Re: Re: Avoid a VAT

Fuck adding in prior posts - if you want to see what I'm replying to, go
look it up yourself.

1) You have never adequately addressed the issue of how you would address
the inequities imposed by a sales tax. Your primary "argument" being that
since the income tax is incorporated into the prices of goods & services,
that everyone already bears an equal portion of the income tax, so a sales
tax would just replicate that.

By doing this you have confused the general with the particular. First,
let's assume that all income taxes paid are ipso facto incorporated into
the prices of goods & services sold in the same year in which the income
tax is paid (a dubious proposition, but let's assume arguendo), and
further assume that this economic burden is spread around sufficiently so
that it all averages out, so that for every $1 of price, a given
percentage, say 25 cents, can be assumed to go into the government's
coffers as taxes, with the result that, instead of looking at what each
person actually pays in income taxes, you look merely to the sum of their
gross expenditures for the year, multiply that by 25%, and you arrive at
their actual economic tax burden. Is that sufficiently close to your
basic assumption?

What you fail to discuss is how this assumed burden relates to a common
yard-stick to be used to evaluate the degree to which this burden is
shared.

Let's try using annual gross income as the measure of the distribution of
the tax burden. It is not the case that everyone has gross expenditures
proportionate to their gross income; some people spend most of their
income and others save most of their income. Thus, the person who spends
more bears more of this averaged tax burden than does the person who
saves. For example, assume the averaged tax rate is 25%, and assume that
A and B each earn $40,000 in gross income, further assume that A spends
$30,000 but B spends only $10,000. A thus pays $7,500 in taxes whereas B
pays only $2,500 in taxes (remember, we're ignoring the income tax
actually paid by each, because that burden has been mixed into the global
average - to do otherwise is to double-count).

The result is that, as a function of annual gross income, A "pays" 18.75%
of his gross income in taxes whereas B "pays" 6.25% of his gross income in
taxes. Thus, even if we make the (dubious) assumption that the economic
burden of an income tax is incorporated into the cost of all goods &
services, and averaged out so that each person bears the tax in proportion
to his expenditures, we find that the tax burden is unequally distributed
when measured against annual gross income.

As far as an income tax is concerned, this isn't looking too good;
however, the conclusions are only as good as the assumptions on which they
rest.

These assumptions were: (a) the entire income tax burden for any given
year is fully incorporated into the prices of goods & services purchased
during that same year, and (b) this tax burden is averaged out so that
every dollar of price bears the same amount of tax.

There are several flaws in these assumptions:

(a) the income tax burden for any given year is not known until the end of
the year; absent such knowledge it is impossible for any given provider of
goods or services to set prices to completely reflect the tax that will
eventually arise;

(b) not all expenditures, either business or personal, are deductible in
determining net income, it is therefore possible for a person to owe taxes
for a given year in excess of their gross annual income for such year
after other expenditures are made. As a result, the excess of such tax
must be paid either out of savings (in which case the economic effect of
the tax burden is shifted to prior years) or out of borrowed funds, which
will be repaid in future years (in which case the economic effect of the
tax burden is shifted to future years). Therefore, you cannot assume that
the income tax burden attributable to any given year is, in fact, fully
incorporated into the prices of goods & services for that same year;

(c) in order to average the total tax burden out evenly amongst the price
of every good or service purchased, you have to assume that everyone is
capable of shifting the same percentage of any tax payment that is
directly imposed on them; i.e., if the government imposes a payment
obligation on person A of $100 and on person B of $200, you must assume
that both A and B are equally capable of shifting the same percentage, say
x%, of that payment burden to others by incorporating it into the price
they charge for the goods or services they sell. This is also a dubious
proposition. The ability of any given supplier to shift a marginal cost
to the buyer will depend, in part, on the elasticity of demand of the
given subset of purchasers who buy from that provider, as well as the
degree to which the goods or services provided are fungible. If the goods
or services are highly fungible and the relevant (sub)market highly
elastic, the provider will be unable to shift any appreciable portion of
his payment obligation; alternatively, if the goods or services are
one-of-a-kind, and the relevant (sub)market is inelastic, then the
provider will be able to shift most if not all of his payment obligation
onto the buyers. This result will hold both between different types of
goods & services, as well as between different (sub)markets for the same
type of good or service.

