Few people disagree that the U.S. tax code needs to change. Currently there are tens of thousands of pages of laws and procedures and regulations, growing by several thousand pages a year. The more complex, the more open to interpretation, breeding new code band-aid after code band-aid, just adding to the complexity. Attempts at social engineering create conflicts with basic economics. Armies of CPA's and tax attorneys are supported by this system to keep the other army of IRS tax enforcers at bay.
Billions of dollars wasted, sucked out of the economy, every year, just to control the sucking of billions of dollars out of the wallets of taxpayers. Imagine what could be done with those funds, the mouths that could be fed, the bailout dollars that could be thrown around.
Several people have recommended a "flat tax" where a set percentage is levied on all taxpayers, eliminating the enormous complexity of deductions and marginal rates. Others have suggested a consumption or "value added" tax, which would impact only those that consume. Those that consume more, pay more. Those that save, pay less.
live under a radically different tax system – one that the pundits and
politicians aren't talking about.
It's called a value-added tax,
or VAT, and it's been used for decades to pay the bills and sustain the
immense growth of governments around the world, from France to Mexico
to Australia. Created in 1954 by a French economist, the VAT is the
most potent, efficient machine for revenue generation yet invented.
As my friend Jim Huntzinger pointed out, the concept of "sustain the immense growth of governments around the world" is a problem in itself.
Presumably a VAT is simple. It may be simpler than our current morass, but truly "simple"? Not really.
The VAT is essentially a sales tax, except that it's charged at each
stage in the development of a product instead of at the moment when the
product is sold.
Take, for instance, a car with a sticker price
of $30,000 and a value-added rate of 10%. Ford might buy its steel and
other materials for $8,000 plus $800 in a VAT tax. A dealer then pays
$25,000 plus a $2,500 tax for the finished vehicle. Ford takes an $800
credit for the tax it already paid and sends $1,700 to the government.
A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer
collects the $3,000, takes a credit for the $2,500 worth of taxes
already paid, and sends $500 to tax authorities. Ultimately, the
government pockets $3,000, or 10% of the retail price of the car, in
Ugh. Yes, I guess it could be fairly simple, definitely more streamlined than the current mess. But collecting at each stage, then issuing credits at each stage, in the end collecting the same net amount as if the total VAT had been collected at the end? But some analysts call this "genius."
The genius of the VAT is that, while the consumer pays it, the
actual cash is mostly collected from producers before it reaches the
retailer. Since the VAT is essentially a hidden charge embedded in the
price of goods and services, raising the VAT doesn't arouse nearly the
uproar caused by increasing income taxes.
The ease with which a
VAT can be increased points to one of its big drawbacks: Governments
see it as an easy way to pay for increased spending, which is a
potential drag on economic growth.
Aha! There we have it! Trying to make the tax less visible so it can be easily increased. That's a good thing? To the contrary, we should always be very aware of the tax we pay, debate the merits of tax increases, and scrutinize how our hard-earned tax dollars are used.
This is also why I've long been an advocate of eliminating the automatic tax withholding out of pay checks, stopping the inclusion of the tax amount in gasoline prices, and the like. When I owned my own manufacturing business, I used to have to cut a check for the biweekly payroll tax… both the employee and employer side. I now pay quarterly taxes by cutting a real check.
When you actually have to write a check it really hits home that you're paying taxes, and how much of your compensation is involved. Of course the logistics of enforcing a system where all taxes must be paid by check is far more complex than regular, almost hidden, withholding.
This is also why it is very dangerous how we're approaching the "tax tipping point"… where more people don't pay taxes than pay taxes. The presumed policies of the next administration may very well push us past that point. More people will be riding free than will have skin in the game.
Perhaps a VAT or especially flat tax is the way to go to avoid this danger. Let's just try to keep it simple.