The Corner

New York ‘Bagel Tax’ Reveals VAT Flaws

Washington think tanks and commentators continue to spin out impressive reams attempting to explain the necessity and virtues of adding a VAT (value-added tax) on top of all the taxes the federal government already collects. The fiscal-policy problem is real enough; thanks to the Obama spending surge, federal budget deficits are unsustainable and a course correction is inevitable. But what most VAT-istas refuse to acknowledge is that the problem is due to new spending, not a sudden collapse in the ability of the federal tax system to raise revenues.

Even so, it’s not always easy to explain why the VAT is the wrong answer. In this, the city of New York has rendered notable if unintended assistance.

Under the tax laws extant in the Big Apple, if a bagel is sold whole, then it is, well, a bagel. But if the bagel is sliced before it is sold, then it falls under the category of “processed foods” and, as a processed food, is subject to a higher tax — a nine-cent tax, to be specific. Since New York City has already spent its way to fiscal oblivion while driving taxpayers out of the city with punitive taxes, this nine-cent tax has become suddenly critical to the city’s financial survival. The New York Department of Taxation and Finance wants its nine extra cents, hold the lox.

This might be a funny and absurd story, but it’s not a rare story to anyone who’s dealt with European VATs. These VATs — in effect national retail sales taxes — have been around for decades, and since their inception all manner of special rates and exemptions have been added to them in order to massage the costs and purchases of the nation’s consumers. Want a biscuit with your soup? The tax is one amount. Want to buy the biscuit wrapped separately? It’s a different amount. All times millions of products times millions of transactions daily.

It’s not that the income tax is pure. On the contrary, it’s a mess. But those who are pushing a pure VAT are living in a fantasy land if they think the United States Congress is going to enact a nice, clean VAT, free of special tinkerings, rates, and exemptions for such things as food, medicine, education, shelter, telephone service, electricity, heating oil, and on and on. The VAT would open up a whole new realm for Congress to play with other people’s money, and a whole new opportunity for lobbyists to ply Washington to manipulate those rules. New York’s silly bagel rule is just a slice of what would be to come.

J. D. Foster is the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.

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