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John McCain's Irresponsible Demagoguery on the VAT

16 Apr 2010
Posted by Bruce Bartlett
It seems like eons ago that John McCain was a senator worthy of respect even when he was wrong. Now he's just wrong. His irresponsible attack on the value added tax yesterday is a case in point.
 
Out of the blue, McCain introduced a non-germane amendment to pending legislation (H.R. 4851) denouncing the VAT. Here is the full text of his amendment, which is in the form of a resolution expressing the opinion of the Senate:
It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery (Senate Amendment 3724, Congressional Record, p. S2302, April 14, 2010).
On April 15, he rose in support of his amendment. Almost all of his statement in the Congressional Record consists of reprinting anti-VAT screeds by the Wall Street Journal editorial page (probably written by Steve Moore), Dan Mitchell of the rabidly anti-tax Cato Institute, and J.D. Foster of the Republicans' favorite "think tank," the Heritage Foundation. McCain's actual words are worth quoting in their totality:
Mr. President, as my colleagues well know--today is tax day. Earlier today I came to the floor to speak about the enormous burden Americans bear every year in order to comply with today's deadline for filing their Federal tax returns. We have a complex, antiquated and oversized Tax Code that wreaks havoc on American taxpayers and, according to the National Taxpayers Union, will require them to spend $103 billion this year in compliance-related expenses. When we have a 2,000-plus page Tax Code which requires over $100 billion in compliance costs--something is clearly wrong. So what is the answer? Amazingly--instead of offering proposals to reform the system and ease the burden on our citizens--some are suggesting creative ways to impose new taxes on Americans and even further complicate our Tax Code.
 
According to this morning's Wall Street Journal, the Obama administration and its allies have floated the idea of imposing value added tax--a sales tax imposed on each stage of production, on each firm's value added with the actual cost ultimately hidden from the end user with the final bill being paid by the consumer at the cash register. This type of tax has been widely imposed throughout Europe. This morning, in an editorial titled ``Europe's VAT Lessons,'' the Wall Street Journal stated….
 
While there is no official proposal to impose the VAT--I think it is necessary for my colleagues to be on record on this onerous new tax. Therefore, I am offering this very simple sense of the Senate amendment which calls the VAT exactly what it is--a massive tax increase that will cripple families on fixed incomes and only further push back America's economic recovery.
 
Daniel Mitchell, a senior fellow at the Cato Institute recently wrote….
 
J.D. Foster, a senior economics fellow with the Heritage Foundation, wrote….
 
I agree with Mr. Foster--every current Member of Congress should say where they stand on the VAT. With this amendment I am giving Members of the Senate that opportunity.
 
Several of my colleagues have explained that they would support a VAT if it was replacing the Federal income tax or the current corporate tax structure. I say to those colleagues that I have not seen a shred of evidence from the administration or anyone in Congress that the VAT would be used as a replacement tax. I am supremely confident that--if and when it is offered--the VAT will be an additional tax on the American people. And that is the last thing the American people need right now. The solution to America's worsening government fiscal outlook is not to increase taxes--it is to cut spending. Congress could get America's economy back on track by focusing on tax relief and simplification, liability reform, regulatory reform, health care security, and energy independence--not on imposing a new, massive tax increase that will cripple middle- and low-income families and delay America's economic recovery.
 
The solution to America's worsening government fiscal outlook is not to increase taxes, it is to cut spending. Congress could get America's economy back on track by focusing on tax relief and simplification, liability reform, regulatory reform, health care security and energy independence, not on imposing a new massive tax increase that will cripple middle- and low-income families and delay America's economic recovery.
 
I ask for the yeas and nays on the amendment (Congressional Record, pp. S2351-2, April 15, 2010).

I have quoted McCain in this way because the HTML version of the Congressional Record does not appear to differentiate between a senator’s spoken remarks and those inserted by him or her. You can only tell which is which by looking at the PDF version, wherein the type face is slightly different.

It's hard to know where to begin to dissect McCain's guerrilla attack on the VAT. There's certainly no serious effort to impose one in the Obama administration or anywhere else that I know of. I just know of a pathetically small number of serious budget analysts who have looked at the budgetary trends and concluded that Congress is never going to cut spending enough to forestall a fiscal crisis and that a significant tax increase is inevitable. That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented.
 
No economist I know of denies this. The problem is that right wing economists have talked themselves into believing that it is better for us to raise taxes in the most economically distorting way possible, better to hold down the tax burden and prevent tax increases. Casey Mulligan of the University of Chicago business school made such an argument on Wednesday.
 
Personally, I think this is nuts. Perhaps if there were any evidence that economically debilitating taxes are harder to raise than those with a low deadweight cost (the output that is discouraged over and above the tax itself) I might be willing to at least think about it, but I am not aware of any. My observation is that when faced with a fiscal crisis politicians are more likely to raise the taxes they already have than impose new ones even when they know that the new ones will be less burdensome, which means that we will raise income tax rates when the time comes unless there is some other form of taxation already in place.
 
