Musings on taxes

I'd like to use this forum partly as an excuse to learn about things I don't know, and tonight I'm thinking about economics, particularly alternate forms of taxation.

My inspiration comes from a few sources:

• An article in today's times about the Value Added Tax, and a follow-up blog post by it's author, Catherine Rampell
• Krugman's op-ed a couple weeks ago about a financial transaction tax
• A paragraph proposal from way back in the "Ideas" section of some magazine (Sam, help?) about heavily taxing just the undeveloped value of property.

For this post, my thoughts on the Value Added Tax.

Today's article was the first I've heard of this tax, embarrassing given its international prevalence. It strikes me as a fantastic idea, particularly when compared with other regressive tax options like the Income Tax.

Of course, unlike the Sales Tax, the VAT would be a federal tax, but this doesn't strike me as much of a theoretical hurdle. If we start from the premise that each level of government needs to raise a certain amount of money from taxes on transactions or assets, the specific mix seems relatively flexible. With a federal consumption tax, federal income tax could drop, state income tax could pick up the slack, and sales tax could shrink or disappear.

So why do I like the VAT better than Income Tax? Basically, it seems more effective.

Sales Tax evasion is hard to track, and the Sales Tax gives further strength to black-market alternatives. My uncle works as a small business accountant, and described at Thanksgiving the shocking prevalence of unreported income from main-street stores. He told me a great story about helping with the sale of a small chain of coffee shops in New York City, which played completely by the rules and reported all of its income. They were bought for a full two times what they were, in his eyes, worth, and he suspects that was based largely on the purchaser's assumption that a significant amount of revenue went unreported, as is the norm.

A VAT spreads the tax burden across every level of production & distribution which would (a) reduce the incentive at any level to avoid it and (b) allow tax collection on some parts of the line even if other parts didn't pay up. Furthermore, it has this beautiful feature that each link on the chain subtracts what previous links have paid, which would encourage each link to pressure its predecessors to pay & disclose. Elegant.

According to the Times article, liberals tend to oppose it on the grounds that it's regressive. No argument there, and it seems that attempts to remedy that would inevitably run into all the same problems of enforcement and loopholes.

More interesting is the source of conservative opposition, beyond the standard concern that taxes are generally bad. A WSJ editorial from October pillories the VAT on the grounds that it would be too effective at raising money for the federal government, which could lead to -- wait for it -- government spending.

The starve-the-beast argument against effective forms of taxation doesn't hold much weight for me. We clearly need to move toward budget balancing, and I have to say this tax is compelling, at least for the ignoramuses among us.