The VAT and Stimulus
A passing point in an interview I gave a while back seems to be getting some attention.
http://meganmcardle.theatlantic.com/archives/2009/10/a_whole_vat_of_stimulus.php
I said that if we had a VAT then cutting it temporarily would be an excellent way of increasing consumption. Some people have likened this suggestion to banging one's head against the wall because it feels so good when you stop.
I certainly wouldn't suggest imposing a VAT just so it could be cut when necessary to stimulate consumer spending. I was simply making the point that that if we had one then temporarily cutting it would be far more stimulative than sending out rebate checks or fiddling with the payroll tax. Rebates are largely saved and have no stimulative effect while cutting the payroll tax temporarily will do nothing to expand employment and will only undermine Social Security's already-precarious finances.
The case for a VAT, as I have explained on many occasions, is that spending will never be cut enough to prevent a fiscal crisis and that the default position will be higher income tax rates unless a VAT is a viable alternative when the time comes for fiscal retrenchment. If the VAT can play some useful role in countercyclical policy then so much the better.
VAT
I like your idea that the VAT can be a good lever that can either be raised or lowered as the state of the economy demands. The fact that it is a tax that cannot be avoided makes it consistent and fair, even if it is regressive.
One of the big problems we have with our tax code are all the loop holes that people with means and influence can take advantage of while the average person is stuck footing the bill.
The case for a VAT,,,
The case for a VAT, as I have explained on many occasions, is that spending will never be cut enough to prevent a fiscal crisis and that the default position will be higher income tax rates unless a VAT is a viable alternative when the time comes for fiscal retrenchment.
Right, exactly -- when the time comes for fiscal retrenchment.
On our current course that time will be about a decade from now -- and "retrenchment" includes those on the spend side recognizing that spending scheduled to rise perpetually as a pct of GDP has to be reigned in and stabilized, and agreeing to corresponding cuts, in exchange for getting more from the revenue side as per the model of the '83 deal on Social Security reform.
Before then a VAT is too good to use -- and waste its revenues on all kinds of pork, bridges to nowhwhere, and new entitlements that run up $1.25 of liabilities for every dollar the VAT brings in.
Because then when day arrives that you really need the VAT revenue, it's already gone, and what are you going to do then?
The Pigovian carbon permit revenue was even better than a VAT -- and what have the Democratic Comgressional leaders promised to do with all of that? (Orszag: "Biggest act of corporate welfare in history.")
I don't see any problem at all with the argument that a tax can be too good to use now.
The World Series is about to start, and if the Yankees find themselves either up or down by six runs in the first game and in need of a reliever, the pitcher they won't use is
Mariano Rivera, exactly because he's too good to use in that situation -- making him unavailable later when they may really need him.
If the VAT can play some useful role in countercyclical policy then so much the better.
Maybe, but I don't see how a VAT could be turned on and off, or up and down, easily. Turn it off or down and all the firms in the production chain take a tax hit in a recession, forced to swallow the tax they've incurred as of that date that the consumers won't pay. (Or the government has to hand out a whole lot of admistratively complicated refunds to a whole lot of businesses.)
And as for consumers, I don't see how a temporary VAT cut would stimulate purchases so much as advance them to before the tax holiday end date -- to be followed by corresponding drop in purchases later. "Cash for Clunkers" writ large. Which proved really costly per car sale.
I think the proponents of the $787 billion stimulus would say it is actually creating new, additional economic activity, not merely mostly shifting it in time forward somewhat, to be followed by a drop. (I hope.)
Has the VAT actually been used counter-cyclically in the many countries that have it?
If so, we ought to have good data on the results. If not, that probably says something.