Progressives for a value-added tax?

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21 Responses

  1. M.Z. says:

    I am also surprised to see that revenue from payroll taxes has essentially remained stable through the recession, and like Megan, I’m not entirely sure as to why that is (and if anyone wants to hazard a guess, I am all ears).

    The payroll tax (except for teeny, tiny Medicare portion) is capped at around $80,000 in personal income. There is just not a whole lot of variability in income in that demographic. Income and corporate taxes are mostly accrued by the last dollar of income. For example, the $250,000th dollar of income is taxes at 40 cents whereas the $10,000th dollar of income is taxed at 10 cents. Despite protestations of free marketeers otherwise, the ability of a person to control whether they make $250,000 or $300,000 is very little and is sensitive to changes in macro activity. Obviously I’m excluding deductions.Report

  2. North says:

    Certainly the Goods and Services Tax (Canada’s VAT) was a significant tool in their arsenal to get that country’s finances back in order. I’d agree that a VAT would probably be a good idea in the US as well though I am kind of leery of the idea of making it progressive exclusively through distribution. Another point in its’ favor is that economists agree that VAT’s are the least intrusive or distorting tax form in terms of their impact on economic decisions and simplicity in collection.Report

  3. jamie says:

    Don’t you think, besides being “fair” and “raising lots of money,” liberals should also consider the impact that particular taxes will have on economic growth? Or do you think taxation has no effect on economic growth at all?
    I agree that VATs are very economically efficient compared to income taxes; perhaps some sort of compromise in which deductions are removed, the overall income tax rate is drastically lowered, and a VAT is added could raise necessary funds.Report

    • Jamelle in reply to jamie says:

      Let’s not assume that because I didn’t mention something, it therefore must mean that I didn’t consider it. Yes, I agree that liberals should consider the impact that particular taxes have on the economy, and that one point a VAT has in its favor is that it has a relatively small distortionary impact.Report

  4. jamie says:

    Alright, just wanted to get that on record. If you are concerned about the distortionary impact of taxation, then I assume you’d also be in favor of the VAT replacing (to some extent) extremely distortionary taxes like the corporate income tax?Report

    • Jamelle in reply to jamie says:

      Yep. I’m not a huge fan of corporate income taxes. It makes far more sense to me to just raise marginal rates on the highest earners, who are disproportionately members of the corporate governing class. Indeed, and I’ve said this before, we could make it even easier by instituting a continuous marginal tax. Hell, if conservatives could agree to that and a progressive VAT (or as progressive as we can manage), I would be more than happy to back off on reinstating more taxes on capital gains.Report

  5. grandmute says:

    What progressive distribution programs do you have in mind? Centralized health (and old-age) insurance is well-justified by the nature of the market for insurance. But other distribution programs tend to be unnecessarily paternalistic (e.g. food stamps) or stigmatized beyond repair (TANF). Theoretically, we can build a convoluted VAT system that exempts or indirectly refunds spending by lower-income households. Politically, I fear, it would be very easy (maybe not with a Democratic administration) to shift the taxation base to low-income households – but much harder to legislate an expansion of the welfare state that might benefit them.Report

    • Jamelle in reply to grandmute says:

      I’ve been thinking about this a lot, actually. Off the top of my head, a significant expansion in the EITC – or some other form of negative income tax – seems like a good idea. What kind of things do you have in mind?Report

      • grandmute in reply to Jamelle says:

        I’m pretty unimaginative about these things. Aside from the existing array of programs, the only one I could think of was funding for education, both K-12 and tertiary.

        It’s strange that you bring up the EITC. This program is designed to reverse some of the progressivity in the bottom range of the income tax, and it works through the income tax. Funding the EITC through a VAT is, first, bureaucratically complicated, because it requires maintaining both tax systems – whereas I interpreted your original post as wanting to get rid of the income tax entirely. Second, funding an EITC expansion through a VAT raises political problems: you would literally be robbing Peter to pay Paul, where Peter is a senior citizen on a fixed income who is ineligible for the EITC but who must pay the VAT.

