Zephyr and 2slugbaits: No, we shouldn’t replace the income tax with a consumption tax, for a variety of reasons.

Matt: He’d argue that the money is needed for a program that will provide broad benefits — universal health care, high-quality child care, enhanced public transportation, supports for victims of economic change, and/or others. The expanded EITC would then function to partially or fully offset the increase in taxes. This would be a bit analogous to the EITC’s initial rationale, which was to offset payroll taxes.

Today’s VATs (mainly in the form of state and local sales taxes) have a fairly high self-enforcement rate, but I think that’s largely because those taxes are not all that large and in most cases not worth the avoidance costs. But if we start talking about adding a federal VAT to replace the income tax, then all bets are off. Then you’ll start seeing all kinds of tax avoidance schemes coming out of the wall.

We need to go back to the philosophy of the Bradley 1986 tax reform; we need to flatten rates in exchange for broadening taxable income. Prior to the 1986 tax reform, credit card interest was deductible. Congress was right to eliminate that tax deduction. The same should apply to mortgage interest rate deductions…although due to immediate problems in the houseing market it might not be a good idea to eliminate that deduction right away.

It also taxes people based on their lifestyle – the better you live the more you are taxed. And the rich do indeed spend far more than the poor.

And a VAT could be structured to reduce the tax burden on the poor by exempting the most basic needs that dominate their budget. Thus, it could be progressive.

A VAT is less subject accounting gimmickry to reduce tax. Besides, corporations just pass most of their income tax through to consumers anyway, in the pricing. So the poor are already indirectly paying more tax than people recognize.

But I do not think we could rely entirely on a VAT. The rate
would be too high.

Even if Prof. Kenworthy is right and the effective household rates over all forms of tax are effectively flat, is that an argument for introducing a regressive VAT?

I note in passing that individual effective rates for all taxes in the US aren’t flat across income quintiles (ack. Economist’s View), and household rates for Federal taxes alone aren’t flat(.pdf) (ack. CBPP) either. That doesn’t prove that Prof. Kenworthy is wrong, but maybe he could give us a reference.

The challenge is being able to convince the population that some strong benefit will result. Universal health care is such a benefit that must be sold. Unfortunately, it must also be delivered in relatively short order. Incremental improvements won’t turn the trick.