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Friday, January 28, 2011

Spanish Social Security

Or is that "Social Insecurity"?
Spain spent 95.7 billion euros on contributions-based pensions in 2010, almost 10 percent of GDP.
Note the comment about 2050 debt required to fund the current system being about 190% of GDP. That's not going to happen.

I can't find this paper in English, but if you read Spanish you might want to see this paper by the economist cited in the article (and others). It's about the regressive impact of raising the Value-Added Tax in Spain.

Díaz-Giménez is a respected economist. You might find his 2007 paper on a flat-tax system in the US interesting. The model used has dated tax rates, but the conclusions will hold.

Valued added means that you tax your own production
every step of the way. In an age of fiat currencies,
tariffs are still needed.
If the VAT is also levied on imports at the point of importation, it will fix that problem. And such a levy, if I understand correctly, does not violate our various free-trade agreements since it is applied equally to all goods, foreign or domestic.

The VAT is a bad way to do the national sales tax. It's an accounting nightmare, and it forces everyone in the supply chain to find the capital to pay it. But it's the only one our Constitution will now allow.

And if it were in lieu of ALL income taxes on business, it would be a significant improvement. If it were in lieu of ALL income taxes, period, it would be even better.

And if it were working, it might be easier to make a case for the Fair Tax.
VATs are a government jobs program. A really bad idea.

The income tax system we have now is horribly corrupt. A VAT will only create even more opportunities for corruption.
I agree with Mr. Arbuckle. Anyone who dislikes the current level of IRS intrusion in their lives ought to be petrified at the idea of a VAT, no matter how efficient it supposedly is. It can only work honestly if there is a tremendous level of government oversight of inventories, both business and personal. That means they're not just looking at your bank statements, they're coming to your wood shop and counting the 2X4's. Otherwise, the cheating gets out of hand in a hurry.

Europeans are more accepting of both corruption and government intrusion than Americans are, so they don't mind so much.

A sales tax, along the lines of existing state sales taxes, is far easier to implement, even if it doesn't capture every penny from every sale. It would do a reasonable job of taxing imports equally with domestic production, as well.
I'm recommending neither a VAT nor the flat tax.

However the paper on the flat tax has an interesting dichotomy between efficiency and fairness that's relevant.

Basically, they found that making it too progressive shut off growth, whereas a flat tax with a less progressive structure produced much higher growth over time, because it raised capital investment.

If you read that paper in conjunction with the next post up you'll see why I might be thinking on those lines.

Paradoxically, the flat tax that produced growth helped the lower income levels a lot more than the progressive structure. It produced jobs.
Neil: a national sales tax will require a Constitutional Amendment, which will require time and will require the trust of people who can't get their heads around the idea that a "progressive" tax hurts the poor most of all.

Someone who know more than me can comment on this conjecture: that once a business goes to accrual accounting, the additional intrusion necessary for the VAT is small. Public companies are accustomed to the extra scrutiny, but yes, it would be rough on smaller businesses. And no, we don't need that. But the ideal choice is not within our immediate reach and we have the choice of trying for something which we may be able to do now or reaching for something that we can't get in the next four or five years.

This is a new one to me. If a sales tax needs an amendment (which makes sense to me), why wouldn't a VAT?
A VAT is a tax on net income, applied in layer upon layer in the supply chain.

A sales tax is a tax on gross income of a particular kind.

The federal income tax would be unconstitutional were it not for an amendment passed that allows it specifically.
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