Taxing services

Every country seems to making its own decisions on what items or services bear a Value Added Tax.

Europe “allowed the application of a reduced VAT rate to certain specified labour-intensive services, but only for an experimental period of three years so as to test its impact [extended time and time again, now until 2010 at least], in terms of job creation and in combating the 'black' economy.

“The list of categories to which Member States were authorised to apply the reduced rates were:

• The repairing of:
• bicycles
• shoes and leather goods
• clothing and household linen (including mending and alteration)
• Renovation and repairing of private dwellings, excluding materials which form a significant part of the value of the supply
• Window cleaning and cleaning in private households
• Domestic care services (e.g. home help and care of the young, elderly, sick or disabled)
• Hairdressing.”

http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/labour_intensive_services/index_en.htm

That’s just an example.

Now North Carolina faces an analogous issue as the Legislature considers imposing tax on more services. The issue of which services to tax seems like just what legislative branches are called to do: log rolling and politics about issues that people can understand. I think it’s fine to consider every service on its own merits (or connections or whatever), and for States to come up with unique sets of services to tax. See http://www.taxadmin.org/FTA/pub/services/services.html (the spreadsheet shows the variety).

Since everyone can have an opinion:

Start with tattooing, I’d say, on the hunch that tattooed folks don’t vote and other folks wouldn’t mind. After tattooing, I nominate legal services. It’s OK to discourage writing fine print and designing golden parachutes. But legal services seem to off the table here:

“While about 50 new services would be taxed, professional services by attorneys and accountants would not be.

“Sen. Dan Clodfelter, co-chairman of the Senate finance committee, said these professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise these industries' costs substantially.”

http://www.charlotteobserver.com/local/story/790665.html

I don’t follow that argument. The professionals don’t pay the tax, the user does. Now maybe there is an economic argument that the professionals bear the burden, but I haven’t seen it. By analogy, it would seem a new and fresh idea to determine sales taxes on the basis of whether the seller’s gross margins are close to its net margins (grocery stores have lots of assets tied up in real estate and inventory, but we tax food more lightly to fight regressivity and to enable survival), and I don’t see why services should be different. Maybe I’m missing something.

Which services to tax is an inexhaustible topic. I tend to oppose taxing tuxedo rentals, which do not seem like a luxury. That tax would hit every high school kid for whom the prom is the biggest event so far. I'd tax 'em if they rent a limo, because that seems like a luxury, but a tuxedo is a necessity for that rite of passage. Wealthy folks own tuxedos, poor folks rent. Still, the purchaser of a tuxedo pays a sales tax.

And you soon get into the capillaries of policy: are massages a luxury that should be taxed, or therapy that should be exempt? Our should we try to distinguish? And so on.