The Brain in a VAT Edition

Summary

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.

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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.

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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)

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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)

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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.

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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).

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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.

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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)

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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

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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).

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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).

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For further information or to comment, listeners are invited to write to [e-mail].

Transcript

[A]

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[B]

Hello and welcome to the Brain in a VAT edition of Slate Money, your guide to the business and finance news of the week. I am Felix Salmon of Fusion. I'm joined by. I'm gonna do it the other way around. This week I'm joined by Slate's moneybox columnist, Jordan Weissman.

[C]

Hello, Felix.

[B]

I am also joined by Tampon Lady.

[D]

Thank you.

[B]

And professional plaintiff Kathy o'. Neill.

[D]

Hi.

[C]

How's it going, Tampon Lady?

[B]

Tampon Kathy o' Neill is going to come to this in a minute. Cathy o' Neill is filing a lawsuit. And in the lawsuit, it explains who Cathy o' Neill is and it talks about how you're a data scientist and a blogger and it says nothing about sleep money.

[D]

I'm sorry about that. Yeah.

[B]

I feel excluded and left out.

[D]

Yeah. Well, I do have other parts of my life that I don't.

[B]

Clearly. Sleep money is not an important part of your life.

[D]

That's not true at all.

[C]

I thought it was like your hierarchy was like blogger, data scientist, podcast host, mother, like that.

[D]

It changes day to day.

[B]

But number one is Tampon Lady. We're come to this. Actually, why don't we just. I feel like before we come to this, I just need to. Because the one and only Audrey Quinn, the producer of this podcast, she's amazing. Didn't understand why I'm calling this the Brain in a Vat episode, because she's not a philosopher. So for those three listeners out there who aren't philosophers, basically you are looking around you and seeing the world, and you have the justified, true belief that the world exists. And that means you know that the world exists. But do you really know that the world exists? Because couldn't you just be a brain in a vat and then some crazy mad scientist is attaching various electric wires to your brain?

[C]

And I mean, this is making you. This is the Matrix.

[D]

This is. Yeah, I was going to say, you don't have to be a philosopher. You just have to have seen the Matrix.

[C]

Seen the Matrix. It's like taking Descartes and like, I think, therefore I am. Okay, but you don't know anything other than you are. That's it.

[B]

So, yes, this whole fiction that you have. There are three real people who record this podcast every week, and they exist in flesh and blood. And talk into microphones is just a figment of an evil scientist.

[C]

I think we should just also clarify for listeners that we're talking about value added taxes today as well. Otherwise known as tax.

[B]

This is. I mean, quite aside from philosophical digressions, we are going to basically spend the entire podcast talking about sales tax, which is not nearly as boring as it sounds. Kathy?

[D]

Yeah, I'm going to make it real interesting because we're talking about tampons. So to be clear, I'm one of the lead plaintiffs. There are six lead plaintiffs on this class action complaint that was filed by a very prominent New York law firm, which I can't pronounce the name, but it's something along the lines of, hey, you know what? You're married to a lawyer.

[C]

Let me see. I might know them.

[D]

Let me see.

[C]

Who is this law firm? Emery Selly or Emery Shelley, Brinkerhoff and Abadi. I actually don't know them.

[D]

Okay, well, they're amazing. They represent, like, Tamir Rice.

[C]

Oh, cool.

[B]

So they just like, sue people for money? They're litigators.

[C]

It sounds like they're civil rights crusaders.

[D]

Civil rights crusaders.

[B]

Do you have the civil right crusader? A tampon? Is that what you're saying?

[D]

It's not exactly what we're saying.

[B]

What's this suit about?

[D]

What this suit is about is the claim that they are illegally taxing tampons in New York State.

[B]

It's illegal to put sales tax on tampons.

[D]

Correct.

[B]

Wow.

[C]

Why? Explain to us.

[D]

Because it's discriminatory and because there's a category of things that are exempt from taxes that this should be part of. And it's clear that it should be part of. So the fact, basically, when you have, and I'll give you a long list of things that are exempt, but they're consumer products that men and women use. So basically our argument is when you have a Consumer health product that men and women use, it's exempt. But when only women use it, it's not exempt. Therefore, it's discriminatory.

[C]

Interesting. So can you give me some examples of things that are exempt from tax?

[D]

Chapstick.

[C]

Chapstick's exempt.

[D]

Anything about, like, Rogaine?

[C]

Rogaine's example.

[B]

What's Rogaine?

[D]

Rogaine is a kind of magical tool you use to keep your hair. So mostly men use it.

[C]

If you're. Wait, Felix, have you actually never had to worry about your hair to the degree that you've never even looked at Rogaine?

[B]

I genuinely have no idea. What.

[D]

Felix.

[C]

Felix has good hair, so that's remarkable. Felix, you might be literally the only man I know who does not know what Rogain is. I envy you.

[D]

Here's another.

[B]

Okay, but hang on a second.

