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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 personal
federal tax bill 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 40% of his income and investment gains, almost exactly 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.
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|  In this corner of many pages, I depict important endeavors we pay for with our taxes. [The first social security check received] | |
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