Furthermore, I think we have to remember that low taxes or tax rates are not an end in themselves; they are the means to an end, which is higher growth and greater prosperity. In this sense, I think right wingers pay far too much attention to the negative economic consequences of taxation while essentially ignoring the negative economic consequences of extremely large deficits. The only reason we haven't seen such effects already is because investment has collapsed, saving is unusually high, deflation is the dominant economic problem, unemployment is high, and, most importantly, current deficits are assumed to be temporary. When the day comes that markets come to believe that they are semi-permanent--perhaps because markets believe that Republicans will block any budget deal that involves higher taxes and may even be stupid enough to block a debt limit increase--then all hell will break loose; inflation and interest rates will skyrocket and voters will demand action on the deficit.
 
Sadly, when that day comes many senators may conclude that a foolish consistency--the hobgoblin of small minds--may require them to oppose a VAT because they were blindsided by McCain's amendment and voted for it without thinking. In the final vote, 85 senators supported McCain, not one spoke against it.
 
Under the circumstances, any senator voting against McCain's demagogic resolution deserves credit. Here are the names of 13 senators with honor and guts: Akaka, Bingaman, Brown of Ohio, Byrd, Cardin, Dorgan, Kaufman, Levin, Reed, Udall of New Mexico, Voinovich, Webb, and Whitehouse (Nelson of Florida and Warner did not vote).
 
I applaud all of them.
 
Finally, I wish someone would ask those voting for this resolution how they feel about the 47 percent of tax filers who pay no federal income taxes. No doubt, they will all proclaim that it is shameful and a scandal. Then ask them what we should do about it. If they oppose a VAT, then the only other way of getting millions of Americans to pay something to support the general operations of the federal government is to eliminate the tax credits that are mainly responsible for them having a negative or zero tax liability. If they are also opposed to that, then it is reasonable to assume that they are either cowardly, stupid or lying.
 
Addendum
 
The Washington Post quotes from this post here.

You are a good person to

You are a good person to raise this question with.

For generations conservatives have been working hard to reduce taxes.

Now we have strong evidence that this generation long struggle has been working and that as a result 47% of households pay not federal income tax.

So why are conservatives now claiming this is a bad thing?

Isn't it exactly what you claim to be your goal


It's not my goal...

but it is the goal of conservatives, Republicans and tea partiers. One reason I favor a VAT is so that everyone will contribute something to the general operations of the federal government. It's unrealistic to think we are ever going to raise tax rates on those now paying no federal income taxes at all.


Why not name their party?

Good for you for naming names, and strongly, saying they have 'honour and guts.' But why not name which party? (Apart from a few names I know offhand, I don't actually know them).


Parties

They are all Democrats except for Voinovich.


How limited is your knowlege of economists?

"That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented.

No economist I know of denies this."

Then you don't know of many economists outside of right wing "economists".

First, the vast majority of economists expert in this area (real economists with PhDs) will tell you that the least economically harmful way to tax is to tax negative externalities and activities, like pollution and cigarettes. Here the harm from the tax is negative. The tax does good in addition to raising money, it increases efficiency and total societal utility. Here's an example of an obscure economist few have heard of saying this, Nobel Prize winner Paul Krugman:

http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html?pagewanted=p...

Second, many economist object to the VAT because, unlike the income tax, it is completely unprogressive. And you don't have to be unprogressive to have a tax that is consumption based and simple. This can be done with the proposal by another obscure economist, New York Times Economic View columnist and Cornell professor, Robert H. Frank. In a Washington Post Op-Ed Frank wrote:

...We can do this in a powerful yet unintrusive way by scrapping our current income tax in favor of a more steeply progressive consumption tax. Such a tax would be straightforward to administer: Each family would pay tax not on its income, but on its total spending--as measured by the simple difference between its annual income and its annual savings.

Because the rich are able to save and invest so much more than the poor, fairness would require that tax rates on the highest spenders be significantly higher than the current top tax rates on incomes.

at: http://www.robert-h-frank.com/PDFs/WP.1.24.99.pdf

And, precisely because this tax is progressive, it also accomplishes point 1: It increases efficiency by taxing externality costs, chiefly the colossal costs of positional/context/prestige externalities. And this is a key point Frank makes in the Op-Ed I cite above. If you really are open minded as you say, then you should read it.


" The vast majority of

" The vast majority of economists expert in this area (real economists with PhDs) will tell you that the least economically harmful way to tax is to tax negative externalities and activities, like pollution and cigarettes. "

We can use taxes as a precise tool to reduce some economic distortions. Krugman is talking about carbon taxes and carbon trade tariffs mainly in this context. One big idea here is that if your taxes are working, you'll see revenues from them drop.
*(Tax co2 to reduce co2 emissions & redistribute revenues to citizens --> less emissions --> less revenue.)
*(Tax cigarettes to reduce incidence of smoking and pay for health costs --> smoking reduction --> health cost reduction --> revenue falls from people smoking less.)