[D]

Let me just give one more example. Category of. Couple more examples. Any kind of dandruff shampoo.

[C]

Okay.

[D]

Which, you know. Okay. And then the most important example is incontinence pads. So incontinence pads are, like, for people who have trouble, you know, with urinary urination leakage. Those are tax exempt, but sanitary napkins are not.

[C]

So the idea is all these are supposed to be. These are all supposed to be medical necessities that are tax exempt, and they don't consider.

[B]

I mean, it seems to me that there's, like, an arbitrary list of things which are tax exempt, and you're like, well, it's pretty arbitrary. So we should put tampons in there, too, because why not? I'm not quite sure how that rises to the level of illegal.

[D]

Well, we're just arguing that the interpretation of the law is wrong.

[C]

Well, yeah. So that's what it means to be illegal. So if you're saying that.

[B]

Wait, so the law isn't like a schedule where it sort of says rogaine and incontinence pads, but not toilet paper and Mars bars? Exactly. It's not a list.

[D]

Although Mars Bars might be tax exempt because all sorts of weird products and candies and potato chips are. But let me think about it. Let me present it this way. By default, everything is taxed. And then there are exceptions. And the exception in this case for medically necessary consumer products was carved out in, like, 1998 or something along those lines. And they started making a list, and they just never put in tampons and sanitary pads. So we're just like, put it in. Put it in the list.

[B]

Okay, but you're saying you're not Just saying, put it in. You're actually saying it's illegal to not put it in.

[D]

We're saying we interpret this law to mean this should be in because it's medically necessary. We're making the case that it's medically necessary, therefore it's illegal to interpret it otherwise.

[C]

Yeah. So I have. So I'm intrigued because the way these laws often work is like you have a legislature come down, say we're, you know, medically necessary things are going to be exempt, and then some regulator comes by, is like, okay, here's what's right, here's what's medically necessary. How did this list get compiled? Was it just a bunch of legislators saying these are things considered medically necessary so we're going to add them to the legislation itself, or is there some, like, regulator out there who's put together this list?

[D]

I don't know the process. I'm not an expert, but I just, I do want to come back to the squeamishness issue. Okay, I've noticed, like, I talk about this a lot, mostly men, and I'm not talking about you guys. You guys are amazing. But like, mostly men are just like, oh, I'm closing my eyes, I don't want to think about this. Basically, the argument, our argument is, it's not a legal argument, it's a socio argument, sociological argument, is that men have been legislators, they've been making this list, and because they don't like to think about women having their periods, they haven't bothered to think about it. They simply don't want to think about it. So it's not on the list.

[B]

So that totally makes sense to me from a sort of path dependency analysis here. The reason why tampons didn't make it onto the list, it's just because the male legislators don't like thinking about tampons.

[D]

Right. But they do. They are willing to think about male pattern baldness.

[C]

Yeah.

[B]

I'm still getting a little bit hung up, frankly on this whole idea that medically necessary things should be tax exempt in the first place. Because, I mean, was this some kind of bizarre attempt to bend the cost curve and reduce the, you know, the cost of Medicare things in our lives, it seems kind of randomly weird way of doing that.

[D]

Well, I think the argument is that you can't. Maybe it is a way of lowering the burden on people who are already having trouble paying for things that are obviously actually necessary for their quality of life.

[C]

I imagine that a sales tax on medicine, for instance, on prescription drugs or Whatnot is going to fall disproportionately on the elderly. I mean, I.

[D]

And poor people.

[C]

Yeah, I mean, but especially people who have to take drugs more often than the general population. So it's literally going to be a tax. It falls mostly on the sick and elderly. And that. That's not a good look.

[D]

I mean, look at it. Look at this way. Sales tax is already a regressive tax. Right. It falls more on poor people because they spend much more of their income. Then on top of it, like, poor people tend to buy tampons, which are expensive items, not in bulk. So that makes it. They're already paying more for tampons than they're paying more sales tax. So it's a super regressive tax. By the way, tampons are also not purchasable through food stamps. So it's like tampons, for some reason, are just this category of things where people sort of. The law is pretending it's not a necessary item.

[C]

Interesting.

[D]

Which it obviously is.

[B]

Which brings me to this sort of weird sleight of fantasy that you and I had on Twitter yesterday, which was like, the women of New York all up and proving to the men that these are a necessary item by pulling a Lysistrata on the city of New York and just, like, going for, like, a day or a month without using tampons.

[D]

I know. It's like, when you talk about the concept of necessary, you're assuming there's a risk. So I want us to, as a thought experiment, to compare the risk of society going without Rogaine for a year versus our society going without tampons and sanitary.

[B]

Shane the Farrow, who has been on this podcast in the past, even managed to come up with the name for this thought experiment, which is the day that New York bled.

[D]

And I'm just telling you, like, here's. And this is when it becomes so. And thank you for that image. This is where it becomes so obviously a medical issue. You know, if you ever talk to a doctor, they will go on at length about how much trouble they have to go to to dispose of blood, like, safely. But for some reason, this doesn't count.

