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Interesting (Older) Piece from the Economist Magazine on Taxation and Class Warfare

By JLP | January 4, 2012

I read this article last night and thought I would share this paragraph:

In general, this newspaper’s instincts lie with small government and against ever higher taxation to pay for an unsustainable welfare state. We reject the notion, implicit in much of today’s debate, that higher tax rates on the wealthy are justified because of the finance industry’s role in the crunch: retribution is a poor rationale for taxation. Nor is the current pattern of contribution to the public purse obviously “unfair”: the richest 1% of Americans pay more than a quarter of all federal taxes (and fully 40% of income taxes), while taking less than 20% of pre-tax income. And knee-jerk rich-bashing, like Labour’s tax hike, seldom makes for good policy. High marginal tax rates discourage entrepreneurship, and no matter how much Mr Obama mentions “millionaires and billionaires”, higher taxes on them alone cannot close America’s deficit.

The article did state that the rich should pay more but that the tax structure should be simplified and deductions taken away. They didn’t endorse a flat tax, which is disappointing.

Related, this opinion piece in this morning’s WSJ was disappointing. I hate the idea of a VAT. That’s all we need is another way for politicians to tax us.

Topics: Economics, Taxes | 33 Comments »


33 Responses to “Interesting (Older) Piece from the Economist Magazine on Taxation and Class Warfare”

  1. Jack Says:
    January 4th, 2012 at 4:22 pm

    The WSJ is incorrect:
    “He’s not the only Republican to speak favorably of a VAT. Herman Cain’s 9-9-9 tax plan featured a flat tax and national sales tax. Very few people realized, however, that the final 9 was a VAT.”

    Uh, no. It was a sales tax, just like most States have.

  2. Jack Says:
    January 4th, 2012 at 4:27 pm

    BTW, I would only support a National Sales Tax if the 16th Amendment is repealed, which it should be.

  3. BG Says:
    January 5th, 2012 at 8:58 am

    VAT is where it is at! Without a VAT you will continue having companies produce goods overseas, and sold to consumers in the US and not have a single penny in taxes paid on them. People who don’t like the VAT, are most likely, people who haven’t researched it and dont understand it.

    VATs in other countries (practically every other country on the planet has some sort of VAT) put our jobs at a major disadvantage. We can’t have Free/Fair trade when they have a VAT, and we dont.

  4. Jack Says:
    January 5th, 2012 at 4:30 pm

    I do not follow your logic, BG. HOW do foreign producers benefit by having a VAT when we do not?

  5. BG Says:
    January 5th, 2012 at 5:14 pm

    Jack: simply because our exports are double-taxed, and _their_ exports have no taxes at all.

    Firstly, products manufactured in the US have an embedded (hidden) cost due to corporate income taxes, payroll taxes, etc, already built into the price of the product. Then, our products are hit with their VAT (tariff) when we export into their country — that is the second tax that is built into the price of our goods when sold abroad.

    So, as you can see — our products are double-taxed (hence have a MUCH higher price) in foreign lands. This puts us at a major disadvantage when trying to compete with foreign labor.

    Now for the foreign produced goods that are imported into the US. Those goods, if bought locally in the foreign land, will have their VAT already on it. However, when those goods are exported to the US, the VAT is ZERO-RATED at their border!! What this means is that the tax is stripped from the goods and the company is allowed to export the goods tax free (the foreign VAT-based government takes the hit and is subsidizing those exports). When the goods are imported into the US, we don’t currently have a VAT (tariff) so those goods are brought in and sold TAX FREE!

    US produced goods sold overseas: Double-Taxed
    Foreign produced goods sold in the US: Tax Free

    Seeing as how companies are extremely efficient, they will of course pick the second option (path of cheapest resistance) and have foreign labor produce the goods sold in the US which leads us to where we are today: There are no jobs/manufacturing left in the US.

    Get it?

  6. Sam Says:
    January 5th, 2012 at 6:20 pm

    Not at all interested in a VAT.

  7. Jack Says:
    January 5th, 2012 at 6:29 pm

    Well, BG, the other countries also have payroll taxes and corporate income taxes — not as high as ours, but they do have them. Still, I see your point.

