Tax Break

Who said tax is boring?

Tax that must not be named

Big Brother

Big Brother

Standing in the Great Hall of Hogwarts one day this summer in the company of my youngest son and half of the picture-popping population of Japan, I was the only muggle who, when asked by the Warner Brothers Studio Guide which House I would want the Sorting Hat to direct me to, did not reply Gryffindor. To my offspring’s  immense embarrassment, I went for Slytherin which produced by far the most interesting characters in the Harry Potter pantheon.

As Halloween loomed ominously over the foggy horizon last week, I had reason to rejoice over my unconventional choice of House, as an old colleague dropped by the office to drain my brain over a cup of steaming coffee. He just happens to be the kid brother of Lucius Malfoy, Lord Whatshisname’s trusted lieutenant. (If any parseltongue speakers happen to be passing by this blog on the way to spying on something more interesting, I wish to state categorically that my old colleague is an exceptionally nice guy whom it is always a pleasure to meet. Any relative of Lucius Malfoy is a friend of mine – really.)

If you fancy scaring someone this Halloween and you happen to be passing through Washington DC, creep up on a member of the House Ways and Means Committee and whisper “V.A.T.” in his ear.

Washington does not like VAT. In a city that breeds acronyms with pride, VAT is a dirty acronym.

Republicans and, to a lesser extent, Democrats  will – while frothing at the mouth – provide an excellent list of reasons not to impose a VAT in America: it hasn’t proven itself; the tax is regressive (clobbers poor more than rich); it will lead to less spending in the economy and hence recession; it will lead to inflation; it is not transparent; it will encourage Big Government. They have a point – the point at the top of their wizardy Dunce Hats.

Obama's Healthcare Halloween Costume

Obama’s Healthcare Halloween Costume

If these politicians would strain their heads for a moment to see beyond  the Atlantic Seaboard, they might notice that VAT has been successfully adopted in around 150 countries (It will surprise American politicians that there are more than 150 countries. They used to think there are only 4  – America, Canada, Russia and Abroad). The tax is, on the face of it, regressive (wealthy people spend less of their annual income on consumption)  but this is countered by the freedom to introduce negative income tax for lower-income groups (or at least raise the threshold for paying tax) as well as the fact that VAT is effectively a lump-sum tax on wealth – over a lifetime even the wealthy tend to spend a large chunk of their dosh and so their capital (which is otherwise free of tax) partially goes on VAT. Moreover, governments often exempt transactions considered basic living expenses (food, clothing, stay at the Kensington Hilton). While experience has shown that the imposition of VAT leads to a one time increase in prices which could have an effect on demand, as part of a government’s macroeconomic policy that can be offset by decreases in corporate and income tax rates which boost the economy. There is little evidence of inflation as a result of VAT and transparency can be guaranteed by insisting on the VAT amount being included on price tags (which some countries have actually outlawed in supermarkets and retail stores because it confuses the consumer – just like the abominal sales tax in the US). As regards the fear of Big Government, VAT is a relatively efficient tax, the rate of which can be adjusted at a stroke – but while during the inflationary 1970s major increases did occur, nowadays – in normal economic circumstances – increases tend to be incremental (a recent exception is Japan, where the tax has been historically exceptionally low).

The real reason that US politicians do not go for a federal VAT appears to be none-of-the-above. The American political system is too populist for its own good. Because of the Primaries system in US elections Members of Congress have their eyes permanently fixed on re-election (especially in the House of Representatives with two-year terms) so that the Whips have limited power to rein them in (they also have nothing to offer them by way of patronage since they cannot serve simultaneously in Congress and the Administration).

Not-So-Sweet Nutcracker

Not-So-Sweet Nutcracker

To understand the contrast with Britain: my favourite Whip story comes from 1979 when the Labour Party was reduced to ignominious opposition by the Thatcher juggernaut. Newly elected Jack Straw (much later Labour Foreign Secretary) was confronted by the fearsome Walter Harrison. Without saying a word, the legendary Whip grabbed Straw by his privates and squeezed hard (I shall refrain from the graphic details as my kids read this). Shocked and in pain, Straw managed to gasp: “What did I do?” The reply from the blunt Yorkshireman was quick in coming: “Nowt, but think what I would do to you if you ever crossed me”.

Overall, the Americans do not seem to have much of a choice in the long-term. Even if they get beyond the current recurring gridlock, the dream to slash corporate tax rates while slashing the deficit will surely not be achieved without a VAT. As opposed to Japan, the US still has the luxury of controlling the printing presses of the world’s reserve currency. The threat of that position being taken by the Euro seems to have subsided by default (literally). Whether the Yuan, too easily controlled by an authoritarian government, could take its place is doubtful. But the party surely cannot go on for ever.

US politicians would do well to come to terms with a federal consumption tax before the burgeoning deficit consumes them. Wishing you all a gruesome Halloween.

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3 thoughts on “Tax that must not be named

  1. Every single time I buy goods in the US I arrive at the check-out, pay my bill and see that’s its more than the product label shows. And every time I realise it’s because of the accursed sales tax. But by the time I’ve waiting so long to pay I’m hardly going to give up my precious purchases. And yet like every other good consumer, I forget until the next time it happens. So there should be no issue in adding VAT as long as the price tag shows the net and not the gross price, as long as there are mugs (muggles?) like me around….

  2. I think it’s perfectly sensible to ignore the problem until they default and destroy the world economy.

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