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Because some states have plans to substitute sales taxes for income taxes, talk about a similar move at the federal level has emerged, including perhaps the introduction of a European-style value-added tax (VAT). When similar proposals have surfaced in the past, they came to nothing. This time, too, Washington will reject the move, though some states may make the unilateral switch.
One big issue is the question of equity. Though consumption-based taxes are easier to administer than income taxes, and much less intrusive, they favor the rich at the expense of the poor. Poorer people, who are forced to spend every penny, wind up paying taxes on their entire income. But because wealthier people tend to save a greater part of their income, they are able to avoid some tax. This consideration alone likely will generate considerable opposition, particularly among representatives and senators from poorer districts and states. There are ways to make sales taxes less inequitable, with rebates to lower-income people, for example, or exclusions for certain staple products, but still, questions of equity remain, and, meanwhile, such solutions reintroduce administrative difficulties and intrusiveness.
Questions of intergenerational equity add to these objections. Because retired people have amassed their nest eggs under an income tax regime, and so have paid taxes on much of the income they have saved, they certainly would object to paying taxes now as they spend the money. Further, because retirees constitute a large and politically potent group, their objections alone could stop such a tax change. Homeowners would swell the ranks of the resistance, because a switch away from income taxes would take away real estate tax deductibility and so lower house values.
Still more powerful resistance would likely emerge from the states. For one, federal sales taxes would raise their costs. Right now, states make no contribution to the federal government, but a federal consumption tax or VAT would impose on everything states buy—from police cruisers to paper clips. For another, those states that rely on income taxes would lose the administrative and enforcement help they currently get from the federal code. Third, states that do rely on sales taxes would feel a tremendous and unwelcome pressure to conform to whatever system the federal authorities adopted. Fourth, questions would arise about which tax is applied first and whether the second tax would compound an already-administered tax—effectively a tax on tax. Finally, additional administrative difficulties would extend to all the cities and localities that rely on sales taxes of their own.
Those who take their cue from Europe argue that a federal VAT is inevitable, that all these other countries have one. That may be true, but it is a more difficult path to travel for the United States than for European nations because U.S. retirees are a more powerful voting and lobbying bloc than in Europe, but still more because the federal nature of this country introduces 50 powerful state political actors that are unknown in European government.