A VALUE ADDED TAX (VAT) OR THE SO CALLED "FAIR TAX" WOULD MAKE TAX INEQUITY AND THE ECONOMY WORSE
[PRECISELY THE OPPOSITE EFFECT OF A NET WORTH TAX]
Yes, we need to reduce our national debt. Yes, this will require spending cuts and additional taxes. A Value Added Tax (VAT) and the proposed "Fair Tax" (Much different form this site's Fair Share Tax Proposal) are taxes on consumption, basically sales taxes. Either would increase the unfairness of our tax system and condemn us to an endless string of recessions. A tax on net worth (as part of the fundamental tax reform proposed at this site) on those who have profited most from government services would improve fairness and make our economy more recession-proof.
Tax inequity: As the Essay shows right now a millionaire investment-class family can easily pay one-half the total taxes rate on their income of working middle-class family. Middle class families often pay over half their entire wealth (>50% of net worth) in taxes each year, while the third-richest man in the world pays a about 2% of his net worth, a tax rate 25 times lower. The tax system has helped assure that the top 1% owns 40% of the nation’s wealth. The top 20% owns 87%.
A VAT would make all the above inequity figures worse. It taxes spending. Compared to the wealthy, the middle and poor spend a much greater fraction of their income and wealth. Thus the VAT would be regressive on income and wealth. For instance, under the proposed "Fair Tax," Warren Buffett's federal tax bill (including his share of corporate taxes) would drop from about 11% to 0.04% of his income and investment gains, a 250-fold drop. The minimum wage worker’s total taxes would decrease from 30% to about 20% of her income (after prebate), assuming she spends her entire income. That’s 10,000 times Mr Buffett’s rate. So under the Fair Tax, the poor do a little better, the rich do stupendously better, and that leaves the middle class to make up the difference. The money has to come from somewhere. The “Fair” tax worsens current tax inequities substantially.
On the other hand the 0.5-2% wealth tax on net worths greater than about $800,000 would reduce current tax inequities. Under the comprehensive reform proposed (Proposed Fair Share Tax Reform), Warren Buffett’s total tax bill would increase to about 35% of his income and investment gains, about the total tax rate our hypothetical middle-class family now pays on its wages. The minimum wage worker’s total tax bill is decreased to about 1%. Typical middle class families would pay about 15-20% of income in total taxes. They would pay federal-state-local income tax, probably no net-worth tax and a few excise taxes; No Social security, property, sales taxes.
The Economy: Investment income and gains are now taxed at 2-100-fold lower rates that income from work (production). Therefore, investment is encouraged relative to work. The United State's concentration of wealth in the very few further encourages investment over work and spending. Give a millionaire a dollar and he will invest it. A poor person will spend it. A middle class person will spend most of it and save (invest) the rest. There is such a thing as encouraging more investment than the economy can sustain, particularly if work and consumer spending drop as the middle class is squeezed.
If tax distortions encourage investment over the other two parts of the economy (work/production and spending/consumption), too many investment dollars chase too few worthy investments. Under supply and demand pressure, investment prices soar. This is an investment bubble, which will eventually burst, and when it does, usually causes a recession. Then, the poor and middle class suffer with job loss, salary reduction, and evaporation of their retirement savings. Any financial regulations that try to curtail irresponsible investing will be overwhelmed by market forces, in this case distorted market forces.
A VAT would mean that investment income gets even more favored tax treatment than under the current system. The wealth concentration in the investing class would increase. The drastic increase in prices caused by the VAT would cause consumption to plummet. Each of these three effects would lead to even more bubbles…busts… recessions. On the other hand, a net worth (wealth) tax would allow a reduction in taxes on work and consumption and so would have the opposite effects: reduce the favored tax treatment for investment, reduce wealth concentration, and increase middle class consumption. Investment would be matched to consumption. Recessions, which undo much of the previous economic progress, would be less frequent and more shallow. The economy would soar. This would increase tax revenues further.
There is much empiric evidence from history that supports the claims made on this page. See the paragraphs next to President Clinton's photo on the Criticisms Answered page. It is probably not coincidental that the two most recent investment bubbles began here in the United States, the industrialized country with the greatest wealth disparity and that each occurred (2001, 2008) a few years after investments were given even more favored tax treatment (1997, 2001, 2003). Nor is it coincidental that the Great Depression started with the US stock market crash, just after the last time our wealth disparity reached the levels reached in 2000.