Overstretch link magnifier for exemptions

A clean VAT can be modified to factor in the variable utility of dollars for high- and low-income earners, but it is a Rube Goldberg machine. The distinctions get fine, unjust, and hard to enforce, and the lines themselves do economic damage. For example, most states exempt from sales tax food for home consumption to help those with lower incomes, but they tax restaurant food, which affects those with higher incomes.3 Thus, caviar at $2,400 a pound is tax exempt, while the White Castle meal at$2.99 is taxable. In Texas, tax is due on candy but not on cake. Popsicles are subject to tax or not depending on whether they are more or less than 50 percent fruit juice. Added tax on jewelry can reach the rich disproportionately. Still, when a VAT is modified to adjust to high and low incomes, the result is commodity taxes with very high elasticities, because there are close substitutes available for taxed items. Tax systems with high elasticities have high deadweight losses — people can shift to substitutes to avoid the tax, and as a result, the damage to private demand far exceeds the revenue the taxes raise. VATs with exceptions or variable rates can be hard to administer. VATs require high compliance costs from both taxpayers and government.4 They are bad vehicles for adjusting tax according to fairness or utility.