I wanted to repeat here a point I made on last night’s OTB Radio program. I am extremely skeptical of consumption taxes (VAT, national sales tax, etc.). A consumption tax will be subject to the same kinds of abuse that the income tax is. With the income tax marginal rates are a distraction. The real question is how taxable income is determined. Similarly, with a consumption tax the issue won’t be what the rate of the tax is so much as what is subject to the tax. Proponents of consumption taxes typically imagine that everything will be subject to their proposed consumption tax.
In reality lots of things will be excluded from the tax. Services will almost certainly never be subject to a consumption tax for a very simple reason: most of the people writing the laws are lawyers and a consumption tax on services would fall on lawyers, too. Something like two-third of all personal consumption expense is for services already. Levying a tax on the consumption of goods while not doing so on services will further exacerbate income inequality, cripple retail, and reduce employment among many other unforeseen secondary effects.
There are also bound to be pleas to exempt things consumed by the poor from the tax, e.g. food, rent. Elders will demand that pharmaceuticals be exempt from the tax.
When the dust has settled what is subject to the tax will be a very narrow sliver of consumption that will have been determined by who has the best lobbyists rather than what makes the most sense.
Update
Check here for a reality check on taxing professional services. You can tax roofers. You can tax hairdressers. It’s darned hard to tax lawyers and physicians and those services account for a lot more personal consumption.
This is true of any tax as far as I can tell. Rather than give up, I would push for a simpler tax with fewer exclusions. Rather than exempt specific commodities or services, exempt the first X amount of dollars spent. Then we can argue about the value of X.
Steve
I don’t think you understand what I’m saying, steve. To date lawyers and physicians have been extremely successful in preventing their services from being subject to consumption taxes. I see no reason that will change and as long as it’s the case talking about broad consumption taxes is just airy fantasizing. Ain’t gonna happen.
Why is this? When I was in Canada I remember EVERYTHING being subject to GST (goods and SERVICES) tax. Though populist rage has dropped the tax from 7% to 5% over the years.
I have no knowledge of Canadian politics or law but the history of consumption taxes in the U. S. is that services are generally excluded.
Update
A quick look at Canada suggests that basic groceries and prescription drugs are “zero rated” and rents, health and dental care, and legal services are exempt.
“To date lawyers and physicians have been extremely successful in preventing their services from being subject to consumption taxes.”
It looks like this is mostly sales tax, or its equivalent. I have never heard the issue raised in PA, but I would agree that there is no special reason to exempt professional services. I assume that you would then want to tax all medical services? Physician salaries make up about 6% of health care spending. Taxing all medical care would raise a lot of revenue.
Steve
I have to ask…after you write something like this, how can you believe in good government? By that I mean policies that are designed to achieve a desirable goal for society as a whole?