Some go so far as to call for abolition of “differential excise taxes on tobacco, alcohol and entertainment. These kinds of taxes, often called sin taxes, are disrespectful of people’s freely made choices and represent an unwarranted interference with private decision making.” Roy Cordato, Sales taxes and free choices, (May 25, 2010), http://www.newsobserver.com/2010/05/25/v-print/498695/sales-taxes-and-free-choices.html. That’s wild. The full letter is pasted below.
A more mainstream conservative view that is skeptical of excise taxes on specific goods says a tax should be “[n]eutral in its impact on resource allocation decisions” but allows for non-neutrality where there are negative externalities or “spillover effect.” Joint Economic Committee Study by Richard K. Vedder and Lowell E. Gallaway, Some Underlying Principles of Tax Policy (September 1998), http://www.house.gov/jec/fiscal/tx-grwth/taxpol/taxpol.htm.
Point of View
|Sales taxes and free choices
BY ROY CORDATO
Continue reading Free choice to use tobacco and alcohol — Tax free!
1. Simplistically, either we adopt a marijuana tax (low hanging fruit) or we go broke because can’t muster the will to make hard choices. This is a test.
2. For years, I worked for Congress on trying to tax income from intangibles, which is not only hard to measure, it’s hard even to locate (companies like to say it’s in tax havens). Locating marijuana will be simple unless the tax is so high as to encourage bootlegging. But once you find it, you can measure it. Or tax it based on potency.
Some conservative in the 21st century sense finds an easy target for mockery in the UK VAT on the op-ed page of today’s WSJ:
Food for animals creates other problems. If it is “suitable for all breeds” it is taxed, but if “it is held out for sale exclusively for working dogs” it is not, unless, of course, “it is biscuit or meal,” in which case it is taxed.
So dog food for “sheepdog breeds” is taxed, but dog food for “working sheep dogs of any breed” is not; food for greyhounds is taxed, food for “racing greyhounds” is not. This may be the only tax in Britain that favors work over leisure.
I don’t believe much of what the WSJ puts on its op-ed page, but we have to fight a tendency to complicate things too much.
The recent Xilinx case says:
“Purpose is paramount. The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer.” http://www.ca9.uscourts.gov/datastore/opinions/2010/03/22/06-74246.pdf
On the surface, parity between deals involving related parties and deals involving unrelated parties can be achieved by ignoring the relationship. That line of thinking would lead to the repeal the related party sales rules, because “If Dad cannot deduct his loss on the sale of closely held stock to Son, Dad does not have parity with an independent taxpayer.” But that repeal would not make sense. Neither does that Xilinx result.
Whatever the Government’s regulations or litigating position may say, a low-taxed subsidiary is not in the position of a contract manufacturer in a world full of contract manufacturers.
People know already how to fix the income tax. For instance, an unofficial list of loopholes and fixes appears at http://www.taxshelf.org/wiki/Main_Page. A broader list, a compilation of tax expenditures (not all of which need fixing) by the Joint Committee on Taxation of the U.S. Congress, appears at http://www.jct.gov/publications.html?func=select&id=5. There is plenty of tax learning to choose from if citizens want a better income tax.
A woman on Fox News used the term “VAT Tax” in the style of “IRA Account” and “ATM Machine.” At least the public is getting exposed to the idea.
A Value Added Tax avoids some problems of the income tax. For instance, the income tax often can’t locate the income of a cross-border corporation (multinational enterprise). That snipe hunt now requires folks to use the arm’s-length method of sourcing income. That method was a joke, the last time I looked, but this useful option shows up in The Shelf Project : “Tax the global income of all companies that do business in the United States on a consolidated basis with income allocated based upon sales, employment or other real world drivers, rather than relying upon transfer pricing regimes.” http://www.taxshelf.org/wiki/Stubs_for_Foreign.
If that option, a worldwide unitary income tax, makes sense but seems remote, a fallback is available: a Value Added Tax. A VAT seems a little like a worldwide unitary income tax that uses sales as the sole factor for income allocation.
The VAT uses sales as its base; single-factor sales unitary uses corporate income. Using income for a base may seem fairer, but giveaways decimate the income tax base. And multinationals’ income, if it can be found at all, is likely to be assigned to low-tax countries. Compared to income, sales are easy to find and measure.
The VAT lacks progressivity, but U.S. corporate tax rates are not steeply progressive.
The VAT uses sales as a base, so it loses whatever advantage comes from two traditional unitary factors, property and payroll. But those two factors may not be useful for unitary now. Payroll and property are the targets in a race to the bottom among jurisdictions like my State, North Carolina, that give tax breaks to companies that bring them in – or maintain them. Using them in the unitary method cuts against what jurisdictions want. Moreover, using a property factor requires people to find intangibles and measure them, which puts us back in the soup.
Arguments against a single-factor sales method appear at http://www.itepnet.org/pdf/pb11ssf.pdf.