    I’m in favor of eliminating all income taxes — but that will require the repeal of the 16th Amendment.

  8. BG Says:
    January 6th, 2012 at 12:21 pm

    Why would the 16th need to be repealed? That amendment formally granted Congress the power to tax income (even though it was already legal before the amendment — see Article 1 section 8). Notice that Article 1 Section 8 already grants Congress the power to impose Sales/VAT taxes too. What is wrong with keeping the 16th amendment and just setting the income tax rates to 0%? Just because Congress has a power, doesn’t mean that they have to use/abuse it.

    But, I agree — if our goal were to dominate the world and make the US the manufacturing center (hence job center) the best tax strategy would be to eliminate all corporate/personal/payroll taxes on income, and replace it all with a hefty VAT. Then WE would have the advantage against foreign countries that continue to have corporate income/payroll taxes (regardless of whether they have a VAT or not already).

    This is why I think a VAT is superior for us right now and we should ignore uninformed people (like Sam above).

  9. BG Says:
    January 6th, 2012 at 5:28 pm

    These guys understand the VAT trade imbalance situation that I’ve been talking about:

    The VAT: Menace to free trade

    So for people who don’t believe my ranting, you can confirm my hypothesis with real financial experts:

    “…The VAT differential is a core, driving aspect as to why U.S. companies find themselves continuously at a disadvantage…”

    Anyhow, now that the big multinational corporations have moved all their manufacturing base overseas, and they can now commit unlimited amounts of financial resources to sway elections (thanks to the Supreme Court): you bet they are going to fight tooth and nail to prevent a VAT from being established in the US — and will likely succeed.

  10. Jack Says:
    January 6th, 2012 at 9:36 pm

    > That amendment formally granted Congress the
    > power to tax income (even though it was already
    > legal before the amendment — see Article 1
    > section 8).

    The Supremes disagreed with you. In 1895, the Court ruled the income tax unconstitutional. The 16th Amendment was put in to override that decision.

  11. Jack Says:
    January 6th, 2012 at 9:37 pm

    > Just because Congress has a power, doesn’t mean
    > that they have to use/abuse it.

    When have they NOT?

  12. Jack Says:
    January 6th, 2012 at 9:38 pm

    Why a VAT vs. a National Sales Tax?

  13. BG Says:
    January 7th, 2012 at 9:52 am

    Jack) read up on the supreme court decision. The 16th was added as a technicality to allow taxation of income from properties. General income taxes were legal before the 16th.

    “When have they NOT?”

    We don’t have a national sales tax or VAT, even though Congress had that power already (Article 1, Section 8) – so that is a perfect example of a congressional power that is not used currently.

    Why a VAT over a national sales tax? Because compliance is higher, cheating is harder, and so we can zero rate at the border for our exports (subsidize our exports like all the other countries do).

    It really is a no-brainer, and I do not understand why people are so vehemently opposed to a VAT in the US. I want to hear logical reasons against a VAT from all the detractors.

  14. BG Says:
    January 7th, 2012 at 9:53 am

    Should be: Article 1, Section 8 above. Not article 1, section “cool dude”.

  15. Sam Says:
    January 7th, 2012 at 10:29 am

    Your argument advocating a VAT for trade competitiveness is a red herring, BG. There is nothing inherent in a VAT that requires a country to exempt exports, it is just a feature that some countries have adopted to help their trade competitiveness. There is nothing inherent in the corporate income tax that requires the US to collect taxes on exports, or to tax a corporation’s foreign earned income as well. (The US is one of only a few that do so.) So current US corporate tax laws could be changed to make them more export friendly if there is sufficient political will, even without a VAT.

    My second objection to a VAT is that it is letting the “camel’s nose in the tent”. If one is instituted in the U.S., it will start out small, say 5 to 10 percent (Herman Cain’s 9%). But it will eventually grow, since politicians (of both parties) are unable to exercise spending restraint, and it will be much easier to just add a percentage or two to the VAT every few years. “.Temporarily, you understand, just until economic conditions get better.” (I got that phrase from “Atlas Shrugged, I think.) I would rather just exercise the spending restraint needed, since I don’t think that you can tax your way to prosperity.

