The Corner

On Tax Fairness

From a reader:

Jonah,

While of course I agree with Arthur Brooks regarding the definition of fairness, I’m really concerned about where this is going.

 

It’s no secret that Obama’s lauded ‘deficit committee’ will recommend a VAT, and on paper anyway, that will more closely match the right’s version of ‘fairness’.  But I’m terrified about what such an obfuscated tool for picking winners and losers will look like in the hands of Congress.  That’s why I think we need to find a way to convince the Republican party to embrace a more transparent but equally broad based tax like a flat income tax or an actual ‘national sales tax’ (which is how the media will spin the VAT).  Otherwise they will be in the difficult position of arguing for bigger deficits against the Democrats new found ‘fiscal responsibility’.  If they have a more transparent alternative proposal, at least we poor citizens will have a fighting chance of keeping some economic merit as a part of how our economy defines the winners instead of profitability being defined by how effectively you manage to lobby for ‘targeted’ VAT givebacks.

This reminds me of Irwin Stelzer’s eye-opening piece on the VAT from last week. An excerpt:

The tax sounds simple, but don’t be fooled. Because both upper- and lower-income families pay the tax at an equal rate, the VAT is considered regressive; that is, it hits the poor harder than the better-off. So it is the practice in countries such as Britain to exempt food, which lower-income families spend a greater proportion of their income on. The technical term is “zero rating,” meaning that exempt items are taxed at a “zero rate.”

 

However, wait until the folks at the IRS get their hands on the regulations for the application of the new tax. They will undoubtedly turn to their more experienced British counterparts for guidance.

 

“Food of the kind used for human consumption,” to a British bureaucrat, is something “the average person, knowing what it is and how it is used, would consider it to be food or drink; and it is fit for human consumption. . . . The term includes . . . products like flour, which, although not eaten by themselves, are generally recognized food ingredients . . . [but] would not usually include . . . dietary supplements, food additives and similar products, which, although edible, are not generally regarded as food.”

 

And so, in the United Kingdom, according to the regulations of Her Majesty’s Inland Revenue Service, crackers made from tapioca starch carry no tax; prawn crackers made from cereals do. Frozen yogurt that needs to be thawed before eating is zero rated, frozen yogurt bears the tax. Get it? If you don’t, too bad—Her Majesty’s tax collectors are not in the habit of offering an explanation for their regulations.

Food for animals creates other problems. If it is “suitable for all breeds” it is taxed, but if “it is held out for sale exclusively for working dogs” it is not, unless, of course, “it is biscuit or meal,” in which case it is taxed.

 

So dog food for “sheepdog breeds” is taxed, but dog food for “working sheep dogs of any breed” is not; food for greyhounds is taxed, food for “racing greyhounds” is not. This may be the only tax in Britain that favors work over leisure.

 

Clothing also presents a problem for the British tax man. Two problems, actually.

 

First, what is clothing? Well, sailors’ lifejackets are clothing because they “have the form and function of clothing,” but “buoyancy aids” are not. Second, since children’s clothing is zero-rated, what fits into that category?

 

Bras up to and including size 34B; body stockings that measure no more than 27½ inches shoulder to crotch; babies’ shawls but not “mother-and-baby shawls intended to wrap around both mother and child.” There’s more, lots more, but you get the idea.

 

This process of writing regulations for the VAT man when he cometh is more than merely amusing. For one thing, it confers enormous power on faceless bureaucrats.

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