Anyone who reads the Wall Street Journal's editorial page knows that it hates the value-added tax. I don't mean hate the way it hates liberals, government regulators and the capital gains tax. No, the Journal hates the VAT more deeply and strenuously than anything else.
The reason is that the Journal sees the VAT as the essential fuel of the welfare state. Without it a European-style welfare state cannot exist. Therefore, if you hate the welfare state--as the Journal does--you must oppose the VAT with every fiber of your being. No fooling around; the VAT means Armageddon, the end of America as we know it and victory for welfare state liberalism. If we impose a VAT we will all soon be cheese-eating surrender monkeys just like the French.
The problem with the Journal's hatred of the VAT is that it also embraces consumption-based taxation. Under a pure consumption tax there would essentially be no taxes on the returns to capital--no taxes on interest, dividends or capital gains. Such would be the Journal's Nirvana, the perfect tax system (insofar as we have to have taxes at least to pay for a really big Defense Department to protect all the wealth that would quickly be accumulated under this perfect tax system).
Hence, the Journal has long championed the flat tax originally developed by Hoover Institution scholars Robert Hall and Alvin Rabushka, who first put forward their plan in a Journal op-ed. The Hall-Rabushka plan is a pure consumption tax with a single rate that is levied equally on businesses and individuals.
Economists have long recognized that while the single or flat rate is the most obvious fact about the plan, it's not the most important. Imagine a flat rate on our current tax base. It would probably increase growth a bit, but not very much because the greatest economic distortions in our tax system relate to the tax base. Substituting any sort of coherent base, whether a consumption base or a comprehensive income (i.e., Haig-Simons) base would unquestionably improve economic performance much more. Even allowing for progressive rates on a consumption base would be far preferable to what we have now.
The problem is that there are really only two ways of taxing consumption broadly: the VAT or a retail sales tax. Every country with a national consumption tax has a VAT, none use a retail sales tax such as we have at the state level. The reason is that the tax collection system is too fragile to allow retail sales tax rates much above 10%. The VAT works well at rates at least twice as high because it is self-enforcing to a large extent--tax payments have to be reported by businesses to collect credits on taxes paid on inputs.
For this reason, the so-called FairTax that many unsophisticated tax reformers favor will not work. I know of no serious tax analyst who thinks it is possible to collect all federal taxes including the payroll tax using this system. Of course, it's politically impossible anyway and therefore not worth wasting one's time with. (The proponents are also crackpots who grossly misstate how their plan really works. See here for analysis.)
Consequently, the only consumption based tax system worth serious consideration is a VAT. Indeed, the Hall-Rabushka plan is a VAT. It is what is known as a subtraction-method VAT similar to the one in Japan. The other type of VAT is the credit-invoice method, which is widely used in Europe. They are mathematically identical.
So we come to the crux of the Journal's dilemma. It wants a consumption-based tax system, but it hates the only type of consumption tax that would actually work.
As long as the Journal could confine the debate to tax reform, replacing the current system in a revenue-neutral manner, it could fudge the contradiction in its philosophy. The problem now is that the Journal also hates budget deficits and they are now much too large to realistically suggest that they be eliminated solely by spending cuts, even if the nitwit tea party crowd thinks so.
The Journal knows that revenues have to rise if we are to make a serious dent in projected budget deficits. It hasn't yet said so in so many words, but it is finally allowing one of its most trusted op-ed writers to suggest the idea in a roundabout way. Thus this morning it allowed Glenn Hubbard, former chairman of the Council of Economic Advisers under George W. Bush, to say this:
If the administration wants to maintain the spending path on which its budget blueprint places us, it must confront and propose significant, broad-based tax increases. Let's be clear what this means.
Our present income tax already relies very heavily on revenue from high earners; the top 1% pay well over one-third of federal income taxes. Mr. Obama's budget increases the reliance. But we cannot count "taxes on the rich" for deficit reduction, health-care expansion and funding entitlements while ignoring the effect of those tax increases on investment, innovation and growth.
To raise the revenue for the president's welfare-state ambitions, the tax increases must necessarily be broad-based, as, for example, with a broad-based consumption tax. A useful start would be to calculate—and present to the public each year—the broad-based consumption tax required to pay for higher spending.