    Third objection – how is it working out for those countries that have instituted it? I am not familiar with all of the countries that have a VAT, but I did encounter it in Europe a couple of years ago. So how are things going for European countries? Has the VAT saved their bacon? What I see is a continent awash in deficit spending; pretty much every country in some degree of trouble from spending more than they bring in. Did the VAT help them? Greece has already defaulted on its sovereign debt (I know, they and the ECB are pretending otherwise, but every one knows it. And you don’t want anyone to know you are going to do it until you actually do it.) How about Spain, or Hungary, or Italy, or Portugal, or France? Ireland? Even countries that aren’t currently experiencing sovereign debt crises, like Japan, Germany and the UK, are indebted up to their eyeballs, figuratively speaking. So if it isn’t helping them, then why would a VAT help the U.S?

    To recap:
    1. A VAT isn’t required to make US tax law friendlier to manufactured exports.
    2. A VAT is an open ended tax that will only get larger as tine goes on.
    3. The VAT doesn’t seem to be helping other countries that have it.

    (My previous comment was much shorter due to my laziness, but your comment above prompted me to elaborate on it.)

  16. BG Says:
    January 7th, 2012 at 3:18 pm

    Sam:

    1) If the US tax code were changed to exempt US corporate income tax on goods shipped overseas, we would STILL be at a disadvantage. Instead of our goods being double-taxed, when exported, it would just be taxed once (at the foreign border due to their tax). Likewise, foreign goods brought into the US would still be tax free.

    Sure, you lessened the pain somewhat, but it is still not Free/Fair trade as our goods are still hit with their VAT (tariff), whereas their goods are not.

    2) And so are income taxes, payroll taxes, corporate income taxes etc. All forms of taxation are “open-ended”. Anyhow, Congress has had the power to establish a national sales tax or VAT since the founding and the rate has been set at 0% for over 200 years. Your argument does not hold water.

    3) Of course the VAT has been helping other countries. I have already detailed extensively the unfair advantage that foreign produced goods receive when sold in the US. The US is practically the only country left on the planet without a VAT, and that is what is putting us at the disadvantage. It is simply this: they have a tariff on their border, and we do not. When two VAT-based countries exchange goods, then it is a wash. When ANY VAT-based country exports goods to a country without a VAT (the USA), then the VAT-based country has an advantage.

  17. Jack Says:
    January 7th, 2012 at 9:39 pm

    “Likewise, foreign goods brought into the US would still be tax free.”

    No, we have tariffs, and have had them since the founding of the country.

  18. BG Says:
    January 8th, 2012 at 9:48 am

    Jack) We do not have a general VAT (tarrif) on all goods. We do have specific tariffs (not VAT) on specific goods made by specific manufacturers/countries — and all the tariffs have been approved by the WTO.

    What I am talking about is a VAT (that acts like a tarrif) that would affect ALL goods from ALL manufacturers from ALL countries of origin. For example, Germany charges a 19% VAT on their border for all incoming goods <– we do not have anything like this and that is why we are at a disadvantage.

  19. Jack Says:
    January 9th, 2012 at 7:43 am

    > We do not have a general VAT (tarrif) on all goods.

    No, but we could increase tariffs more easily than creating a VAT, and it would only impact foreign companies, right?

    Anyway, doesn’t every other country also have corporate income taxes, payroll taxes, and personal income taxes? So we are only at a disadvantage if our rates are higher than theirs.

  20. BG Says:
    January 9th, 2012 at 8:27 am

    Jack) the WTO and NAFTA dont believe that the VAT other countries have acts like a tariff, and puts US manufacturers at a disadvantage. I think it would be a hard battle (with the WTO and NAFTA) to add an across the board tarrif, unless it is in the form of a VAT.

    Sure, there may be other ways to accomplish the same goals: to create something VAT-like that acts as a tarrif on all imports. But why beat around the bush? BTW, you said yourself that other countries have lower corporate taxes than the US.

    At first glance, I hated the idea of a VAT as much as everyone else. Then I researched it, and came to the conclusion that if we are going to compete, we need a VAT to help level the playing field. Companies may still choose to keep manufacturing offshore: but it won’t be because our tax policy makes it a no-brainer.

