A Bit More on Taxes

Kevin and Duncan* both point out that the VAT (see post below) is somewhat regressive. True 'nuff. So why do it? Mostly because it's safer than the alternatives. Reasoning below the fold.

The two main ways of raising revenue are increases in the income tax and hikes (or implementation) of a variety of small bore taxes (estate, gasoline, tobacco, etc). Kevin recommends the latter route. Generally speaking, I'm for it, but not when we're creating a dedicated source for a specific program. When a variety of mini-taxes are around, it's easy for Republicans to pick off just one or two unpopular ones and thus destabilize the whole endeavor. They did it with the estate tax, but that, at least, was just general revenue. What if it had been supporting only health care? A gasoline tax would prove, I fear, similarly vulnerable.

Option number two would be an income tax hike. Problem there is that the income tax covers so many things (general revenue, after all) that it's easy to cut it simply by invoking a handful of unpopular programs and accusations of government waste.

So to be clear, I'm all for raising revenue those ways -- a gasoline tax is especially crucial -- but I don't think they're functional or secure as dedicated sources of revenue. In contrast to their fluctuations, look how stable the payroll tax has been. Despite being the most in-your-face of the taxes, it's rarely been mucked with. Mostly, I think, because it's supremely clear about what it does. As a single tax with no other targets that pays for a program with no other sources of revenue, it's much tougher to attack. The VAT would enjoy similar clarity of purpose.

As for the regressiveness of the tax -- it's true, it is a bit regressive. You could create exemptions for basic food stuffs and the like, as they have in Europe, but I don't quite think you need to. A 3-4% VAT wouldn't be so regressive as to pose a serious financial problem to the vast majority of folks, and those who did feel it would end up quite a bit ahead thanks to the health care the tax provided.

* Duncan's probably right on his quibble with me re: the application of the tax. He is, after all, an economist. So go read him on it.