Value Added Taxes and Capitalism

I write a lot about value added taxes and often receive the same response, that they are regressive. As a single tax, this is true, although mitigating factors are whether there is some type of rebate, increase to net wages during transition (when they change the tax tables) and especially if there is a surtax on high incomes and inheritances (preferably one that treats cash or in-kind distributions as normal income). Every single tax need not be progressive if the entire system is.

The reality is that, for the most part, there is no difference for consumers between paying a VAT and paying embedded income and payroll taxes in the price of the product. When you buy any good or service, the salary and associated taxes, from the janitor to the store clerk to the line employee to the CEO are included. The only difference is that for a VAT, labor and capital are taxed at an equal rate. Also, income taxation for higher income shareholders and CEOs may not all be included in the price because of deferred compensation through savings which are harder to track, so separate taxation is still required, which also makes sure that richer people pay a higher rate.

In a free and competitive market, taxes that are levied are paid. In capitalism, however, price can be manipulated for tax effects, including outsourcing and off-shoring production and design. Any CFO or CEO that does not know how much of the product price is attributable to their own taxes, payroll taxes and employee income taxes (which they collect for IRS) and the corporate profits tax should be fired. Of course, lowering those tax rates won’t increase hiring, increase dividends by much or decrease prices. The money will go to the Executive Class in bonuses. He who makes the rules, gets the gold. As importantly, in oligopolies, the company has the power to set prices, not the free market. Most of the prices we pay are either oligopoly or monopoly set, often with little regulation to keep them down.

The tax plan I put forward, which includes a subtraction VAT with deductions and credits for employee child subsidies, health care, retirement savings, education, and remedial education and mental health through charitable giving can be manipulated to zero as long as the alternative services are superior to what the government offers. Beyond that, there is little room to game the system. All items are VAT payable and all income above a certain level is taxed at the same rate. It is more fair and more obvious than trying to calculate who pays what part of corporate income taxes and what is the true embedded tax rate in the price of a product. We can’t stop oligopoly pricing with taxes except to the extent that employee-owned firms start producing more of what their owners consume, taking them out of the market entirely, but that is a different story.