Replacing the federal income tax with a disaster in the making

Sometimes Republicans act like they want to lose the election. Why else would they be floating the idea, just before their national convention, of replacing the federal income tax with a value-added tax?

Here comes House Speaker Dennis Hastert (R-Ill.) talking about the wonderful idea of what looks, feels and almost smells like a regressive federal sales tax. Maybe Hastert and other Republicans talking up the idea haven’t noticed that Massachusetts Sen. John Kerry, the Democratic presidential nominee, is making President Bush’s alleged penchant for slipping tax breaks to the rich a big campaign issue.

Or maybe Hastert couldn’t help himself from hyping his new autobiography, “Speaker,” by extolling virtues of the value-added tax described in its pages. Or maybe Republicans who want to talk about this deserve a gold star for having the courage to promote what could be the most unpopular idea of the campaign.

The reason it’s politically stupid to push this idea is because the value-added tax itself is stupid. Yes, Europe has it. And the income tax has become outrageously complex and outrageously beneficial for countless special interests. But that isn’t reason enough to replace it with a tax that is just as complex and difficult to administer, but more unfair.

The value-added tax is imposed at each stage in the production and distribution chain. When petroleum is turned into a complex hydrocarbon called plastic, it gets taxed. When the plastic is turned into a dashboard, it gets taxed. When the dashboard, and the car it’s in, gets sold, it gets taxed. And when a consumer buys it, he pays the end-product tax, and all the accumulated value-added taxes that have been loaded into the final price of the car.

The tax’s advantages allegedly are many. The value-added tax supposedly gets rid of the hated U.S. Internal Revenue Service, frees Americans from having to make all kinds of decisions based on how it will affect their taxes, encourages savings and neuters Congress of the power to bend the income tax code to suit special interests. Taxing what you consume rather than what you earn has a certain puritanical goodness about it.

Unfortunately, there’s more bad about the value-added tax than good. Fundamentally it’s bad because it’s unfair. By taxing consumption instead of income, the value-added tax will consume a greater share of the incomes of the poor and middle class than of the rich. The tax is a regressive tax, and the income tax, for all its faults, is progressive. Those who can afford to pay more should pay more. Even a flat income tax would be more fair.

Then comes a long list of other problems. How much will it cost? How high will the tax have to be to replace the revenue lost from the abolition of the income tax? No one really knows, as the wide range of guesses by various experts show: Perhaps 15 percent on all goods and services sold at the retail level. Or 23 percent. Maybe 30 percent, or even up to a staggering 50 percent. Buying something for $5? Add on another $2.50 for the tax. Incredible.

Suppose lower income families are not required to pay the tax on purchases of more than $18,000 a year, as some have proposed. Who makes up the difference? How do you prove that you haven’t bought more than $18,000 worth of goods? Will the government have to create a whole new bureaucracy to keep track of everyone’s purchases?

Do we tax imported products? How about outsourced services? How would its collection be enforced, and wouldn’t the new collection apparatus just recomplicate everything? How do we prevent wholesale cheating and the loss of sales to foreign products not burdened with a similar tax? Won’t we create a huge black market? Do we, like some European countries, exempt manufacturers from paying taxes on products in certain early or intermediate stages of production?

Won’t tax-driven higher prices spur inflation and cool the economy? Do you tax food, clothing and medicine, and thus increase the relative burden on lower-income individuals and families? On Internet sales? Aren’t we on the same path as the income tax, by creating all kinds of complicated exemptions and rules to achieve socially and economically desirable goals?

And doesn’t this whole idea arise from the utopian view that if we just wipe the slate clean we can create a new tax system free of abuses, complications and complexities?

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