Slicing the Bagel Reveals VAT Flaws

J.D. Foster / August 25, 2010

Washington think tanks and commentators continue to spin out impressive reams attempting to explain the necessity and virtues of adding a value-added tax (VAT) on top of all the taxes the federal government already collects. The fiscal policy problem is real enough—thanks to the Obama spending surge, federal budget deficits are unsustainable and a course correction is inevitable. What most VAT-istas refuse to acknowledge is that the problem is due to new spending, not a sudden collapse in the ability of the federal tax system to raise revenues. Even so, it’s not always easy to explain why the VAT is the wrong answer. In this the city of New York has rendered notable if unintended assistance.

Under the tax laws extant in the Big Apple, if a bagel is sold whole, then it is, well, a bagel. But if the bagel is sliced before it is sold, then it falls under the category of “processed foods.” And processed foods are subject to a higher tax—a nine cent higher tax, to be specific. Since New York City has already spent its way to fiscal oblivion while driving taxpayers out of the city with punitive taxes, this nine cents of tax is suddenly critical to the city’s financial survival. And so the New York Department of Taxation and Finance wants its nine extra cents, hold the lox. (more…)