I find the concept of "tax free" services interesting as a European. VAT is placed on everything and people are just fine with that. Would not come to my mind to question that concept.
In England some items are zero rated, (most food, children's clothes, books etc) and other items have lower rates.
> and people are just fine with that
There's a pretty vigorous campaign to move tampons and pads to the zero rate.
That does not exist in the EU any more. Only products that did not have VAT at the time of introduction of the VAT system can retain it. Austria has no VAT free items as an example.
> There's a pretty vigorous campaign to move tampons and pads to the zero rate.
Pointless campaign because it cannot be done. You cannot remove VAT under EU regulations from an item.
Books, most food etc are still zero rated in the UK. It's fairer, VAT is a regressive tax, and this helps a little.
There's a referendum coming up to do just that...
And if they leave the EU they can do whatever they want. But we can also discuss a few other purely hypothetical situations.
Er, not quite. I for one would rather see VAT disappear. It's a regressive tax, it hits the poor (and start-ups) disproportionately, and it's basically just a huge "get out of jail" card for lazy lawmakers who won't dare to tax the rich. Which is why it is so "popular" around elites of every country.
Think about someone who has a billion dollars. Not income, already in the bank. Without a consumption tax, they can spend all of it without paying any taxes.
Now think about someone who has student loans or a mortgage (i.e. someone not rich enough to pay for it outright). With an income tax they have to pay income tax on the money they're using to pay back the loan principal. Switch to a consumption tax and they don't.
So where does this idea that consumption taxes are regressive come from? The theory is supposed to be that the rich spend less of their income than the poor. First small problem, that's only true for the super rich. Someone making $120K/year is pretty well spending it all on a big house and a new car and sending their kids to college. It's the people who have a billion dollars and make ten million a year in interest who aren't spending anywhere near that much.
But those same people also don't have anywhere near that much in "taxable" income because they have fancy accountants and the investments they own don't have definite values until sold, which they never are. So they can make a million dollars in interest without paying any tax, and then they can use a different million dollars in principal to spend on anything they like, also without paying any tax.
But if we had a consumption tax on cars and yachts and airfare, they would be paying that. So which one is the regressive one?
But even with VAT they almost don't, that's the thing. Because they can afford not-even-that-fancy accountants (or just one), they can simply reclaim the tax as business expense or shuffle most of it downstream to whoever is buying their services (there are bazillions of rules, of course, but they are not that hard to bend). People without accountants and company ownership cannot do that.
Say a "normal" guy buys car X, paying £1000 -- 200 of those go in tax. A "vat-savvy" guy buys the same car through his company, pays £1k, then claims VAT as a business expense. In practice, he's just bought the same car for £800. This is widespread, and obviously frowned upon by tax authorities, but it's like emptying the sea with a spoon. (Note: cars are actually more regulated than other items, exactly because of this sort of trick happening since the beginning of time on a well-known expensive item, but there are plenty of equivalent items that go undetected).
> The theory is supposed to be that the rich spend less of their income than the poor.
It's not just that, it's that in absolute terms the exact same thing is taxed in exactly the same way for rich and poor alike. That is regressive, like all flat taxes. It wouldn't be if and only if rich people only ever bought more expensive luxury items, which is not true in practice: they buy a lot of stuff in the same malls working-class people use, but they pay the exact same flat tax on each sweater.
> So which one is the regressive one?
It's a false dichotomy -- you can (and should) use multiple types of taxation at the same time. It's pretty clear that personal income taxes are not sufficient, but the answer is not removing those to introduce flat consumption taxes which are even worse in real terms; the answer is to increase taxation on capital profits, rent and property, which is where the real wealth lies.
Tax theory is old and fairly well-understood from a systemic perspective, but obviously nobody wants to piss off their political donors, whereas little people are easily gamed.
Which is not tax avoidance, it's tax fraud. If you allow the rich to commit tax fraud then it doesn't really matter what kind of tax code you have.
