Slate Money: The Brain in a VAT Edition (March 5, 2016)

Host: Felix Salmon, with Jordan Weissmann and Cathy O’Neill
Main Theme:
A deep dive into the world of sales taxes—why some items are taxed and others exempt, the ongoing campaign against the "tampon tax," and a wide-ranging exploration of value-added tax (VAT), consumption taxes, and the bizarre quirks of America's tax system.

Episode Overview

The episode unpacks the complexities—and oddities—of sales taxes in the U.S., focusing on the movement to eliminate the sales tax on tampons in New York (the so-called "tampon tax"), investigates the broader philosophical and economic underpinnings of consumption taxes like VAT, and contrasts European and American approaches. The hosts also take a critical look at regressive taxation and how subtle pricing practices can impact consumer behavior.

Key Discussion Points and Insights

1. The "Tampon Tax" Lawsuit in New York

• Cathy O’Neil's Role:

  • Cathy is a lead plaintiff in a class action lawsuit arguing that taxing tampons is illegal in New York State because similar products (e.g., Rogaine, incontinence pads, dandruff shampoo) are tax-exempt as medical necessities.
  • The suit claims the current policy is discriminatory since products primarily used by men (e.g., Rogaine) are exempt, while tampons, used primarily by women, are not.

  "When only women use it, it’s not exempt. Therefore, it’s discriminatory." — Cathy O’Neil (05:20)

• Examples of Exempt Products:

  • Chapstick, Rogaine, dandruff shampoo, incontinence pads.
  • Sanitary pads/tampons are not exempt, making the policy appear arbitrarily gendered.
  • Discussion of how legislative squeamishness about menstruation has led to this omission.

• Regressivity and Access:

  • Sales tax is regressive and disproportionately affects poor women, especially since tampons are not covered by food stamps (SNAP).
  • The suit is as much about social change as legislative correction.

  “Sales tax is already a regressive tax … Poor people tend to buy tampons, which are expensive items not in bulk, so they're already paying more”—Cathy O'Neil (09:57)

• Memorable Moment/The "Day That New York Bled":

  • Felix and Cathy imagine a Lysistrata-style demonstration where women stop using tampons to demonstrate necessity.

  “The day that New York bled.” — Felix Salmon (11:11)

2. Philosophical and Practical Tangents: “Brain in a Vat”

• The episode title refers to the philosophical question (a la The Matrix): Are we just "brains in a vat"? Used as a humorous segue into whether the podcast hosts and topics are as real as they seem.

  “Do you really know that the world exists? Because couldn't you just be a brain in a vat...?” — Felix Salmon (02:21)

3. What is a VAT? The Ted Cruz Flat Tax Plan

• Understanding VAT:

  • VAT is a sales tax collected at every stage of the production process, prevalent in most developed nations except the U.S.
  • Jordan explains how instead of just taxing the end customer, each value-adding process pays VAT, with costs intended to be passed to the final consumer.

  “It’s basically a sales tax, but it’s collected at each stage of the production line.” — Jordan Weissmann (15:27)

• Ted Cruz’s Proposal:

  • Desires to replace several existing taxes (including corporate income tax) with a federal consumption tax (VAT), branding it as a "corporate flat tax."
  • The plan is modeled after Japan’s invisible version of VAT—intentionally structured to be less noticeable.

  "One of the most conservative guys in the race is trying to create the most invisible a new tax to levy on Americans." — Jordan Weissmann (19:03)

• Progressivity, Regressivity, and Economic Implications:

  • VAT is inherently regressive: people with lower incomes spend a higher percentage on consumption, so they pay more proportionally.
  • European systems mitigate this with generous social benefits.

  "A consumption tax is much more regressive than an income tax." — Felix Salmon (21:03)

• Theoretical Motivation:

  • Economists sometimes prefer consumption taxes because they are not 'biased against savings,' but this can come at the expense of fairness for the less wealthy.

4. Sales Tax Oddities in America

• Why Isn’t the Tax Included in US Prices? (27:12–32:56):

  • In the U.S., sales tax is almost always added at the register (not included in shelf prices), unlike Europe.
  • This makes tax less "salient" for consumers, possibly encouraging spending.
  • Research (Chetty et al.) shows that when taxes are included in shelf prices, sales drop—indicating people react to visible higher prices.

  "In one store, they adjusted price tags to include sales tax—and sales declined like 68%." — Jordan Weissmann (30:42)

  • Some items (like gasoline and movie tickets) do include taxes for reasons lost to history, and state/city sales taxes vary widely.

• State and Federal Complexity:

  • Five states have no sales tax; there is no federal sales tax.
  • Ted Cruz’s plan would have complicated these dynamics with a federal VAT, potentially leading states to piggyback on it (raising regressivity and complexity).

• Tax Avoidance Tactics:

  • The art world finds creative ways to avoid sales tax (e.g., shipping art out-of-state, using tax-free warehouses like the Geneva Freeport).

5. Tax Policy and Behavior Shaping (23:26–24:34)

• Taxes can motivate certain behaviors: not taxing necessities, taxing vices (carbon, high-frequency trading).
• Sales taxes can be “puritanical”—discouraging consumption and encouraging saving, but can be problematic during economic downturns or for low-income individuals.

Notable Quotes

• Cathy O’Neil:
  • "For some reason, tampons are just this category of things where people sort of—the law is pretending it's not a necessary item." (09:57)
  • "[On tax exemption] When only women use it, it’s not exempt. Therefore, it’s discriminatory." (05:20)
• Felix Salmon:
  • "Do you really know that the world exists? Because couldn't you just be a brain in a vat?" (02:21)
  • "A consumption tax is much more regressive than an income tax." (21:03)
  • "Every foreigner who comes to America gets confused by this idea where you go into a store ... and you have to rummage around for extra change ... it's so confusing." (27:12)
• Jordan Weissmann:
  • "In one store, they adjusted the price tags...and the result was that sales declined like 68%." (30:42)
  • "Ted Cruz is trying to create the most invisible a new tax to levy on Americans." (19:03)

Timestamps of Important Segments

• Tampon Tax Lawsuit: 04:41–13:09
• Philosophical “Brain in a Vat” Explanation: 02:21–03:36
• VAT/Consumption Tax Explanation & Ted Cruz Plan: 15:06–23:26
• Sales Tax Visibility and Consumer Behavior: 27:12–32:56
• State vs Federal Sales Tax & Art World Tax Avoidance: 34:05–36:39
• Tax Policy and Incentives: 23:26–25:12
• Numbers Round: 40:12–45:52

Memorable Moments

• “Day That New York Bled” Thought Experiment: The team imagines a world without tampons, highlighting the arbitrary nature of medical necessity lists.
• Lysistrata Digression: Using Greek theater as metaphor (11:45).
• Numbers Round: Amusing and sobering figures (like a law firm’s US$710m loss in 6 months, and Puerto Rico’s $9bn electric utility debt).

Takeaway

This episode delivers a lively, insightful look at how sales taxes are set—and why they're often so regressive and arbitrary—using humor, philosophy, and grounded examples from law, economics, and daily life. The conversation around the tampon tax especially illuminates the intersection of gender, policy, and economics, while the broader VAT discussion shows how tax policy reflects a society's values (and quirks).

For further information or to comment, listeners are invited to write to slatemoney@slate.com.