Emmanuel Saez on Value-added Tax - Dictionary of Arguments
Saez I 185
Value-added tax/VAT/Saez/Zucman: Contrary to what is widely believed, the VAT exempts a significant fraction of the economy. Finance, education, and health care, three of the largest sectors in our modern economies, are typically exempt. Finance has contributed more than any other sector to the upsurge in income inequality in the United States; health care is high on the list too.(1) Introducing a new tax that exempts these sectors would not exactly advance the fight against inequality. VAT excludes finance because there’s no easy way to compute “value-added” in the financial industry. For regular businesses, value-added is equal to sales to customers minus cost of intermediate inputs. The financial sector manages your funds (bank accounts, mutual and pension funds) by taking a cut on the returns, and it lends you money (credit cards, student loans, mortgages) at a high rate. But it does not explicitly and separately charge for its services.
Saez I 186
(...) because the VAT is (correctly) perceived as regressive, necessities such as food receive preferential rates. For all these reasons, France and Germany for example, which have standard VAT rates of 20% and 19% respectively, only raise about 8% of their national income via VAT.(2) In other words, the VAT only draws on 40% of their national income. In the United States—where the health care and finance sectors are larger than in Europe, but where people save less of their income overall—the base of the VAT would be a similarly low fraction of total national income. To raise 6% of national income in revenue, America would need to apply a 15% VAT rate. The limitations of VAT and payroll taxes mean they aren’t up to the job of funding the social state at a time of high inequality. >Social State/Saez.
Saez I 187
Solution/Saez/Zucman: The United States can leapfrog the VAT. It can pave the way in the creation of the fiscal institutions of the twenty-first century(...) by creating a national >income tax.
1. Bakija, Jon, Adam Cole, and Bradley T. Heim. “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from US Tax Return Data.” Williams College Department of Economics Working Paper 2010–22, revised January 2012.
2. Organisation for Economic Co-operation and Development, Revenue Statistics (2018c), Revenue Statistics 2018. Paris: OECD Press, 2018c._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.