[C]

Wait, Felix, what is Lysistrata? I'm not familiar.

[D]

Just explain.

[C]

Yeah, explain that.

[B]

Oh, my God. So we have people who don't know about philosophy. We have people who don't know about Greek theater. Lysistrata is a Greek play about a group of women who got so fed up with the war that they decided to basically go on sex straight and they said, unless you guys stop killing each other, but you don't get any sex.

[D]

And it worked, right?

[B]

And it worked.

[C]

I feel like that's. I feel like that's definitely inspired some. I actually used to have an old poster that said girls say from the 60s that said girls say yes to boys who say no. So it was like, say no to the draft. So I feel like that sort of like, must have inspired a few protests.

[B]

In fact, it inspired the latest Spike Lee film is a remake of Lysistrata.

[C]

Oh, interesting.

[D]

Can we just talk about one tampons just for one more second?

[B]

Okay, One more tampon fact before we move on to the.

[D]

I just want to say I'm very proud to be part of this suit. I think it should be a national thing. But it's not enough. Like, honestly, I can't tell you how many times I have needed a tampon in the middle of a day of work or, you know, giving talks or teaching. It's just ridiculous. We should have tampons in every bathroom, just like toilet paper.

[C]

That seems fair.

[D]

Thank you.

[B]

Maybe not the men's bathrooms.

[C]

Why not?

[D]

Well, it's arguable. Depending.

[B]

It's arguable, yeah. Okay, so on which note, I'm going to segue seamlessly into a Ball and Branch ad.

[C]

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[B]

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[C]

Yeah. So this is a fascinating kind of subplot going on in the presidential election. For a long time, I'd say American liberals mostly have liked the idea of creating some sort of value added tax in the US And Americans are pretty much the only people who don't know what value added taxes are. Every industrialized country has a VAT. Even non industrialized countries have VATs. They're, they're incredibly widespread. And what, what is a VAT? Pretty simply, it's basically a sales tax, but it's special in the sense that it's collected at each stage of the production line. So, like, if a hog farmer sells some pigs to Hormel, you know, to make bacon, Hormel is going to pay some of the VAT on that. When Hormel sells its bacon to Walmart, it's Walmart's going to pay some of the vat.

[B]

It's just. But it's basically a sales tax that when, when Hormel buys the pigs, it pays tax.

[C]

Exactly.

[B]

And then when the next thing on the chain happens, they pay tax on, like the increasing price.

[C]

Exactly. And the idea is that it all, in the end, economically gets passed on to the consumer. That's more or less. So it's a sales tax with some complications to make sure the government gets all of its money, that no one kind of cheats on it.

[D]

I just want to, just because I haven't thought about this until this week, so to really clearly delineate that system you just described from our system.

[C]

Yeah.

[D]

All you have to do is walk down, like 30th or 28th street in New York City and there's like a million jewelry stores that say, oh, we sell to wholesalers with no taxes. So if you happen to be somebody who deals in, in jewelry, you can, you can buy this stuff without tax. But if you're just a consumer, you have to pay sales tax. So we do not have. I don't know if that was a perfect example.

[B]

Yeah, it's a really good example. Basically not everyone pays sales tax in this country. In fact, most people don't pay sales tax in this country. If you're a corporation buying stuff from another corporation, there's no sales tax.

[D]

Exactly.

[B]

Where the only people who wind up paying sales tax most of the time are the poor schlubs like you and me in the store.

[D]

End consumers in this country, the end consumers are only them.

[C]

So no, that's actually wound up in not start again. So that's not entirely true. So with of that it actually is supposed to be just the end consumer paying for it. The cost of the tax gets passed along the entire chain of production. But that's really just an administrative thing. It's to make sure that the government gets its money. But theoretically it is supposed to just be.

[B]

In any case, it's probably not worth getting too caught up on the difference between VAT and sales tax. They're basically the same thing. What's interesting is this idea that Ted Cruz has, which is that you can basically abolish all corporate income tax and a whole bunch of other taxes and replace it with one nationwide sales tax, vat.

[C]

And that's what's fascinating here. So for a long time this was kind of taboo in Republican politics because again, the VAT's very popular in Europe and a lot of conservatives have looked at a VAT as sort of a secret tax, a secret money making machine that was, you know, once it was in place, liberals could quietly ratchet it up because people aren't going to know exactly how much VAT they're paying all the time.

[D]

Why is it secret? I mean, why do people think it's secret?

[B]

Because it's built into the chain of value addition. So when you buy something in Europe, you don't really know how much of that is taxed.

[C]

Again, I don't fully agree with that. I think conservatives kind of fear this a little too much because when you're in Europe and you get a receipt, it shows you how much VAT you're paying. Like a sales tax receipt in the us. I mean people aren't unaware of it, they know about this. But that is a conservative fear that it's going to be a secret tax.

