In response to Sean Linnane’s post recalling the anniversary of the Whiskey Rebellion, the historical lesson drawn from this event is usually that Americans are inherently anti-tax. Actually, that’s not quite true. The problem with taxing whiskey wasn’t so much that Americans weren’t willing to be taxed as that whiskey was the principal medium of exchange — it was what people used for money. Consequently, the same jug of whiskey might be sold and resold many times before someone drank it. Since federal sales taxes applied on each transaction, the actual tax borne by a given jug of whiskey might in principle be very high — far higher than the tax. So by taxing whiskey the way it did, the government made it difficult to do any economic transaction other than barter (specie was scarce).
This tells us two things relevant to current economic discussions. First it shows why a VAT is superior to a sales tax because previous taxes paid are credited to final sales, thus avoiding the cascading problem that was at the root of the whiskey rebellion. Second, it shows why things like the Tobin tax are a bad idea. Because the tax is on transactions rather than final sales one doesn’t know who actually bears the burden of the tax or how much the burden is because of cascading.
4 responses so far
1 joemarier // Sep 25, 2009 at 8:12 am
Well, I’m not sure how much the federal government wanted alternate media of exchange in the first place. The cascading may have been a feature, not a bug.
2 EscapeVelocity // Sep 25, 2009 at 1:44 pm
Pork was also a common currency.
3 marxst1 // Sep 25, 2009 at 3:15 pm
Can anyone refer me to a good resource for understanding VAT and how it would be implemented? Bartlett, and a few others seem to be a proponent ogf it, and I admit as a philosophical exercise it seems interesting. However, and this may just come from a limited understanding of it, I would think you have some major hurdles:
1) Administration costs for tracking a VAT tax seem like a nightmare.
2) How do you balance the tax so it doesn’t become “regressive” costing a lot more for lower priced goods than higher priced goods which would end up putting the tax penalty more on the poor.
3) In all examples I’ve found, you still have the same amount of tax paid (and really it ends up being paid by the consumer either way since the “final” price of an item would be the same) so what would be so beneficial about it?
4) If it does decrease the tax burden at the production level (pre consumer) like they say, where do we recoup that money in this system? In other words, won’t you just end up having to increase the overall tax rate all the way down the chain?
Any help would be appreciated.
4 ltoro1 // Sep 25, 2009 at 8:06 pm
marxst1 , I will try to get back with you on some resources vis a vis the VAT, but first I am going to take a stab at your hurdles (based on my understanding).
1) I would assume your administration costs would be similar to what states currently incur administering sales taxes. In fact, the federal government would probably have to contract with the states to remit the VAT to the Feds.
2) Don’t know how you handle this without exempting certain items like food and medicine. For what its worth, all of the columns I’ve read that were written by Bartlett addressing the VAT assumed that lower income people should be paying more taxes than they are now.
3) Yes, ultimately the consumer pays the tax. The point is that the VAT is effectively only paid once for a particular good or service. One of the problems with a retail sales tax, especially if you have a sales tax on services (legal fees, accounting fees, etc.), is that you can end up taxing intermediate goods and services rather than final goods and services. The problem is, that this can lead to a pyramiding of taxes (i.e. the same good or service may be taxed more than once).
4) Marxst1, the way I see it, the producer collects and remits the tax. He or she does not pay it, in this case ( a VAT) the consumer does. However, I would argue something similar (with some qualifications) about corporate income taxes.
Hope this helps. I will try to post some links later on the VAT.
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