A recurring controversy in the Guaranteed Minimum Income (GMI) discussion is the question which tax to use to fund the system. For some reason, the major proponents have fallen to like primarily single-tax systems, and the main debate seems to be about whether to use the Value-Added Tax (VAT) or Income Tax (IT) for the system. The arguments presented are often rather bogus, though.
A video I saw recently in German is defending the use of VAT with a variety of arguments. Two of those arguments struck me as particularly interesting.
Does a VAT Cope Better With Reduced Work?
The first argument is basically saying that since the industrial revolution, we have been working at reducing the work needed by humans. If we tax income, the tax revenue will go down. On the other hand, consumption is always necessary, even if we do not earn anything, we always have to consume, hence a consumption tax like the VAT will always generate tax income, where an IT will not. They propose a VAT of 100%, but propose to remove most other taxes, including the income tax.
This argument feels intuitively correct, but it is flawed as a closer examination shows.
Let’s assume a 100% VAT and a 0% IT. Let’s further say everyone receives a GMI of I monetary units. Let’s further assume that all that money is spent on consumption, and not put on a saving’s account or similar. At a 100% VAT, that means the state gets I/2 of tax revenue from the purchases per person. The VAT from the GMI alone thus covers half the GMI. To cover the other half, there needs to be another I monetary units per person that is being spent, yielding another I/2 in taxes, covering the whole GMI of I.
Hence, the population will have to earn another I of monetary units via other means—via income. So even with a VAT, the population has to earn some money somehow.
Compare this to the IT model. We assume a 0% VAT and a 50% IT. Everyone now receives a GMI of I/2 monetary units—as there is no VAT, the goods are priced at half the cost of before, so the population can buy the same amount of goods with that. For the state to earn I/2 monetary units via the 50% IT, the population needs to earn I monetary units. Which is exactly the same as in the VAT model.
Concerning specifically this argument, VAT and IT are absolutely equivalent.
Does an IT Punish Work by Humans?
The other argument is that an income tax negatively reinforces work by humans. If an employer has to pay income tax, every wage for a human costs more, disincentivizing employing people.
The mentioned video tried to clarify this by comparing two products with different percentages of human work involved. A product with higher human work involved will grow in price faster than a product with less human work involved, because cost for automatons do not include an income tax overhead.
Again, this argument appeals intuitively. But again, it is flawed—much in the same way as the one above, even.
Let’s say a worker earns W money a month in a VAT-only system. This means he can spend W/2 money units on products, as the other W/2 will go to the state as VAT.
In an IT-only system, the worker thus only needs W/2 money units from the employer to afford the same products. At an IT rate of 50%, the employer has to pay W money, just like in the VAT-only system.
Again, IT and VAT are very much interchangeable.
Differences
Just because the two are equivalent concerning these specific arguments does not mean that the two taxes are equivalent in all cases.
The two kinds of taxes have different ways of being collected. Both require paperwork, but the VAT is slightly easier to control due to the specific situations in which it applies.
More importantly, though, the two taxes affect imports and exports.
An income tax applies to exports, but not to imports. Thus goods imported do not include the IT and will have an advantage over locally-produced goods which include the IT. Goods exported will have the IT included as well, and thus are penalized compared to external goods.
A VAT applies to imports, but not to exports. Goods imported compete on equal footing with locally-produced goods—which, with a low IT, will have a huge advantage, even. Goods exported on the other hand will have no tax applied to them, giving them a distinct advantage over other products in other countries.
Exports benefit a local industry greatly, meaning that the local population earns more money, and thus can spend money better.
From this point of view, a VAT is definitely preferable.
On the other hand, a VAT is much less easy to scale in a way that makes richer citizens pay a higher percentage of their wealth. In a VAT-only system, richer citizens will invest a lot of their money in situations that do not incur a VAT, giving them a distinct benefit over poorer citizens.
Summary
Under the condition of equal tax income, the two kinds of taxes are absolutely interchangeable within a given country. The main differences are reflected in the effort required to raise them, how they affect the rich versus the poor, and how they interact with external countries.
All that said, though, I have so far not found a good argument on why this is an exclusive either/or question. Outside of “it would be simpler,” a combination of the two like now does not seem problematic.