[B]

And conservatives in general really hate new taxes because introducing a new tax is really difficult. But increasing an existing tax is a lot easier. So they don't want to just create a new knob or dial, which can be ratcheted up by those evil liberals.

[C]

So Ted Cruz has kind of broken this taboo in a way, and he's alarmed a lot of people on the right by doing it. And his plan essentially is he wants to bring in this new vat, which he's trying to hide the fact that it's a vat. He's calling it a corporate flat tax. And you can get really kind of in the weeds about how he's structuring the thing to kind of hide the fact that it's a sales tax. It's actually inspired by Japan's version. Japan is really idiosyncratic. It has this weird version of the vat, and he's more or less copying theirs. That's the short version what he's doing, because it's a little bit more invisible. So it's kind of ironic that one of the most conservative guys in the race is trying to create the most invisible a new tax to levy on Americans. But then what he would do is again, get rid of the corporate income tax that exists now. He would reduce income taxes to a flat 15% tax. You know, would this. Would the VAT then pay for all that? No, it would still lose lots of money. But it is kind of reviving this debate about are consumption taxes a preferable to some kinds of income taxes?

[B]

And so the difference between consumption taxes and income taxes is quite obvious. For most of us, it's not that different. For most of us, we earn money and then we spend it on stuff. And the amount we spend is more or less the same as the amount we earn. And if there's a tiny little difference, it's the amount we go into debt that year or the amount that we save that year. But for rich people, the difference can be quite large. But in general, the differences in income tax is obviously a tax on money you earn. A consumption tax is a tax on money you spend. And this is the weird thing that the Europeans who have had this consumption tax, this sales tax, for as long as I can remember, are generally considered to be these kind of, you know, socialist places where they redistribute wealth and stuff. But a consumption tax is much more aggressive than an income tax.

[D]

Yeah. And so I'd like to.

[B]

And so the European way of doing this is one of the few areas where the European way of doing things is actually more regressive than the American way.

[D]

If. If I might just dumb down the conversation a little bit for the listeners and for myself. I want to think of the tax system as this just enormous input and output machine. So you just take money from all the people who live in the country and then you give money for various services. Right. So all these arguments are more or less taking in, let's just say a similar amount of money. So the question is, and I know it's a little bit less than we currently take in, but just imagine it's about the same amount of money. So the question is, who is it taking more from and who is it taking less from?

[C]

Yeah, I think that's about right. I mean, we talk about how tax burden is distributed across the economy, not just how much are we collecting taxes, but who's paying it. Why the system is still progressive in the end in Europe is that even though they have a kind of flatter tax base, they collect from a broader swath of the population because of things like the vat, they have more progressive benefits. You know, they do more to help the poor. And so that's how it works out. That's actually a criticism a lot of people levy or kind of target at American progressives is that we're determined to just tax the rich and then give benefits to the poor, which is that's not really how it works in other parts of the world. One other thing to add is you'll often hear economists say that they like consumption taxes more than income taxes because income taxes are, quote, biased against savings. Right. And this is like one of those really interesting econ speak things that I think confuses a lot of people and you kind of just need to cut through it. What they're really saying there is that they're not even talking about income taxes as you and I think of them, you and I think of our income taxes, what we pay on our wages. Right. What they're really saying, talking about there are like capital gains taxes. When they talk about that economists are telling you is that, well, when you tax capital gains, that means you make less money off your investments. And so it means you want to save and invest a little less. Whereas if you just tax consumption, you have every reason to save that money instead because that money is going to have a higher rate of return. And it's this funny thing that it makes it sound we're really the value judgment. It's really a value judgment in the end, which is more important, do we tax consumption, which is helpful for which is going to probably lay a little bit more heavily on the poor, or do we tax things like returns on bonds and stocks and you Know, that.

[D]

Brings up the other layer. The only other layer I can really understand about taxes, beyond like taking in money, giving out money, which is that we also can use taxes to give motivation for certain kind of behavior.

[B]

And this is the general way that taxes work, especially in Europe, but to a certain degree in the US as well, is that you want to tax the things that you want less of and not tax the things you want more of. So if we want people to have medical necessities, then we don't tax medical necessities. If we want less carbon emissions, then maybe we tax carbon emissions.

[D]

If we want less high frequency trading.

[B]

We tax high frequency trading. And so that's one way to look at VAT or a sales tax is like, is this way exactly as Jordan says, that is trying to persuade people to spend less. It's very Puritan in its own way and saying you shouldn't be spending, spending your money, you shouldn't just be wasting your stuff, your, your income on stuff, you should be saving it and investing it in the economy. And that's a little bit weird because someone has to spend money, otherwise you don't have an economy.

