There are lots of good reasons for conservatives to cheer when various Republican candidates propose a consumption tax, or a tax on spending as some call it, or, in one of its most used forms, a value-added tax (VAT).
Such a tax would, or potentially could, replace some of the taxes now borne by work and risk-taking. Exports could be exempt, providing them with the same subsidy European and other nations provide their exports. Some consumption taxes are cost-effective for society, such as those that reduce health care costs by inhibiting smoking or reduce costly regulations by taxing pollutants. And it can produce real money for the Treasury (not a virtue say some, who would reduce in tandem taxes now levied on incomes).
Researchers at the Urban-Brookings Tax Policy Center estimate that a 5 percent consumption tax in its most common form, a broad-based, value-added tax, levied on the value added at each stage of the production process, could raise about $160 billion per year. That's real money, and it could be much more, especially if the internationally common 20 percent rate were applied. But even then, it would not be enough to replace all income taxes.
For that reason alone there is one claimed advantage a VAT definitely does not have: It will not eliminate income taxes, or the IRS, or the K Street lobbyists that thrive on writing special provisions into the code to advantage their clients at the expense of the ordinary taxpayer. It will, instead, massively multiply the number of rules-writing revenue agents and further enrich their special-privilege-seeking lobbyists. Here's why.
A VAT, levied at each stage of the production process, has all of the complexity of our tax code, and then some. For one thing, in practice a VAT is rarely if ever a flat tax. In Britain, for example, there are three different rates, as it is reasonable to expect there would be here, when those with access to the political system finished carving themselves a healthy portion of privilege. Instead of the 20 percent to which Britain's "standard rate" has inched up, children's car seats, fuel, and "mobility aids for older people" are charged at 5 percent, the latter only if you are over 60 and the devices are installed by a builder after you fill out the necessary eligibility forms. Her Majesty's tax collector warns that "you don't get the reduced rate if you just buy" the mobility device. Books, newspapers, motorcycle helmets, and children's clothes and shoes are "zero-rated," jargon for exempted, but must nevertheless be reported on business tax returns. Incontinence products are not taxed, but maternity pads and "sanitary protection products" are. That difference might not survive our gender-conscious courts.
And it's not as simple as even that. Hot food pays no tax: When I was in Britain several stores installed microwave ovens to "heat" sandwiches and the like, thereby converting them to tax-free "hot food." Other food and drink "for human consumption" also incur no tax, unless they are crisps (potato chips to us), ice cream, soft drinks, and other specified items. Which might explain why Mike Bloomberg, who knows what's good for us, is building a huge headquarters in London, where some greens and food police are hoping he will run for mayor. It boggles the mind to imagine the punitive rates that food police here would impose on items they deem unhealthy—sodas, sugary foods, salty foods, anything Michelle Obama has put on the list of foods verboten for school lunches.
Nor is distinguishing between nontaxable children's clothing and things worn by adults an easy matter. Her Majesty's tax collectors have decided that bras up to and including size 34B, but no larger, are for young girls and therefore exempt; leotards and swimsuits measuring 27-and-a-half inches (or less) from shoulder to crotch are not taxed. Shoes up to a certain size are not taxed, and there are special rules for people whose foot sizes are not identical for the right and left feet. These and other items are, they say, designed for young children who meet "measurements . . . based on children up to the eve of their 14th birthday, as this is when the body dimensions begin to merge with those of the general adult population." For manufacturers who find that vague, there follows a list of measurements of clothes Her Majesty's Revenue and Customs will consider designed for the young: The merely young-at-heart pay full rate.
VAT proponents among Republican candidates will undoubtedly say they will not allow producers to get sucked into such a quagmire, the cost of which would be borne by consumers. So if you believe that (1) a consumption tax would completely replace all income taxes, rather than be added to our current tax code, (2) arguments on behalf of children, health advocates, safety advocates, the elderly, and others would fall on deaf political ears, and (3) the K Street crowd would quietly sublet their spaces to worthier tenants and, like the obsolete old soldiers they will have become, simply fade away, then by all means support an American value-added tax.
But do give a thought to the cost of adding this complex system of taxation to our manufacturers of goods and services as it would actually work in the real world. And do consider one other troubling aspect of such a tax: The amount of VAT paid along the way from raw material to retailers' shelves is embedded in prices paid by consumers, who do not receive a statement showing the total amount of this tax they have paid during a year and therefore are not especially sensitive to increases in the rate. This lack of transparency is the politicians' friend and makes it far easier to raise VAT rates than income tax rates.
Perhaps it would be best if presidential wannabes would get on with the hard, tedious work of reforming our hideous tax code rather than adding a consumption tax to our burdens.