        That aside, I think the EITC (assuming the income tax survives!) is a very good candidate for expansion. It has relatively good political support precisely because it is tailored to serve the “deserving poor.” In turn, however, that means that a substantive expansion of the EITC will increase the divide between EITC-eligible and EITC-ineligible low-income households – roughly between those who can work and those who cannot.Report

        • Kyle in reply to grandmute says:

          You know, I’ve never heard or read anyone refer to post-secondary education as tertiary. Which, now that I think about it, is kind of funny. I mean presumably smart people would know that tertiary comes after primary and secondary but for some reason have stuck with post-secondary.Report

        • Alex in reply to grandmute says:

          The first policy that comes to my mind to alleviate the impact of a VAT on those of a lower-income is a universal and significantly raised minimum wage. Benefits include: essentially no administration, minimal distortion of economic motivations, and increased spending-power of a vast section of the population – providing even greater revenues through the VAT. The ultimate source is business without the necessity of corporate income/capital gains tax and absent any bureaucratic/paternalistic/stigmatized/etc social programming.Report

          • grandmute in reply to Alex says:

            It takes great fortitude to describe a “significantly raised minimum wage” as having “minimal distortion of economic motivations.” What of the decisions to work, to pursue higher education, to migrate to the US, to retire, to become a stay-at-home parent, to marry, to seek financial assistance from the government, to open or expand a business, to hire workers, to invest in capital..?

            For comparison, minimal distortion of economic behavior might happen in the case of a uniform, universal one-time cash payment. But, in terms of achieving policy goals, that’s neither here nor there. Perhaps distortion is actually necessary, and it is the policymakers’ responsibility to effect the best distortion in the economy.Report

            • Alex in reply to grandmute says:

              I completely agree with you, grandmute. When I referred to “minimal distortions” I meant to say that a minimum wage increase avoids negative distortions associated with taxing business processes, such as excessive vertical integration or aversion to reinvestment or capitalization. Those tend to be the distortions that economists talk about, and I’m glad that you mention other and even positive “distortions” because the debate is too often about what the “least harmful” policy is instead of the “most beneficial”. I think there are many beneficial “distortions” of a higher minimum wage.Report

  6. Katherine says:

    I’ll second North’s mention of the usefulness of the GST. I think as much as possible has been done to prevent regressivity: it does not apply to “necessities and there is a GST credit for low-income people (about $100-$200 quarterly in my experience, decreasing as income rises).

    There are substantial downsides to any government passing it, though. Ours was massively unpopular – the government that passed was decimated in the next election (for that reason among others). In addition, figuring out what a “necessity” is takes a lot of trouble and invites a huge amount of lobbying, and you end up having to draw lines in some fairly irrational prices. (I remember, at least before the reduction from 7% to 5%, that 6 doughnuts were cheaper (or close to being so) than 4 doughnuts, because 4 were taxable and 6 weren’t. Don’t recall why.)Report

    • North in reply to Katherine says:

      Katherine, just when I thought I couldn’t like the GST any more you have to go and suggest that it was responsible for the great Tory train-wreck. I’m seeing pink hearts even though my rational mind is clutching at reality and gibbering about how the Tories did so much to earn their devastating defeat that the GST was just the cherry on the top.Report

  7. Jay Daniel says:

    — regarding the low variability of payroll taxes: this makes intuitive sense. Wages have not significantly declined, and the unemployment rate has “only” gone up 4-5%. Absent significant changes in wages, payroll tax receipts will largely mirror the employment rate. Overall income tax revenue has fallen much more dramatically because the highest income earners are expected to see their income fall by 35%. (derived from:

    Since we already collect the vast majority of taxes from the top 10% of income (, your progressive project is currently hitched to the wagon of the continued success of the American affluent.

    I’m also going to have to quibble with you about the VAT. If your purpose is to come up with less volatile sources of tax revenue, the VAT is NOT the way you want to go, especially if you are going to include exemptions for food and non-luxury clothing items. Since, combined with rent, you just exempted out the vast majority of the median person’s spending, your VAT will largely be dependent on the sale of luxury items and appliances. Sales of luxury items and appliances fluctuate with income, but at an even greater amplitude.

    Your stated purpose is to try to find a stable source of revenue for an expanded welfare state. Unfortunately for your project, the most stable taxable year-over-year economic transactions are non-investment income and the sales of essential goods.Report

  8. Bob Cheeks says:

    A civil war would be more beneficial to the this country than the program you’d like to implement. Are you off your meds?Report