[C]

It's especially weird right now. Like theoretically, savings is long term going to spur more growth because the more savings there are, the lower interest rates are going to be and the more companies can borrow to then, you know, build factories or whatever, do R and D. But we're like in this weird period where we're looking at permanently, maybe permanently low interest rates from here into the horizon, and we really, really, really need more spending in the economy. And so we're having this, suddenly having this conversation. So we should tax consumption instead, which is just, it's like this is probably the worst time possible to be having this specific conversation. Maybe it's like in a theoretical economy, long term it's a good idea.

[D]

And in a theoretical economy, like the poorer people have the ability to save and not buy the stuff that they're buying. But right now they're in a crunch.

[B]

The good news is that no root and branch tax reform is ever going to happen because these things are so incremental. But we're going to move on to my favorite bit of the tax code of sales taxes in a second, just after I talk about texture, which is the app for your phone or your iPad or, or your other device where you just have every single magazine in the world on your iPad and it's one subscription that costs less than buying like three magazines at the newsstand. And literally it's almost Impossible to think of a magazine which is not included in Texture. You can get the New Yorker. You can get Vogue. You can get Men's Fitness. You can get Esquire. You can get whatever magazine you want. You can search across magazines to read broadly on a certain article. You can look through back issues of Consumer Reports to find out which kind of coffee maker you should buy. You can even look up sheets and towels to see if you should be, you know, if you should trust Felix when it comes to ball and branch. You can get all of this at your fingertips for a single subscription. And in fact, the cost of the subscription is nothing if you sign up for a free trial. If you go to textured.com slatemoney, you get unrestricted access to all of the best magazines in the world for free. So go to texture.com slatemoney costs nothing. It's free. Okay, so my final thing that I wanted to do is I feel like one of those stand up comedians where you're like, did you ever notice how. And I'm coming in from Europe, the European Seinfeld. Yeah.

[C]

I assure you Felix has never once in his life worn either dad jeans or white Nikes. It just never happened.

[B]

It's true. So, yeah, I come to America and I'm kind of weirded out by the idea that isn't a vat because it's just such a basic form of how we live in Europe. But then the other thing which every single foreigner who comes to America just gets completely befuddled and confused by is this idea where you go into a store and they're like, this thing is 9.99 and you're like, great. And you pick it up and you take it to the register and you have your $10 bill. And then like, that's $10.09 or something. And you're like, what? And you have to rummage around for like, extra change. And it's so confusing.

[D]

They don't do that in Europe.

[B]

I just don't any other country. I think there are bits of Canada where they do it. But basically this is a peculiarly American thing.

[D]

The only thing I'm sad about when I go to Europe and don't see that change from, you know, 999 to 1009, which is, by the way, a very small sales tax, is that when I used to be a barista at Coffee Connection in Lexington, Massachusetts, I had a lot of fun computing everyone's tax.

[B]

Like in your head. Because I'm a mathematician, because I'm a math, I thought Mathematicians were all like really bad at arithmetic.

[D]

Well, I'm an exception, Felix, to many roles. I would even tell people like, if you buy those separately, you'll save a penny in tax. That was my favorite trick, you know.

[C]

But what did they look at you? I mean, did they look at you?

[D]

They're like, holy shit, who are you anyway? But yeah, it is really dumb, isn't it? It's super dumb. Why do we do this, Jordan?

[B]

Why do we do this?

[C]

Well, I mean, I know why. I mean stores, it's pretty obvious why they do it.

[B]

Go on, tell me what, let's, let's be really obvious about this.

[C]

Yeah, I mean it makes people spend.

[B]

More because how does it make people.

[C]

Spend more when you don't. So this is a subject called tax salience, right? When people.

[B]

It makes the taxes more salient. It makes the taxes more obvious.

[C]

No, the opposite. It makes it less obvious. So here's the thing. If you just put a price of something pre tax on a shelf right at the grocery store, like this can of beans is $1. In real life it's like 108 with sales tax. People think, oh it's $1. And then they get to this, they get to the checkout and they go, oh shit, it's 108. Well they're not going to go and put like the can of beans back because it's more than they thought. They're just going to pay for the can of beans. And so what they.

[B]

Surely the fact that you get this kind of weird unexpected sticker shock every time makes the tax more salient. I always thought that the reason that Americans did this was because it was a bunch of sort of anti tax crusaders who wanted everyone to be annoyed at sales tax.

[D]

It's a Republican conspiracy.

[C]

No. So there's actually been research on this. I am awkwardly holding up my laptop right now.

[D]

We love it when you do that.

[C]

Yeah, this happens more often than you guys could ever realize out there in listener land. But so I don't know if it was ever actually, I'm sure it was published in a journal somewhere. I'm looking at the working paper version of this, but there's a paper called Salience and Taxation Theory and Evidence. As for some pretty well known economists, Raj Chetty, who's like now like a superstar, Adam Looney, good guy, Corey Croft sort of a few years ago. But they, they did an experiment at a store and in most of stores the sales tax was not display. The price without sales tax was displayed. And then in one Store, they adjusted the price tags to show prices, including a 7 point, you know, 3 whatever percent sales tax. And the result was that sales declined like 68%. Right.

