Sunday, December 19, 2010

The VAT v. "The Single Tax"

Chrystal Freeland discussed the idea of a value added tax on Ali Velshi today. The plus of it is to reduce consumption; the minus is that it is regressive, although that could be offset with credits.

Fareed Zakaria discussed the increased fees (resulting in “demonstrations” in London) and increased VAT in Britain with George Osborne. Gordon Browne disagreed, saying

I can recall back in the early 1970s the Far Left (“People’s Party”) wanted a “Single Tax”, which it claimed must he an “income tax”, so that “life was fair” and everybody started at the same place in line (that’s what Chairman Mao wanted).  I think we studied "The Single Tax" in high school government class.

Zakaria said that US Congress was playing a shell game, risking financial instability in order to pretend it could keep tax cuts. Britain, Zakaria thought, may be facing its problems more squarely and the UK may be much more creditworthy in the future.

1 comment:

Luis Carlos said...

Regarding advantages and disadvantages of a bank transactions tax, let me draw your attention to a recent book that discusses the Brazilian experience with its use as internal form of taxation.

The book is available at and is called.

Bank Transactions: Pathway to the single tax ideal by Marcos Cintra, a Harvard trained professor of Economics in Brazil.

After all, is a Bank transactions tax a bad idea?

This book proves that this modern tax technology may become the building block for tax reform around the world.

Tax reform is a recurrent theme in public policy around the world. Nevertheless, since the spread of value-added taxes (VAT´s) in the second half of the nineteen hundreds, little technological progress has taken place in this important field of public policy.

This book brings fresh new concepts into this debate, and shows that

a-) value-added taxes can be rightfully challenged in its presumptive virtues of neutrality, efficiency, economicity, and equity, especially in countries with a federal political organization, and

b-) bank transactions taxes, a tax species that evolved directly out of technological modernization of monetary and banking institutions with the coming of the electronic age, could displace VAT´s as the predominant element in tax reform around the world.

The typical criticism of turnover taxes, such as a bank transactions tax, stresses the allocative distortions which they presumably introduce in the economy through massive relative-price changes introduced by its cumulative nature.

In this book, such widely accepted “truth”, which has become dogma among economists, is carefully tested through the use of input-output simulation models for 110 products constructed from Brazilian National Accounts data. It is shown that such uncritical belief in the superiority of value-added taxation is based on a set of strong assumptions which are, nevertheless, seriously weakened by lack of empirical validation.

The conclusion is that since bank transaction taxes require lower tax rates than VAT´s to collect a given revenue target, they introduce less allocative distortions than conventional tax systems, and can be more efficient than value-added taxation.

Best regards

Luis Carlos da Silva