him. I'm opposed to a VAT, and I suspect that his position may be a little more complicated than the article suggests.

[gridlock]

Look at this graph. Look at that long straight upward line showing the total US taxes as percentage of GDP from 1992-2001, followed by a sharp turn back to the historical (yet still too high) levels in the last three years.

The next time anybody says there is not a dime's worth of difference between the Republicans and the Democrats, remember this graph. Clinton was trying (and succeeding) to transform the United States in to a European-style welfare state. George W. Bush has turned back the tide. It will be very interesting to see what this graph looks like in 2009. To see whether the sharply downward line crosses 25%, or if it levels off at the historical comfort level.

[The Raven]

Those tick marks are three years - so it starts in 1989 or there abouts

[Muleteam1]

>>VATs may have the perverse effect of actually creating political pressure for other tax increases. Why? Because they place a higher relative burden on lower-income earners who spend a higher percentage of their income on consumption.<<

This sounds much like legalized gambling which is a "quick fix" for the politicians until they can get their retirement. Gee, and that sounds like FDR's socialist security pyramid scheme.

Muleteam1

[untrained skeptic]

This article doesn't even argue that VAT is bad. It argues that VAT combined with other high taxes is bad.

We need to scrap the income tax system we have now and move to either a flat tax or a consumption tax.

We need to get rid of all the overhead on our economy that is required to comply with the current tax code.

We need to stop all the political favortism that goes into all the tax loopholes for special interest groups.

[Muleteam1]

>>We need to stop all the political favortism that goes into all the tax loopholes for special interest groups.<<

A consumption tax makes the best sense to this old taxpayer but I like the simplicity of a flat tax. However, I am not holding my breath until political favoritism and loopholes go away. If a new tax system is ever devised, I do not expect the demise of companies like H&R Block and Intuit Software because the complexity in filing will still be there.

Muleteam1

[ImphClinton]

Except. The Rich do not consume much. Thus the poor and middle class pay all the taxes.

To make such a tax work the very rich would still need to pay an income tax. There would need to be a payment made to every person each month to make up for the tax otherwise the poor and lower middle class would see a drastic drop in their purchasing power. The tax should not be applied to Homes but be applied to building materials. All these things make for a difficult bill.

Do we really want a government payment for every individual. But how to avoid it? I suppose you could raise the minimum wage to $10 / hour and index it to inflation or wages in general. That way the working poor could afford the tax and their employer would have to pay the cost as it should be.

The poor could also be given a tax exempt card tied to their facial recognition with a predetermined amount of tax exemption per month. But that subsidizes employers too cheep to pay a working wage.

[expatpat]

Here's the future with a national sales tax.

[Principled]

That's where we'll be headed with no reform IMO. HR 25 outlaws the taxation of income - personal or business. The accompanying amendment would repeal the 16th and go further to make the taxation of income unconstitututional.

The idea is to get reform that is good before we get politician designed reform....

[untrained skeptic]

The rich consume an awful lot, and the things they consume tend to be very expensive so a percentage tax will bring in a lot of revenue off of the rich.

Those wealthy enough to have vast sums of money invested currently are able to put that money into investments that are taxed at a very low rate. Or they do what Kerry does and put their money in tax free municipal bonds.

A lot is also invested in stocks, which is an investment in our economy and helps our economy grow. That will produce more sales and more taxes.

Businesses pay wages based on what people are willing to work for. If wage earners are being taxed highly, they will demand higher wages, which will take profits away from businesses. That means a slowing of the economy, it also means that the wealthy that invest in those companies get a smaller return on their investments, which means they shifting the tax burden on the working class really doesn't shift the burden away from the wealthy unless they are investing in things like municipal bonds.

Who would a consumption tax hit harder? Likely it would hit those who aren't working. It could make the effective cost of living go up for those on welfare.

It could also harm those on fixed incomes, such as Social Security, because their incomes don't adjust well to changes in the market.

There's definately issues to be concerned with in how a new tax system is implemented, but I think those issues can be worked out.

We need to move to a system where we don't have a huge portion of the population that pays little to no taxes, yet get to vote for people who would impose more taxes on others to give them more benefits.

[groanup]

VAT ping.

Not a good endorsement of your position.

[groanup]

To make such a tax work the very rich would still need to pay an income tax.

The very rich don't pay an income tax. They have their money invested in municipal bonds which pay tax free interest.

There would need to be a payment made to every person each month to make up for the tax otherwise the poor and lower middle class would see a drastic drop in their purchasing power

Such is the law proposed under HR 25. See my tag line.

[Protagoras]

If the Republican Party enacts a new tax on the American people they will be out of power for at least a generation.

That's why they call them the "stupid party".

[untenured]

We need to scrap the income tax system we have now and move to either a flat tax or a consumption tax.

"Scrap" had better mean repealing the 16h amendment and, to be safe, enacting an amendment specifically prohibiting income taxation. Otherwise we are going to find ourselves with value-added and income taxation.

[Your Nightmare]

Not a good endorsement of your position.

This article is very ignorant of what a VAT is. I expected more economic knowledge from the WSJ.

[untrained skeptic]

""Scrap" had better mean repealing the 16h amendment and, to be safe, enacting an amendment specifically prohibiting income taxation. Otherwise we are going to find ourselves with value-added and income taxation."

You bring up an exellent point.

[ImphClinton]

The rich spend a very small amount of their income each year. That may be a lot of money but not a very large percentage of income. The poor and middle class spend most of their income. Thus this tax will shift even more of the tax burden to the poor.

Municipal Bonds pay far less than stocks it could stay free of income tax for the rich. Stock sales and Bond sales should be subject to either the sales tax or an income tax. This should apply to estates as well over $5,000,000. The tax should only be for the gain - inflation.

Your assumption on wages is only good for the top 20 % of wage earners and that is going to 10% rather fast. The rest of us either accept a low wage or don't work or it is outsourced. Thus 80% of the population will need some kind of protection if a tax like this takes effect.

I really hate welfare. I feel it is none of the Government's business to pay money to people unless they are employees of the Government. The Government was right to end slavery. Well the minimum wage coupled with welfare and food stamps is nearly as bad. It takes dignity away from people and traps them into miserable living conditions. The only solution for this is a drastically increased minimum wage. Had the minimum wage kept up with general wage growth since 1969 it would now be around $12.50 / hour and this is what it should be raised to. This would do away with welfare and food stamps and the very poor. It would shift the burden to where it should belong Employers.

Sure prices would rise but that will happen anyway and besides more people could afford the higher prices. Few jobs can still be outsourced so that is not really a problem. Companies could be exempt from the tax if necessary for their survival anyway. But that should only be allowed in Bankruptcy Court.