To appreciate the importance of this statement one must read between the lines. Of course, the blame for any large tax increase must be placed squarely on Barack Obama's policies even though half of projected deficits result from Bush's policies. Nevertheless, it is the very first sign of realism with regard to higher revenues that I can recall reading on the Journal's editorial page, ever. Up until now its position has been that the only permissible tax increase is that resulting from a further cut in the capital gains tax, which would lead to a flood of new revenues according to Journal dogma.
Moreover, the Journal seems to finally be dipping its toe into the VAT pool. Of course, it can't reverse decades of opposition overnight, so it will have to be called a broad-based consumption tax or BBCT. But as I have noted, the only viable BBCT is a VAT.
It will be interesting to see whether the Journal allows other dissenting views to its heretofore unrelenting opposition to tax increases of any kind and a VAT in particular. It may end up having to take it all back and disown its own blasphemy. Nevertheless, it is a start, the beginning of fiscal sanity in a place where little has been seen since the death of Bob Bartley.
Addendum
Fortune also suggests the need for a VAT today. Chait comments on the same Hubbard article here. On the WSJ editorial page's idiocy, see here.
Question
At the risk of exposing my ignorence, how is a VAT all that much different from the FAIR tax other than being applied to business to business sales as well as at the retail level. I can understand why a VAT proponent would oppose the FAIR tax since any tax applied only at the retail level would need to be so large it would quickly provide lifetime employment for smugglers and black marketeers. But why would a proponent of the FAIR tax adamently oppose a VAT? And yes, I know they are all idiotic morons too deluded to appreciate the enlightened brilliance of the economic intelligensia (sarcasm intended) but have any VAT proponents made an effort to learn and understand why FAIR tax proponents oppose a VAT? Is there potential for common ground if the two groups engage in discussion rather than trade insults?
FairTax/VAT
The FairTax people oppose the VAT, so they say, mainly because it is a hidden tax. They believe that seeing the tax paid at the checkout provides transparency that will limit the tax take. This is idiotic, of course. If we had a single rate VAT everyone would know that it is included in the cost of everything they buy. By contrast, I doubt that more than 10% of people can accurately tell you the current retail sales tax rate in their state now. The idea that transparency requires a single point of collection at the retail level is just plain stupid.
It is not very well hidden in Europe
I've always thought one of the advantages of the VAT, at least as I've paid it in Great Britain, France and Spain was the big bold "VAT AMOUNT" line on most of the sales reciepts. I kind of like knowing how much of my tourist dollar is going to support the European welfare state. I admit, to rarely applying for a VAT tax rebate after returning home (most of my souveniers are too inexpensive) but all the stores suggest it and point out the VAT on the reciept.
Seriously, if that is their strongest argument, there should be at least some potential for discussion. Making a VAT at least as transparent as a retail sales tax should not be a major problem.
I would also propose the VAT as a replacement for the corporate income tax in order to take advantage of WTO rulings that allow border adjustability of VATs but not income taxes.
The "hidden" VAT
If you ever go to Europe or Russia (I know - find a conservative with a passport!) and walk into a store, you will find price tags that have the VAT percentage on the price tag that tells you precisely how much the price of a given item is VAT.
Argument about "hidden taxes" easily disposed of.
"Hidden" VAT is Laughable
Good Lord - have any FairTax people every traveled overseas? The notion that a VAT is somehow hidden from the consumer is utter lunacy. As in 2 + 2 = 5 lunacy.
Visit another country for pete's sake, it is SO BLINDINGLY OBVIOUS to anyone with their eyes open what the VAT rate is.
Japanese voters are so keenly aware of their applicable VAT rate that politicians in the Diet haven't been able to raise the country's VAT (a subtraction method VAT, no less) without triggering mass protests. That's been going on for decades.
Similar examples in German and U.K., where VAT rate hikes were pushed through over public protests. The point is that people know all too well that their consumption of goods and services is subject to VAT.
Frankly, the argument is so stupid it's astounding it ever surfaced. Who would want their name attached to it? You'd instantly lose credibility.
