So Ive been trying to get my head around the discussion about raising, or not raising, income taxes and VAT (aka sales tax). Everyone seems to be assuming that raising both will simply translate into more money in the governments hands (and a lower deficit) and that lowering either will mean less money in the governments hands. But thinking a bit about this, it cant be that simple. I assume that this has been studied by Economists, but Im starting here from scratch. Comments welcome. Suppose VAT goes up. More money collected by the government for each weeks groceries or for all big item purchases. More money collected presumably means more social programs and less deficit. But it also means, especially at the bottom of the income scale but also at the upper end, that people will be buying less. The poorer end of the scale will be able to afford a bit less food and the middle class will be able to afford a bit less electronics. Besides the social impact (esp on the poor), this also means less income for hard-working store-owners. Maybe less store workers employed. Certainly pain to individual store owners. But more to the point, less income tax taken in from store owners and from others further up the food chain. Taking it one step further, store owners and store workers and truck drivers etc will have a bit less to spend, so it spirals. Will the initial boost in VAT income be more than the tax collection hit up the line? Probably. But its not a simple equation. Same for income tax. Raise the income tax, more money to the government and less deficit. But that means that I and a million others will be spending a bit less at the store, a bit less to gardeners and cleaners, and a bit less in restaurants and non-necessity stores. Less VAT collected because income tax took away some of our spending money. So all of the above earn less, and pay less income tax, and struggle themselves a bit more, and they spend less on other things, and around and around it goes. Is the income tax gain more than the lost income tax and VAT up the line? Maybe. But its not simple. The first thing that Americans say when I mention this is that Reaganomics failed. But that put the extra money in the hands of the upper end of the income scale, who saved it instead of spending it. That wouldnt happen if more money was in the hands of the lower or middle, even upper middle, classes, meaning anyone who decides what to spend based on how much they earn. Im not sure how a serious economic analysis of this stuff will turn out. Its complicated. But Id sure love to hear a single politician or news pundit relate to the issues complexity, and realize that raising VAT to lower the deficit will have ripple effects that will hurt not only people but also the governments income tax revenues and more. Is there ever going to anyone on the news whos smart enough to realize that this is a complex deal? jpost/Business/Business-News/In-reversal-Lapid-nixes-2014-income-tax-hike-332978
Posted on: Tue, 26 Nov 2013 06:46:58 +0000