THE BLOG

VAT and Flat: Whuzzat?

06/22/2010 05:12 am ET | Updated May 25, 2011

The VAT and the Flat: Bad ideas whose times have come. Again. It's that tax season of our lives when we're all miffed about what the IRS squeezes out of us, enforcing an absurdly complicated and grossly unfair set of rules. We're feeling might victimized.

TO THE RESCUE!!! Here they come...that cavalry of economists and other self-appointed experts, blowing not only their own horns, but trumpeting their simple plan to
A) Replace the foul system with one that's fair and oh yeah,
B) Get themselves on cable news to talk about VAT and Flat.

The problem is that a Value Added Tax and a Flat Tax are both inherently UNfair. They appeal to the wealthy and their political enablers because their simplicity can hide a fundamental flaw: Everybody pays the same. Rich or poor. It's the same old Regressive vs Progressive debate with different sound bites.

Sad to say, the desire to make everything simple is like honey that attracts the political wannabes and intimidates even those who are in power, like say President Obama, who refuses to flat out dismiss the VAT-Flat idea.

In the case of the VAT, a so-called Consumption Tax, really just a multilevel Sales Tax, we all pay the same amount for what we buy. Levies are imposed on suppliers, and producers or manufacturers, along with retailers, who pass them all onto, you guessed it, the consumer. We all are docked the same percentage.

The Flat Tax operates on the same principle. In this case we lump all our income together, doing away with virtually all deductions, report that figure on a one-size-fits-all form and again pay the same percentage to Uncle.

A simple example reminds us of why equality can be such inequality. If the figure is 10 per cent, the person who spends his entire 10-thousand dollar income really has only 9-thousand for living. The million dollar earner is left with 900 thousand. You want tax simplification? It's as simple as that.

Besides, which deductions do these weed killers eliminate? Do we abandon the favored treatment for homeowners? How about charities? And municipal bonds?

Tax policy is really social policy. Somebody has decided our society will benefit from a sector's favored treatment by the government. Unfortunately, all too often, the economically powerful and therefore politically powerful have distorted that principle so they pay less than we should. Over time we've been left with a law-of-the-jungle jumble that's impossible to penetrate. And holding the bag.

We do need to replace it. But not with a new approach that only makes things worse. What we should is plunge into the tangle and start cutting away at the vegetation that shelters only the favored few.

At the same time, we should strive for a system with more brackets, not less, so the rich payback a larger share of the wealth our society gave them the opportunity to accumulate.

We may disdain governments, but we need them and we have to pay for them. The best we can do is spread the pain evenly and not more unevenly with Flat and VAT, which really benefit only the fat cat.

More:

Taxes Economy