The only apparent explanation for the FairTaxer's reliance on the "hidden VAT" argument is that they simply can't think of any valid reasons criticize the VAT. They got nothing else to throw at it.
The one obvious strike against VAT (it's regressivity) doesn't register because their silly plan is also regressive. And yes, the FairTax is silly to anyone who has spent more than two weeks applying themselves in a serious way to these issues.
VAT is coming. The only real questions are (1) credit invoice method or subtraction method, and (2) what gets traded for it: individual income taxes or corporate income taxes. There are compelling arguments for both.
I question whether the
I question whether the Democrats have the stomach for imposing a VAT. I agree that it would be the sensible way out of our fiscal soup, but it would involve payment by those marvelous folks with incomes below $250,000, many of whom currently make no net contribution to the general finances of the federal government. So the VAT is economically less damaging than would be increasing either income tax, would relieve some of the over-burden we currently place on the income base, would not complicate operations of state and local finances (it works just fine on top of lower government retail sales taxes, something that would not be true if the feds adopted a national retail sales tax), and could support a way out of our deficit hole. But will the president or the Congressional leadership get on board and push it (as they would have to do)? Not too sure about that.
Income adjusted VAT
Wouldn't it be possible to balance a VAT with a refundable tax credit on VAT paid for necessities (food, some clothing etc)for low income families in such a way that Democrats would have difficulty opposing it as regressive?
That's what Canada does with
That's what Canada does with its VAT, the Goods & Services Tax.
So? Your post lacks a
So? Your post lacks a conclusion.
BATT
Bruce,
Are you familiar with David Hartman's border-adjustable business transfer tax? It too is a subtraction-method VAT that would have the political appeal of a job creation engine - leveling the playing field with foreign producers. No question we need to move in the direction of the lowest possible rate on the broadest possible base, but as of today, neither political party seems interested in upsetting any the constituencies, right or left, that are heavily invested in the current system of exclusions, deductions, credits and rebates.
Of course, the blame for any
Of course, the blame for any large tax increase must be placed squarely on Barack Obama's policies even though half of projected deficits result from Bush's policies.
Actually, the estimates I've seen are significantly more than half.
The fact is that, just like when Clinton was first in office, the Republicans want the Democrats to do the heavy lifting of raising taxes because it is necessary. Then they will pummel them for raising taxes and try to ride that to power. The Dems are now deer in the headlights; too afraid to move in any direction.
Our political climate has made fiscal responsibility an impossibility.
The other consumption tax
There is the consumption tax from taxing income less savings and investment. The transition is to allow increasing use of pretax accounts until eventually all income is saved and all taxes come from withdrawals from pretax accounts. What is wrong with the progressive consumption tax?
Bruce, you don't really quite
Bruce, you don't really quite say one way or the other, but is your proposed VAT supposed to be an additional tax on top of federal income taxes, medicare taxes, and social security taxes? Or do you propose the imposition of a VAT with corresponding reductions or elimination of the income tax? If it's the former, this has no chance at all, and you should quit wasting everyone's time.
Also, I'm not quite convinced
Also, I'm not quite convinced that calling other proposals idiotic, and their proposers idiots, is the surest way to win adherents to your cause.
Maybe not but it makes me feel better.
Makes you feel better about
Makes you feel better about what? Why the world doesn't just acquiesce and implement your self-evidently brilliant policy prescriptions already? I'd recommend a nice long walk instead of name calling. It helps when you are feeling frustrated, and may additionally provide the benefit of helping you come up with even more new and ingenious ways to raise taxes.
VAT
Will someone please explain to me how state sales taxes would figure in the proposed plan?
Small correction
"The problem is that there are really only two ways of taxing consumption broadly: the VAT or a retail sales tax. Every country with a national consumption tax has a VAT, none use a retail sales tax such as we have at the state level."
Canada's GST is actually a retail sales tax, and is nearly identical to the provincial sales taxes other than the list of exempted items was a little different when the tax was introduced.
You're right about the political impossibility of hiking such a tax above about 10% though. The GST was introduced at 7% and people acted as though the government had killed their first-born.
