I Smell a VAT & (tax) Holiday Fun

I Smell a VAT!

On 2/2 I wrote about a bill proposed by Congressman Kevin Brady (R,Tx). The bill would make the deduction of state sales taxes a permanent part of the tax code. As of today one can deduct sales taxes but the law allowing this expires in two years.

What I found interesting was that the (current) deductibility of local property and state income taxes (“PI”) was not included in Brady’s’s bill. The suggestion to me was that as soon as the sales tax issue had been made permanent, deductions for the other SALT taxes would be eliminated. I didn’t think that the bill had a snowballs chance in hell given that it would have opened the door to higher net taxes via lower deductions. (stealth) This bill would have been very damaging to the big Blue states of CA, Il and NY.

Well, I’m wrong again. Senator Maria Cantwell (D. Wa) has introduced S.24:

To amend the Internal Revenue Code of 1986 to permanently extend the election to deduct State and local sales taxes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

Cantwell’s Bill has the support of other big Democrats including, Reid, Nelson, plus some senate republicans; Ensign and Alexander.

With that cast of characters this bill is going to pass. Deductibility of state sales taxes is going to be made permanent. What might this mean?

I think this is the first step towards eliminating the other critical deductions of income and property tax. That would be an absolute disaster for the big Blues. They all have high property taxes as well as big income taxes. States like Texas with no income tax but big sales taxes would win big. (What is Harry Reid thinking of??)

Should this happen it will change the way states generate income. Sales taxes will rise in every state to take advantage of the permanent deduction and the loss of deductibility of other SALT taxes. I doubt that this will be offset by any reductions in PI. Net-net the blues lose, which is the point of this.

I think this legislative maneuvering is leading us to a point where a national VAT is established. That would imply that there would be very few if any deductions left. No mortgage, property or income taxes deductions would exist. We shall see if that develops, if it does it will change everything. One downside I foresee is that it would significantly undermine the economics of home ownership. It would also make it more expensive to have/raise children. More of those unintended consequences you keep hearing about……

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Holiday Fun?

I am convinced that a Tax Holiday is coming for large multinational corporations who have big bucks stashed offshore due to high US taxes. This will happen as part of a broader restructuring of corporate taxes. These big tax breaks will be sold to the public as a “Pro Jobs”. Phooey!

We did this in 2004. That holiday was also sold as ‘pro jobs’. Some results from the companies who got big breaks seven years ago:

When you see/hear the talk of a Tax Holiday over the next month or so think big dividends for the corporate sector and no dividends for workers.

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