Published: May 29, 2009 04:02 pm      

Reforming taxes — 05./31/09

Politicians talking about it doesn’t mean it will happen

Tax reform reminds us of that old adage about the weather. Politicians love to talk about radically exchanging our system of taxation, but they seldom, if ever, actually get around to doing something about it. That’s why we are skeptical about the renewed talk about tax reform in both Congress and the Kentucky General Assembly leading to anything more than minimal changes in the status quo.

With the federal budget gushing red ink to the tune of a trillion dollars or more a year, revenue flat because of the recession, and President Obama pushing for a costly new health care plan, it is not the least bit surprising that the Value Added Tax, or VAT, would be proposed — again.

Here in Kentucky, where the state is facing a revenue shortfall that is expected to top $1 billion, Rep. Bill Farmer, R-Lexington, is proposing eliminating the income tax on both businesses and individuals in favor of extending the sales tax to all services except food, medicine and a few professional services. Rep. Jim Wayne, D-Louisville, wants to lower taxes on lower income groups by shifting more burden to the wealthy.

For years, many have argued for extending the sales tax to services simply because the greatest growth in Kentucky’s economy is in the service industry. Both the VAT and adding a sales tax on services have the advantage of taxing spending instead of income, but both are inflationary and a bit regressive. A tax on services would mean it would cost us more to have our vehicles repaired, our homes cleaned, our leaking pipes fixed and to get our hair cut.

The VAT would greatly add to the cost of just about everything we buy. That’s why the only way we could support the VAT is if it is coupled with either the elimination of the federal income tax or substantial cuts in the income tax. That not only would put more money in our pockets but greatly simplify our lives. To us, that’s the VAT’s greatest appeal.

Unlike the income tax, everyone would pay the VAT. There is a huge underground economy in this nation in which individuals are paid under the table and do not report the income they earn. But everyone — even thieves and prostitutes — spends and would pay the VAT.

The VAT is a fact of life in Europe, ranging between 18 percent and 25 percent. Even Canada has a relatively modest VAT — called the Goods and Services Tax — of 5 percent, with exceptions for things like groceries.

From Europe’s and Canada’s experience with the VAT, politicians in Washington know this: It raises a ton of money and is much easier to collect than the income tax. Replacing the income tax with the VAT would immediately simplify our system of taxation. Of course, we have developed a rather extensive economy — accountants, bookkeepers, tax lawyers, etc. — whose careers depend on the complexity of the current tax code. We’re not so sure they would really want it simplified.

On Thursday, a coalition of advocacy groups for low-income people challenged legislative leaders and Gov. Steve Beshear to take up comprehensive tax reform during a special session that likely will be in June.

When the General Assembly voted to increase alcohol and tobacco taxes to cover a $456 million shortfall in fiscal year 2009, House Speaker Greg Stumbo, D-Prestonsburg, and Beshear pledged to consider tax reform before the next regular session. But both have said since then tax reform should be studied in-depth before any action is taken.

Kelly Davis, of the Washington, D.C.-based Institute on Taxation and Economic Policy, said poor Kentuckians carry too much of the load in Kentucky while the wealthiest tax payers in the state don’t carry enough of it.

A tax reform bill former Gov. Ernie Fletcher pushed through the General Assembly did ease the tax burden on the working poor, but it did not increase taxes on the wealthiest Kentuckians It was a good first step — but more needs to be done.

There is another reason why meaningful tax reform has never gotten far on either the state or federal level: The distrust of the people in their elected leaders. To the average person on the street, there is no difference between tax reform and tax increases. Former Gov. Paul Patton had an excellent proposal for overhauling the state’s tax code but because many ordinary Kentuckians saw his proposals as a tax increase, they never came close to being enacted.

Politicians in Washington and Frankfort will continue to talk a lot about tax reform, but our hunch is that when all is said and done, that’s all it is: Talk with little or no action.