GST is a VAT
No. The Canadian GST is a true VAT, not a RST. Canadian businesses pay the GST on their purchases and get this tax refunded when they collect GST on their sales. A RST excludes business purchases from tax via suspension certificates, not a refund process. The Canadian GST looks different from European VATs in that the tax is added on purchase and is not embedded in the quoted price. But that's irrelevant -- you can run a VAT (or a RST) with or without separate quotation of the tax in list prices. The Canadian GST really is a VAT.
Thanks
Ah, thanks for the clarification.
Liberals would be OK with VAT if social services matched too
Aside from its regressiveness, the VAT has some attractive features for most of us leftists out there. By its nature I think it would discourage excess consumption, which would be good for the environment and potentially good for social cohesion to the extent that it discourages conspicuous consumption at the margin.
But to get liberal support I think you would need to solve the regressiveness problem by using collected tax dollars to pay for more things that benefit people with lower incomes. Top on my list would be health care, subsidized child care, larger college subsidies, and more of the kind of automatic stablizers they have in Europe. To do this you would probably need to collect taxes at a greater percentage of GDP than we are collecting right now. Our tax rates would have to be closer to those in European countries.
European countries have a VAT and a strong social safety net; I always have a hard time understanding what conservatives think is so bad about the quality of life in European countries.
Not in this lifetime
The entire reason this discussion is even necessary is liberals started making unrealistic spending promises 2 generations ago and the bill is coming due in our generation (for all the hype, the "Bush" deficits are a rounding error on the entitelment mess). Conservatives may RELUCTANTLY accept the need for a VAT in order to avoid complete fiscal collapse; but if the price of liberal support is to dig the hole even deeper by turning the social safety net into a hammock, than bond defaults would be a preferable option.
BTW, how are Greece, Spain and Portugal financing that safety hammock these days? How long will Brussels be able to tap Germany, France and Great Britain for cash to subsidize the rest of the continent before the well runs dry? Europeans have a wonderful quality of life. So did we for 50 years. The bill is coming due on both sides of the Atlantic. We have room to increase revenues as a percentage of GDP by a small amount. They have pretty much hit the cieling, and in some cases fractured it.
The price of a VAT must be hard enforcable spending caps.
In Ireland, there is no VAT on household food and
other essentials, including clothing,etc. It is possible to construct VAT laws including and excluding broad categories of transactions, and even applying VAT at different rates to different levels or types of transactions.
Not that complicated, actually. They adjust the VAT system regularly here as the need for economic stimulus to certain sectors or higher levels of income to the State become apparent.
It is actually quite an elegant system that works quite well and fairly, once the proper exclusions have been addressed.
Of course there is always debate about what constitutes a proper exclusion, but changes are as easy to undo as they are to do.
deficit reduction
The deficits are so large and will be growing that a multi-pronged attack on them will be necessary. A VAT for sure, plus some inflation when possible, plus cuts in entitlements. Of course stopping the wars would be a big help but those seem sacrosanct to Washington for murky reasons. A VAT could be made easier by starting it at a low rate, and then increasing it as needed.
Basis for Compromise
Pretty much every VAT proposal I have seen adds the VAT on top of the income tax system. I'm not sure about the one that Mr. Bartlett supports, but if his is different, then that should be made evident.
One of the reasons that FairTaxers oppose a VAT is that very reason - the European experience is that a combination of a VAT and an income tax proves to be too much of a temptation for legislators to resist raising taxes. It has been suggested that the FairTax be implemented in addition to a scaled back version of the income tax that only affects "the rich" and that idea is roundly rejected because pretty much everyone knows where that leads. After all, the current income tax system was started in 1913 and was only supposed to affect the rich.
If you reject the notion of retaining the income tax, then the new consumption tax (whether it's a VAT or an NRST) would have to replace those revenues. If you raise that much revenue without a means of addressing regressivity, then it becomes politically a non-starter. The FairTax addresses regressivity by means of a rebate. This is far more efficient and manageable than opening up Pandora's box by exempting certain items and having the government picking winners and losers.
VAT
I would be happy to substitute a VAT for all or part of our existing tax structure except the payroll tax for reasons I don't have time to go into. However, as a practical matter, we are never going to abolish the corporate or individual income taxes, so a VAT will be on top--just as it is in every other country.
