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Tuesday, October 14, 2003

VAT Taxes

In Jim's last tax post (Back to taxes), he proposes a combination income and Sales Tax. The VAT (Value Added Tax) is a close relative of the sales tax and is very common. VATs are usually preferred since the tax is collected in small increments at each point in the supply chain and therefore reduces the incentive to evade taxes. This post lists many VAT rates, for example, France 19.6%, Denmark 25%, etc., which are similar to the level that Jim is proposing. Since most countries with VATs have reasonably well functioning economies, there is nothing inherently catastrophically wrong with it.

On the other hand, is it true that consumption taxes keep people from "living beyond their means"? I don't see a lot of evidence of this in the literature one way or another. Also, what does it mean to live beyond ones means? Where do people get the money to do that? Does that really mean they spend more money than you personally feel is prudent when they are younger and less money than you personally feel is prudent when they're older? Is it a good idea to impose this particular fiscal choice on everybody whether they want it or not?

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