[B]

Because everyone thought that it was a pre tax prize.

[C]

No, no, no. I think that was. They just.

[B]

We actually talked about when we talked about this when we did our restaurants thing episode and we were talking about how Danny Meyer is making service included in the price. And the reason why that's dangerous for restaurateurs is because people are so used to seeing the lower price that when they see the higher price, they get a sticker shot.

[C]

They looked at this issue one where they looked at alcohol sales and they compared increases in excise taxes, which we don't need to get into those. Basically, they're invisible to consumers. They happen earlier in the supply chain and retail sales taxes. So the invisible sales tax, the invisible excise taxes that were like packed into that pre sale price had a bigger effect than the sales tax. So people.

[B]

In terms of putting people off.

[C]

In terms of putting people off. So they. Sales declined more. So I guess. Yeah.

[D]

But I'm going to agree with Felix that it's really difficult to actually stage a good experiment on this because Americans have been really like socialized. We've been trained to add a little bit of cushion onto any price that we see. It's hard to just.

[B]

One of the weird things is this is not the law. Okay. Anyone can set up a store where taxes are included if they want. You have this negative equilibrium where, as Jordan explains, if one store sets up the protocol that they are going to have taxes included, that just hurts that one store. So there's no incentive to. To do it. But there are a couple of examples of things where for random historical reasons, I guess taxes are included. It's so weird. So one example, the most obvious example is gasoline prices. Gasoline prices always tax included. Another one is. I love this one. Movie tickets. If your movie ticket is $14, you pay $14. It's not $14 plus tax. And then you go in there and you buy your popcorn and then that if your popcorn is $14, it's $14 plus tax. There's no real rhyme or reason to this.

[C]

Yeah, I mean, I still feel like, you know, I mean, stores could choose to show everything, you know.

[B]

Yeah. But as you. It's obvious why any individual store doesn't.

[D]

Yeah.

[B]

I just don't understand how we wound up in this situation. And why is it that again, only you crazy Americans do it.

[D]

I bet it is a protest. I bet like the first store, I mean, this is totally. I'm making this up. But the first store was like, I don't. Taxes. I'm just going to tell you the price and then you're going to have to like pay Uncle Sam as though.

[B]

As though the tax is any less of the price that people pay than all of the other different components that go into it.

[C]

Yeah. I still think they were trying to fool people into thinking they were spending less than they ultimately would. But there are ways that other countries deal with this, you know, when they have a more federal system of governance. Like they don't have like these, you know, little towns and states dealing with all these issues. But in Japan, for instance, they at least used to. They may have changed it, but they used to force stores to actually display their post VAT tax on like price tags or their post VAT price on price tags. So you couldn't have some stores kind of fudging and showing the pre tax.

[D]

Instead of showing price. Right. Consistency. Speaking of consistency, I just have a really dumb question. I learned from my tampon tax case that like five states don't even have sales tax. And so am I. That's correct. Right.

[B]

Well, sales tax is. Are not just. I mean, there is no federal sales tax.

[C]

Yeah.

[B]

It's up to each state whether and how much sales tax they charge. And then if you live in a place like New York City, there's more. On top of that, there's municipal sales taxes as well.

[D]

Yeah.

[B]

Sales taxes are not a very sort of devolved in this country. And so they change wildly depending on which city you're in, let alone which state you're in.

[D]

Yeah. So but the Ted Cruz plan. I'm sorry, I know we finished.

[B]

That would have been federal, but it.

[D]

Would have been a federal. So that's also very different.

[C]

Yeah. I mean it kind of complicates things when you have. The one theory I've seen is that if we ever did move to a federal vat, you might see states kind of piggybacking on it. And so moving to something like they would get rid of their current retail sales tax and then kind of move on to the VAT as well.

[D]

Talk about regressive.

[C]

Yeah. And then that would get very complicated for things like exports from different states because you'd have to deal with zeroing out different vats. And it would. The US is just not good for like simplicity is not our strong suit. It's just not what we do well.

[B]

Yeah. I mean, and it's art week in New York this week, all of the big art fairs. And the. One of the things which just galleries get tripped up on all the time is sales tax. And in fact, Larry Gagosian, the single biggest art dealer in the world, wound up getting, you know, fined for not charging sales tax. You can understand why you wouldn't. If you're selling, like, a $10 million painting, the. Neither the buyer nor the seller wants to charge sales tax on that. And so what he would do was he would ship the painting to his clients, you know, summer house in New Jersey across the Hudson river, and say, oh, well, because I'm shipping it across state borders, I don't need to charge sales tax. And then it would sit there for five minutes and then go back to the penthouse on Fifth Avenue.

[D]

So they would do the sale. The sale in a place that has less tax.

[B]

If you. If you sell a thing in New York.

[D]

Yeah.