  21. Jack Says:
    January 9th, 2012 at 12:12 pm

    I will ask again — do other countries not have corporate income taxes, payroll taxes, and personal income taxes?

  22. BG Says:
    January 9th, 2012 at 3:01 pm

    Jack) I am not understanding your point. As I told Sam (in comment #16), even if we completely eliminated corporate income/payroll/etc taxes, we would still be at a disadvantage: because foreign countries could still import goods into the US tax-free, while our goods are still impacted by their VAT tax (tariff on THEIR border).

  23. Jack Says:
    January 9th, 2012 at 4:13 pm

    When you say “at a disadvantage,” we must look at whether a comparable item is cheaper to the consumer if it is made in another country.

    So let us look at a consumer in the US. If the corporations and workers are subject to the same income and payroll taxes in both countries, how is an item made in Germany cheaper because no VAT is paid on it, when no VAT is paid on the US-made product, either?

    Now for the German consumer. If the corporations and workers are subject to the same income and payroll taxes in both countries, how is an item made in Germany cheaper because VAT is paid on it, when the same VAT is paid on the US-made product, too?

  24. BG Says:
    January 9th, 2012 at 5:29 pm

    Jack) It is silly to think that both countries have the exact same corporate (+personal, etc) income tax rates, yet one country has a 19% VAT (Germany).

    This is untrue, because the United States has the 2nd highest corporate tax rate in the world (Japan is #1), once you combine the federal and state corporate income taxes in the US. Germany is ranked #5, btw.

    Obviously, Germany is using their VAT to offset their lower corporate income tax rates: because there are only so many sources to generate revenue.

    Anyhow, to answer your question: if both countries had the EXACT same corporate income tax rates, and Germany has a VAT and we don’t: then there is no disadvantage. The disadvantage only exists for the country with the higher Corporate income tax rate. And the converse is true too: the country with the lower corporate income tax rates (likely offset with a VAT) has the advantage.

    I already said this in comment #8:

    “if our goal were to dominate the world and make the US the manufacturing center (hence job center) the best tax strategy would be to eliminate all corporate/personal/payroll taxes on income, and replace it all with a hefty VAT. Then WE would have the advantage against foreign countries that continue to have corporate income/payroll taxes (regardless of whether they have a VAT or not already).”

    We are saying the same thing, I do believe.

  25. Jack Says:
    January 9th, 2012 at 5:46 pm

    Thank you, BG. So the issue is not that we do not have a VAT, but that other countries have lower corporate income tax rates. So, why do we have corporate income taxes at all? After all, corporations are nothing but groups of people, so tax the people. The removal of all the waste associated with computing corporate income taxes would put our companies at a tremendous advantage over all others.

    interestingly, Germany’s personal income taxes are somewhat higher than ours, topping out at 50.5%. The corporate income tax in Germany tops out at about 30%, where ours tops out at 33% (with a couple of bizarre bumps of 39% and 38% for a couple of small bands).

    So, the existence of a VAT does not seem to be a particular advantage to Germany — their people just pay more in taxes.

  26. BG Says:
    January 9th, 2012 at 6:27 pm

    And, of course, the VAT in Germany helps fund the German government whether the goods are made in Germany or not.

  27. Jack Says:
    January 9th, 2012 at 6:41 pm

    That the Germans have more government is not something that I think is to their advantage.

  28. BG Says:
    January 9th, 2012 at 6:48 pm

    “So, why do we have corporate income taxes at all?”

    Because we do not have a VAT (or sales taxes).

    “So, the existence of a VAT does not seem to be a particular advantage to Germany…”

    Yes it is, because it allows them to have a lower Corporate Income tax (plus they are funding their government even if the goods are produced elsewhere).

    We are saying the same thing, except I am taking it one step further: to have lower Corporate Income taxes (which I favor), we need to institute a VAT to “pay for it”.

    Now, I’d like to hear your opinion: if you want to eliminate corporate income taxes, and you are also against a VAT: then how would you fund the government?

    Also notice that relative to the US, Germany has a balanced budget — whereas, we are bleeding $1.1 trillion / year. So, comparing the USA’s tax rates (when running massive deficits), to another country that has basically a balanced budget is fundamentally flawed.