The main point I wish to convey is that whether we like it or not the tax/GDP ratio must rise very substantially from where it is now and where it has been historically. How much will depend on how much entitlements can be cut, but I suspect that federal revenues will need to rise to at least 25% of GDP to stabilize the debt/GDP ratio.
An increase of this magnitude if raised via the income tax would be economically dibilitating. That is why I favor a VAT. Rather than fight it to the death, as most right wingers want to do, I think it would be better to cut the best deal possible for accepting a VAT in terms of tax reforms and entitlement cuts as the price.
Reform and Entitlement cuts must lead the package
Despite my initial uncertainties, the more I learn about a VAT, the more attractive it becomes. I see no reason a rational conservative should oppose it, particularly if they have been open to the FAIR tax.
Nevertheless, entitlement cuts and tax reform must lead the deal and they must be put on the table by the Democrats. I have too many painful memories of previous balanced budget agreements. Ronald Reagan agreed to $2 in tax increases in return for $1 in spending cuts. The tax increases were enacted. We are still waiting for the spending cuts. George H. Bush went out to Andrews Air Force Base and the Democrats ate his lunch. Again, plenty of tax increases but no spending cuts. Despite claims that Clinton cut spending in addition to raising taxes, examination of budgets from the 90s demonstrate he simply gutted the Defense Department to claim the "peace dividend", leaving us woefully unprepared for the challenges of the new century.
When George W. Bush raised the issue of SS reform n 2005, the Democrats would not even discuss the issue. Rather than respond to Paul Ryan's roadmap with counter proposals of their own, the Democrats are trying to use it as a club to bash Ryan and other Republicans. They have never made a good faith effort to restrain entitlement spending. The smoke and mirrors they use to game CBO scoring of their current healthcare reform proposals demonstrates their lack of sincerity.
Yes, we need a VAT. Yes Republican members of Congress should accept, even embrace the VAT and help get it enacted. And yes they should wait to do so until AFTER the Democrats have stepped forward with meaningful entitlement reform proposals. Republicans who propose, or even accept, any form of tax increase prior to movement by the Democrats are simply alienating their base and inviting the Democrats to plant a knife in their back. If the tax increases move first, the Democrats will simply turn around and demand the Republicans detail spending cuts to reform entitelments. When Republicans respond with a proposal, not matter how restrained, the Democrats will chop it into 30 second tv commercials and Rahm it down their throats.
O RLY?
>the Democrats are trying to use it as a club to bash Ryan and other Republicans. They have never made a good faith effort to restrain entitlement spending.
Neither have the Republicans. First they added on Medicare Part D with absolutely no source for its revenue (other than the national credit card). And now one of their talking points in denouncing the House-Senate health insurance reforms is that it would move funds out of Medicare to help pay for it.
>When Republicans respond with a proposal, not matter how restrained, the Democrats will chop it into 30 second tv commercials and Rahm it down their throats.
Just like claiming a proposal to require people to buy health insurance from private companies (but with federal vouchers, but no abortions kthx) is equivalent to the Great Leap Forward with added bonus of turning Grandma into Soylent Green.
It Doesn't Work That Way And You Know It
Spending cuts (entitlement or otherwise) aren't coming without being coupled with tax increases. No one (Democrats and Republicans) is going to vote for only spending cuts; particularly in entitlement programs. As the GOP likes to say, that's a "job-killing bill" (for politicians that is) as the elderly are not going to allow their Social Security and Medicare to be cut.
But more importantly, I want to comment on this kind of thinking. This is why conservatives have failed over and over and over to cut entitlement spending and trim the welfare state. They have no problem cutting spending for programs they oppose or have no use for such as Social Security or Medicare (until recently when the GOP became the Party of Medicare) but don't dare ask them to cut spending for the programs they love such as the Defense Department or corporate subsidies.
So, you want to trim entitlement spending? Fine. Offer a bill that cuts entitlement spending in the same percentage as any government program conservatives love. Show the people who support the entitlement programs that you are serious and willing to sacrifice programs that you love as much as they love their entitlements. That has a chance to pass.
However, the position of "you sacrifice first by allowing entitlement cuts and then I'll consider sacrificing later by agreeing to higher taxes" is as phony and insincere as they get.