[B]

To someone who does not live in New York, then you don't need to charge sales tax.

[D]

Right.

[C]

Wouldn't like the idea then just to be. Rather than doing, like, the weird shipping thing just to have a warehouse somewhere that has no sales tax and keep all of the art there. And wouldn't it just make sense to have an art gallery somewhere that's not New York City or just have the.

[D]

Art fair somewhere where there's no taxes?

[C]

Yeah.

[B]

Yeah. And trust me, the art world is highly alive to these issues, which is one of the reasons why most of the art in the world lives in something called the Geneva Freeport, which is in Switzerland, and it's just completely tax exempt from everything.

[C]

Doesn't Miami have, like, pretty big sales taxes, though? Because I know Florida, like, I'm pretty sure they rely entirely on sales taxes.

[B]

I'm always so completely befuddled and bemused by everything Florida when I'm in Florida, that the percentage extra that I get charged on my cash items is not the real thing I'm thinking about. I will say, however, that I feel like this protocol of adding sales tax at the till is good for one thing, which is moving us towards a more cashless economy. Because if you have to faff around with quarters and dimes and nickels and pennies and things, because you always get randomly, like, you know, $11.26, that's a pain. Whereas if you just pay that on a card, it's as Easy to pay $11.26 as it is to pay $12.

[D]

I have, along those lines, something to report from my trip to Amsterdam this week, which is I went into a grocery store and tried to pay with cash and they wouldn't accept my cash.

[B]

Good for them.

[D]

I had to pay with my credit card. I was like, are you kidding me? It's a grocery store.

[B]

All right, on which note, we are going to move on to my favorite consumer. Good. Now, okay, here's a question for you, Kathy. Would you consider men's razors to be a medical necessity?

[C]

No.

[B]

No. So they should be taxed.

[D]

I mean, I could, like. Let's think to ourselves about a situation for a specific person that they need to shave for some reason.

[C]

I'd say they're an aesthetic necessity.

[D]

No, no, no, that's not.

[B]

No, but they're more. They're more ne than Rogaine.

[D]

Why? Hair is not bad for you.

[C]

You've. Right now.

[B]

But wait, but it's more medically necessary. Okay.

[C]

Either way, Kathy would have me be like a beard. Like a bushy, balding.

[D]

I mean, I come from a family of lumberjacks, people.

[C]

Okay, that's, that's. Now we're understanding the biases here.

[B]

So, so, okay, so we have come to the general conclusion here that if you want to be paint, if you want to be using razors because you're a nice, sophisticated gentlemen like myself, then you're going to have to be paying sales tax on those razors. And if you're going to be paying sales tax on those razors, you want those razors to be as cheap as possible. And if you want a good quality shave, then you also want the combination of not only cheap but also really high quality. So how do you get there? Harry's Razors. They have their own factory in Germany. They make awesome razors with lots and lots of blades. And it's super close. Five blade cartridges, comfortable shave. One million guys have already done this, so I guess that means it must be good. But no, it's not just that. We're not just following the masses here. They are actually genuinely really good razors. So what you do is you go to Harrys.com and rather than paying $32 for an eight pack of blades, you can get them for half price. The starter set at Harry's is an amazing deal. For $15, you get a razor, you get moisturizing shave cream, you get three razor blades. And because you're awesome people who listen to slate money, Harry's will give you $5 off your first order if you use the promo code money. So pay less sales tax on your razor blades. Pay less just money overall for your razor blades. Go to harry's.com h a rrys.com Enter code MONEY at checkout. Get $5 off and be richer. Okay, I think we have a numbers round.

[D]

Yes, I'm ready.

[C]

Yeah, I can start.

[B]

Okay.

[C]

Yeah, so I actually, mine's a letter, but the letter includes numbers. It's from. The number is $2,100. And the letter came to us this week from, from Eric Funkhouser. He was responding, of course. Last week we were talking about academic publishing and the fact that they get pie on all this free labor where they have this wonderful model where they ask professors to do peer review for free and then they get to profit from it. So Eric was listening to our episode and he said, I am an energy system electricity market innovation scholar, and I review articles for a few top journals in my area. This weekend I coincidentally listened to your podcast about Elsevier's rent seeking business model while completing my review of an article under consideration for one of journals. Your comments got me thinking, so I calculated the avoided cost to Elsevier using the lowest billing rate I use when contracting. Had I billed them, my Invoice would be $2,100. That's just for one of three blind reviewers. And then there's the time spent by the associate and chief editor. My billing rate is lower than most folks in my field because I'm a social scientist rather than an engineer. So I imagine the overall avoided cost approaches 8,000 to $10,000 per article. Anyway, thank you.

[D]

That's a lot of money.

[C]

Yeah, thank you, Eric, for bringing that to our attention. Again, these guys get away with murder.

[B]

Okay, My number is 958 million Australian dollars.

[D]

Okay, wait, what's the Australian dollar compared to the American dollar?