  29. Jack Says:
    January 9th, 2012 at 8:01 pm

    > “So, why do we have corporate income taxes at all?”

    > Because we do not have a VAT (or sales taxes).

    That is a non-sequitur. We did not have a VAT before corporate income taxes, either.

    > to have lower Corporate Income taxes,
    > we need to institute a VAT to “pay for it”.

    No, we don’t. The untaxed corporate income will go either to the shareholders or to the employees, at which time it will be taxed.

    > how would you fund the government?

    I would cut most of it.

    > we are bleeding $1.1 trillion / year

    Which is more than the ENTIRE defense budget, and more that Clinton’s ENTIRE budget. What part of the budget has grown more than the GDP?

  30. Jack Says:
    January 9th, 2012 at 8:10 pm

    BTW, Nissan and Daimler just announced a joint venture to build engines — in the United States.

  31. BG Says:
    January 9th, 2012 at 9:18 pm

    Thats great news…we need more manufacturing to come back. So you want to replace all taxes with just “personal” income taxes? I’m fine with that too, though a sales/vat would encourage saving over consumption.

  32. Jack Says:
    January 9th, 2012 at 10:08 pm

    > So you want to replace all taxes with just
    > “personal” income taxes?

    Did I say that? No.

    > a sales/vat would encourage saving over consumption.

    And in what would one invest that savings? If consumption is decreased, money flow slows, and the economy tanks, bringing down stocks, bonds, real estate, etc.

  33. BG Says:
    January 22nd, 2012 at 1:17 pm

    A national sales tax would be flawed just like state-level sales taxes are. I can, right now, purchase an TV (manufactured in China), imported into the US, then imported into my state (Texas) via Amazon.com and get away WITHOUT PAYING ANY TAXES.

    I am (the consumer) “supposed” to remit a Texas Use-Tax form to pay the 8.25% sales/use taxes: but nobody does that. Sales taxes have that ‘flaw’ in the United States.

    If the tax structure were setup as a VAT system: Then corporations/retailers would be all over themselves to ensure the taxes are paid so that THE BUSINESS can get a refund for the VAT that THEY have already paid.

    The VAT system is setup so that the tax rolls downhill through the manufacturing and retail channels, and each “consumer” in the chain is ensuring that the “supplier” before them in the chain has paid the taxes. If a company in the supply chain obtains the goods, and the supplier before them in the chain has NOT paid the VAT taxes, then it is the “consumer” in the chain that EATS the loss (so there is a heavy incentive to only purchase from reputable/non-cheating suppliers) <– HUGE INCENTIVE AGAINST CHEATING.

    Once the goods get to the FINAL consumer (me) in the chain, and since the VAT tax has been passed along the chain, I end up paying 100% of the VAT sales tax (just like an HONEST consumer in the sales tax system). Since I am the final consumer (I don't add-value and resell the item) then I eat the full cost VAT tax, as I should.

    Note: This also would eliminate the massive tax loopholes that allow executives for corporations to avoid paying taxes for their private jets. The corporation is the "consumer" for the jet, so they would pay 100% of the VAT sales-taxes on the jet. In the income-tax system we have, a corporation can purchase a private jet and then write it off as a business expense so they avoid all taxes on the purchase.

    "And in what would one invest that savings? If consumption is decreased, money flow slows, and the economy tanks, bringing down stocks, bonds, real estate, etc."

    Why do you think a consumption-based economy is the only type of economy? Instead of a consumption-based economy that drives over-consumption and ravaging of the earth's finite resources (and rewarding the corporation that can do this the best), a non-consumption based economy would would favor the person who can fix and repair things (ever see a TV repairman recently?). Tourism, Arts, Science, Education etc would all have more appeal in a non-consumption based economy. People would invest IN THEMSELVES instead of the corporation that can make the cheapest (and replaceable) iWidget.

    People would still purchase cars, but they would purchase cars that have better QUALITY. Instead of tons of cheap Chineese plastic crap that break after a few hours/days use: people would purchase items made to last a long time, items made by the best craftsman.

    BTW: I hope the real-estate market NEVER "recovers" to its past bubble levels. Who in their right mind wants to have a required necessity for life (Shelter) be expensive?

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