Sunday, February 20, 2005

Sales Tax

For once, I think I've come across an issue where I'd like to respectfully disagree with Matt Yglesias. Commenting on a national sales tax report from Knight Ridder Matt says such a tax "would be a disaster virtually without precedent in modern history", because "the incentives to evade the tax through cash payments would be enormous".

I think he is wrong, and I'd like to cite my beloved Norway as an example. As it happens Norwegians already pay 23% VAT on everything except food (and a few other types of merchandise I think). And as far as I know tax evasion is not a big problem. My gut feeling (there may be some data on this somewhere) is that income tax evasion is a bigger problem. Income taxes are about as high as they are in the US, perhaps a bit higher.

As a non-practicing econ major I actually think sales taxes have a lot going for them - they encourage savings, are simpler to collect and would virtually eliminate the need for personal tax returns and income tax planning (and related consultants).

Of course sales taxes are also strongly regressive and would have to be accompanied by huge corresponding distribution of wealth from rich to poor. I don't see how this would ever be politically possible in America; even in Europe they have to resort to indirect measures such as collective bargaining and strict employment laws to achieve it. Thus, like Matt and most other American liberals I am also officially against the national sales tax. But not because I think people will cheat.

UPDATE: Jesse Taylor over at Pandangon seems to think I messed up by citing a "successful" VAT tax as an argument in the debate about the national sales tax. He probably has a point, perhaps it is easier to evade a straight point-of-sale tax than a value-added tax. I'm certainly no expert on taxation but I suspect that's why the Europeans went with VATs in the first place.

If Matt thinks replacing the income tax with a a national sales tax is a terrible idea while replacing the income tax with a VAT is a far better one then I take back my previous assertion. If not then I still disagree with him.

And as for Republican intentions; yes they're clearly hell-bent on a strategy of deception to advance their narrow self interests. But that doesn't mean we should react to every Republican proposal with knee-jerk opposition. In fact I took Jonathan Chait's argument to heart the other day as a model for what liberalism is or ought to be:
liberals are agnostic about the size of government, and therefore more evidence-based in their approach to public policy, and therefore better able to make policies that create a better life for most Americans
As liberals we owe it to ourselves to examine the merits of all proposals, good or bad.

Now back to my usual habit of heaping praise on everything Matt has to say: This post on Israel/Palestine is just awesome! It elegantly says what I clumsily tried to say earlier with this question:
Imagine for a moment that Sweden and Norway are mortal enemies at war. Then ask yourself this question: Would it be in America's best interest to have me and my fellow Norwegian-Americans direct US policies in Scandinavia?

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