The Complexities of Tax Policy

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I’ve always been skeptical when wonky types on my side of the ideological aisle start proclaiming one tax or another to be universally better than others.  Typically, among conservatives, that becomes a preference for consumption taxes, like the value-added tax (VAT).  What appeals to them (and me, honestly) about such a tax is that it applies taxes to consumption, meaning everybody who consumes something has to factor the value of government into the equation.

What may appeal to big-money donors is that it pushes the tax burden down the economic ladder.  Joseph Sternberg points that out in the context of Europe and, specifically, Germany:

Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income.

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A chart at the link shows that Germany’s tax burden, as a percentage of income, falls pretty evenly across the socio-economic landscape.  Take social security out, and essentially, the country has a VAT for lower-income households and an income tax for higher-income taxes.

I’m not sure that spreading the tax burden on paper ought to be the goal, though.  The cost of government is spread out in one way or another, even if we don’t capture the effect of, say, lower wages and lost jobs because wealthy job creators pass on the cost of government to their employees.

The really lost component is the effect that particular taxes have upon the economy, and that will depend greatly on the specific conditions of the local area… its culture, its industry mix, is geography, and so on.  Rhode Island, for example, could boost its economy with a low sales tax because none of the state is far from the reach of out-of-state consumers.

These questions get impossibly complex, though, and the best approach is probably to tax based on the legitimate claims of government, meaning a philosophical rationale for each tax, not an economic one.  That way, the cost of government will be most accurately priced into the economy.

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