It’s called ‘VAT’, guys

Reporting from the NYT indicates that states across the country, facing huge fiscal deficits they must close, are going to institute a number of new taxes “on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.”

The Times tries to explain this as a move to widen the tax base to match the modern economy:

In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods. But as the nation’s economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that.

It’s certainly true that, given the modern service economy, state sales taxes don’t cover nearly as much of total economic activity as they once did. But the new state taxes are in no way a serious attempt to widen the tax base and fix the problems of the sales and income taxes.

How do I know this? Well, if you’re really and truly interested in doing this right, then you implement a VAT, or a Value Added Tax. VATs are what many European states use to solve the problem of a narrow sales tax. They have the benefit of taxing both goods and services , putting the cost of compliance on the company instead of the state, and taxing only the value-added at each stage, instead of having the cascading effect of a traditional sales tax.

The most important point about the VAT is that it applies at an equal rate to everything you buy. No chance to game the system, no way lobbyists can say, “Don’t tax clowns, tax those evil armored car services instead”. But imposing a VAT would be too politically difficult in most US states right now, given our puerile political culture. Socialism! So instead, our state governments are imposing specific taxes on specific services that just happen to be politically weak, or easy targets, or deemed ‘bad’ in some moral framework. Just so we’re clear, this is a terrible way to impose taxes. It will artificially shift consumption away from the services unlucky enough to be taxed and towards the services that had a better lobbying operation in the state capital. From the standpoint of justice and free markets, it’s probably better to impose a lower VAT that covers everybody than it is to tax the bejeesus out of a grab-bag of targeted services. After all, clowns are people, too.


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This is a group blog. JSC5 currently writes from the US. JSC7 writes from behind the Great Firewall of China.

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