For example, a Mercedes dealer in New York City is (a) much more able to
shift the burden of any payment obligation imposed on him than the minimum
wage janitor employed by such dealer (same market, different goods and
services), and (b) much more able to shift the burden of any payment
obligation imposed on him than is a Mercedes dealer in Mishawaka, IN (same
good, different markets).

(d) People often either use their savings or borrow in order to make
current purchases. In the first instance, they shift the economic burden
of this year's taxes into prior years; in the second the burden is shifted
into future years (when the loan must be repaid from future earnings).

>From the foregoing it should be obvious that the simple assumption that
all income taxes imposed for any given year are economically borne pro
rata by every person in accordance with their expenditures is a flawed
assumption. Since the assumption is flawed, so are the conclusions. It
follows, therefore, that you cannot compare the distribution of the
economic burden of an income tax with that of a sales tax merely on the
assumptions you've been making, and without that assumption you have no
guarantee that the sales tax would be less inequitable than the income
tax.

Secondly, your only affirmative "solution" to inequities is to give a
rebate to everyone in the same amount, to cover "necessaries." Since
different people spend different amounts for necessaries (e.g., because of
higher costs of living, different family arrangements, higher prices
because the merchant is in the position to shift more of his costs onto
the buyers, etc) it follows that such a rebate would not solve any
distributive inequities. In fact, the simpler alternative of simply
lowering the sales tax rate or choosing not to impose it on so-called
"necessaries" would (a) accomplish the same result with less
administrative cost (no rebate checks to write) and (b) would be more
equitable than a rebate because the reduction in tax would go according to
expenditures, not as a flat rate.

For example, if the rebate amount were $750, and if A spends $5,000, which
is taxed at 10% - $500 in tax - whereas B spends $10,000 - $1,000 in tax -
A ends up with a net gain of $250 while B bears $250 worth of taxes;
however, if the tax rate is simply lowered to 2.5%, then A bears $12.50 of
tax and B bears $250 of tax - a more equitable result than the rebate,
which effectively shifted $250 from B to A (equitable in the absence of
any reason for wanting to redistribute wealth in that manner; since the
example was generic, so such reason applies).

In short, your premises are flawed, and you have not, in fact, addressed
issues of interpersonal distributive equity.

Finally, you did, in fact, completely miss the point I was making about
the EITC; your response was completely beside the point (and thus
irrelevant). It goes without saying that, if there is no income tax, then
there would be no income tax credit of any sort; duh! That was not my
point.

My point was that the EITC represents a social spending program
accomplished using the administrative mechanisms of the current income tax
on the (rather sensible) assumption that since such a spending program is
based on the same data used by the revenue-generating aspects of the
income tax code, and involves the same sort of transfer from government to
individual (i.e., a check drawn on the U.S. Treasury).

Since the EITC is not primarily a tool for fine-tuning the revenue-raising
aspects of the income tax but is rather a social spending program, it will
not go away just because the income tax goes away. Instead, it will be
moved to another program, run by another agency, and instead of being able
to leverage the administrative resources currently devoted to running the
income tax, will require its own separate set of adminsitrative resources,
thus increasing administrative costs. Further, since the sales tax would
itself require administrative resources, the combined effect is most
likely that you will continue to have to pay for the IRS, but you will
also have to start paying for the EITC Agency, thereby increasing overall
administrative costs and increasing the government's need for tax revenues
rather than decreasing it.

Until you can adequately explain why that is not a reasonable concern, you
have not made the case that we should give up the devil we know for your
little pet devil.

.

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