[B]

So that works out at roughly US$710 million. It's still a lot of money. So one of the weirder experiments out there in the corporate world is this company called Slater and Gordon, which is a law firm and it's an Australian law firm. And a few years ago they went public. And this is almost unheard of.

[C]

Oh, it can't happen in the US.

[B]

It'S almost unheard of anywhere in the world that you can have law firm which has historically just been a partnership, you know, start selling shares in itself and going public. You know, we saw what happened when all of the investment banks, which used to be partnerships, went public. That didn't end well. And so everyone was very interested in what would happen when Slater and Gordon went public. Well, now we know what would happen when Slater and Gordon went public. This law firm which basically just builds itself out and commits law for clients contrived to lose $958 million in six months.

[D]

Wow. How?

[B]

That's their six month loss.

[C]

How, how do you, how do you do that?

[D]

I like the way you say commits law.

[C]

You know, like I laughed at that. Wait, I'm, I'm really confused how they did. That's like, that's a lot of money for a law firm, to any law firm to lose time.

[B]

Their share price is, is big, basically zero at this point. So let this be a lesson to all your lawyers, all you lawyers out there. It seems like it might seem like a good idea, but trust me, it probably isn't.

[D]

Good. I'm glad they went bad. So My number is 9 billion. I'm talking about Puerto Rico's electric authority debt. $9 billion, is that PREPA?

[C]

It is prepa, yes.

[D]

That's of course only one eighth of the island's total debt of $72 billion. Puerto Rico, as we've talked about before, is in a huge debt crisis. What's interesting about the electric authority is that it's in enormous debt in spite of the fact that it's been accused of selling, of sort of rigging the oil sales. So it's been buying terrible quality sludge, I think it's called, and pretending that it's high quality oil. And it's been like polluting the environment and hurting people around it.

[C]

So they're really nasty people, you're telling me they bought lower quality oil than they were required to and just like pocketed the difference. Pocketed the difference, spewed pollutants into the environment, which by the way, this is a big problem with Puerto Rico in general. Their electric. Let's stop and think about this. Their electric authority is still burning oil for electricity. Like that is, that is pre modern practically at this point.

[D]

And in the meantime they managed to get into $9 billion of debt.

[C]

They still lost enough money that they landed. That's, that's disgusting and sad.

[D]

It's really disgusting.

[B]

But the good news is that the silly bondholder types who lent them all that money and now are going to have to take losses.

[D]

I'm so glad to hear that.

[B]

And so that's just capitalism in action, right? If you lend to bad oil companies who lose money and can't pay it back, then you lose money.

[D]

Do we know that? Do we know that they're going to lose money?

[C]

I say, are they? I haven't been following this story too closely recently, but I don't think they're any closer to taking a haircut at.

[D]

This point, I'm afraid of another Argentina situation.

[C]

Yeah. Because this is gridlock on the Hill.

[B]

I mean, yeah, this Puerto Rico situation is going to play out extremely slowly. Well, it's one of the things that journalists like myself have a problem with in Puerto Rico because it would be great if there was one big default and then one big resolution. You could write about the default and you could write about the resolution and it would be over. But there are so many different entities in Puerto Rico and they're all going to wind up defaulting at different times and having different kinds of haircut and there's going to be a huge amount of litigation and this is going to go on roughly until the 12th of never. So there will be no resolution. But all you need to do is look at the price of these bonds to see that no, they are not. No one is realistically expecting that the full principal and interest is going to wind up getting repaid.

[D]

And what's bad for journalists is even worse for the actual people living in Puerto Rico.

[B]

Yeah, I think, you know, whether whether or not, you know, Bond haircuts are good or bad for the people living in Puerto Rico is something which we will be arguing about much more on Slate Money going forwards. I'm quite sure that is it for us this week. Thank you very much for listening to the Brain in the VAT episode of Slate Money. We don't only talk about sales taxes on this show, but this week I guess it was a sales tax show. So to find out about things which aren't sales taxes, subscribe to Slate Money by searching for us in the iTunes store. Leave a review there. Write to us. Our email address is slatemoneylate.com send little mash notes to Audrey Quinn, the producer who makes this all seem coherent. The executive producers are Steve Lichti and Andy Bowers. And check out all of the other Panoply [e-mail] calendar so we'll talk to you next week on Sleep Money.

[E]

Hey, this is Eric Malinsky, the host of the newest podcast on Panoply, Imaginary Worlds. Every other week I explore different sci fi fantasy genres, how they're created, and why we suspend our disbelief. You could start at the beginning with what makes a good origin story, whether you're applying for a job or starting out as a new superhero. You could also check out my five part series on Star wars where I looked at how the evil empire became a metaphor in sports and politics and whether Princess Leia's gold bikini is a feminist icon. Imaginary Worlds gives you the backstory behind pop culture stories and how they've changed the way we understand the real world. You can subscribe in itunes, Stitcher, or wherever you get your podcasts.