And it's a lot easier to catch tax fraud for consumption taxes than income taxes because the thing being taxed is physically in your jurisdiction where you can find it and see how it's being used.
> It's not just that, it's that in absolute terms the exact same thing is taxed in exactly the same way for rich and poor alike. That is regressive, like all flat taxes.
That's the fallacy. It isn't.
Suppose everyone gets the same $5000 worth of government services and everyone pays a flat 10% tax (of any kind). A rich person pays $10,000 on $100,000 and a poor person pays $2500 on $25,000. The result is progressive because the rich person is down $5000 ($5000 - $10,000) and the poor person is up $2500 ($5000 - $2500). If you double the tax rate and the level of government services then the rich person is down $10,000 and the poor person is up $5000, etc. You can increase or decrease how progressive it is by setting the tax rate but there is no point (above 0% tax) that there is not more money going into the poor person's pocket than coming out when everyone is paying a flat tax and everyone is receiving a fixed quantity in government services.
> It's pretty clear that personal income taxes are not sufficient, but the answer is not removing those to introduce flat consumption taxes which are even worse in real terms; the answer is to increase taxation on capital profits, rent and property, which is where the real wealth lies.
Taxes on earned income are worse than consumption taxes for the reasons I've already mentioned. Taxes on investment income are nice in theory but are extraordinarily difficult to collect because you can't locate "investment income" on a map the same as you can a car or a refrigerator, so they end up actually being regressive because middle-income people who don't own international corporations have to pay them while high-income people who do own international corporations don't.
The problem with taxes on property and rent is that they increase the cost of housing, which is also regressive. Property taxes make it more difficult to afford a home and forces more people into renting (which also increases rents), while a tax on rent causes more rental properties to be sold to occupants, which is good for middle income people, but that reduces the supply of rental properties (and therefore increases rents) for people who don't have the credit to buy a home, which is very bad for lower income people.
Consumption taxes are good because they're simple and hard to scam. You buy a sweater, you pay the tax, so does everybody else. Then the government gets a percent of everybody's expenditures and gives it back out as a fixed amount of services, which is progressive as above. If you want it to be more progressive all you have to do is either raise the tax rate, or spend the tax money on things that disproportionately benefit the poor (like public education).
I generally agree with your argument, but there's an argument to be made that rich people benefit more from eg protection of property by the police, because they do have more property.
(Not all that convincing to me, but it's a decent argument.)
A really nice tax is a tax on the unimproved value of land---it's fully born by the owner of the land and (for economic reasons) can not be passed on to the renter. Henry George had a point.
That isn't a problem on the tax side, it's a problem on the services side. (And that specific example is almost irrelevant because enforcing property rights is such a tiny proportion of government expenditures.) If the rich are getting $5500 worth of government services and the poor are getting $4500, then change what services the government provides.
Although notice that it's still progressive even in that case as long as the difference is small: If the rich pay $10,000 in taxes and get $5500 in government services while the poor pay $2500 in taxes and get $4500 in government services, there is still a transfer of wealth from rich to poor.
A good way to dispense with the calculations is to make the primary "government service" a basic income. You don't get $5000 in "government services," you just get $5000.
A somewhat similar argument can be made against minimum wage: even if it works perfectly well, it's people shopping at Walmart that pay for the increases compared to market wage. People shopping at Walmart are probably poorer than the national average, so why not make the overall population pay in eg negative income taxes or a basic income to help poor Walmart employees. (A slightly more sophisticated argument would yield a similar conclusion, even if Walmart's stockholders were bearing the difference between market wages and minimum wages.)
It should come to mind to question the concept of taxing everything. But unfortunately, for many people it doesn't. Imagine the economic growth if VAT were eliminated but then Hollande might have to move into a smaller palace and the 60% of French workers who work for the state would have to take a two week vacation instead of a month.
Erm, what? The VAT is clearly labelled on every product and not at all hidden. In fact, if you grab any receipt in Europe you will see the different VAT rates very clearly on the receipt. That's important anyways because in some cases you can claim it back (for instance company expenditures).