Flat versus VAT

Posted in Weekly Newsletter on by .

Cutting taxesBen Carson emerged from his sinking poll numbers last week to offer a tax reform proposal that’s constructive in at least two ways.

First, Carson’s “flat tax” aligns with the sort of tax simplification that’s the essence of genuine reform. Nobody except maybe a few wind energy enthusiasts can still be uncertain that the current tax system is convoluted by design, as a self-perpetuating favor machine.

Second, Carson’s idea provides an illuminating contrast with a value-added tax (VAT), favored by candidates Cruz and Paul as a tradeoff to abolish the corporate income and payroll taxes.  Getting rid of those taxes sounds good, but the 20th century in Wisconsin could be regarded as an extended seminar in what you get by adopting one tax to eliminate another. (Answer: two taxes.)

A creation of European tax reformers—which may tell you something—a VAT adds a layer of taxation each time a raw material or a product goes through a new stage of production that makes it more valuable. In other words, it imposes a little penalty each time someone takes something and improves it. The consumer ultimately pays. And attractively low initial rates have a way of going higher.

Carson’s plan hardly meets with universal applause, and he has unfortunately danced a bit on details.

But he deserves credit for advancing the discussion of a policy issue that could yield big dividends in economic expansion while addressing the problem of too many people paying nothing, and thus having no stake in curtailing the expansion of government. At least GOP candidates are initiating discussion of a tax system we needn’t be ashamed of.

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