A second role of taxes is to raise revenues to pay for government services. This is what we are talking about in the VAT concept and its relationship to current income and capital taxes. We expect VAT revenues to increase with economic activity (similarly to income tax or capital taxes). We might like a VAT to compliment income and capital taxes because we don't like the effects of having to raise only those two taxes.


Krugmanites rarely know what a "negative externality" is

Remember, Krugman won his "Nobel" for the same reason that Obama won his; not because he was a particularly distinguished economist, but because he was a prominent critic of Bush in his weekly NYT column.

In the linked article, Krugman claims that temperatures will rise by 9 °F. No climate scientist in my community (I exclude "climate modelers, who are not climate scientists) think that this is even vaguely possible. Indeed, those of us who actually do or use climate data in our research know the following:

(a) Current global temperatures are not excessive, neither in degree nor rate of change, compared to those that have occurred historically.

(b) The Medieval, Roman, and Minoan warm periods were as warm (or warmer) than today, as was the Pliocene, yet there was no "runaway" temperature rise that Krugman's favorite models propose (note, Krugman is a true macroeconomist; he cherry picks models that agree with his pre-selected ideology). Not through the loss of the albedo from the polar ice, nor the release of methane from clathrates, nor any of the other factors that Krugman is claiming.

(c) Computer climate models that predict such catastrophes are highly parameterized mathematical constructs (quite different from "science"). They have failed to predict anything better than random (a broken clock is wrong twice a day). Nor do they account for the Medieval, Roman, Minoan and Pliocene warm periods.

(d) It is entirely clear why "number crunching" climate models fail: They do not capture correctly factors that are significant regulators of Earth's temperature, including cloud formation (low clouds damp temperature rise), the biosphere, and the oceans.

(e) Human generated CO2 is about 10% of total CO2, which which is about 10% of the greenhouse effect of water. Without major, unopposed amplifying feedbacks, changing human CO2 emissions by any amount would have no significant effect on the global temperature.

(f) The fact that global temperature has regulated itself for a million years between two states, the Ice Ages and the current warm period, means that there are opposing feedbacks, clouds undoubtedly being one of them, opposing feedbacks that are not captured in alarmist models.

(g) The only scientific grounds for any alarm whatsoever is the possibility that human activity might radically change the mechanism by which the Earth has naturally regulated its temperatures between these two states. There is very little evidence for that possibility, however.

People like Al Gore and Paul Krugman simply deny the conclusions that a half century of climate science have produced.. Having corrupted climate science, they have attracted a small group of computer modelers who, as climategate has shown, will game peer review and hie data, will give them the "science" that they want to further their political agenda.

And what if we climate scientists are wrong, and CO2 IS a problem? Well, as Jim Hansen has pointed out, the impact of "cap and trade" taxes will be so small as to make no difference. Remember, we can reduce the US CO2 emission to zero and have growth in China and India re-create it in just three years.

So get your facts straight before you cite Paul Krugman. And this starts by reading Krugmans January 12, 2008 column, and marvel at this man''s bad economic judgement:

http://www.nytimes.com/2008/01/11/opinion/11krugman.html?ex=1357707600&e...

Krugman likes high taxes, and will cherry pick data to overcome the fact that taxes always do economic harm. This article was about European social democracies, countries like Greece, Spain, and Italy. Despite having had their defense paid for by the US for 60 years, having had essentially all of their tcechnological innovation coming from the low tax "evil capitalistic" US, and having enjoyed "free health care" supported by medical breakthrughs that came almost entirely from the American evil "for profit" health care systems,they are in sovereign default. And yet Krugman lauds their high tax rates beyond his "wildest ambitions" and wishes their fate on the US.

Some taxes are necessary, including to minimize externalities. But they need to be constructed to do the minimum damage. Having Paul Krugman design them is the worst of all possible ideas.


Krugman

He won his Nobel for very important theoretical work on international trade that was well deserved whatever one thinks of his Times columns. Similarly, Milton Friedman's Nobel was well deserved regardless of what one thought about his columns in Newsweek. 


Krugman's work on

Krugman's work on international trade was important enough, but not particularly distinguished over that of dozens of other macroeconomists. He was singled out over many of equal merit because he was anti-Bush.

Even his work on trade fits into the standard paradigm of macroeconomic, whose practitioners build "spherical cow" models for the real economy. These models do not work, of course; they are too crude. After all, economies are not dimensionless points in space. Demand is not aggregate. Millions of players in a marketplace do not sit by idly as politicians expropriate resources to distribute to their cronies. We may, as Keynes said, all be dead in the long run, but our children will not be, and Krugman's spending ensures them that they will be in slavery to foreign debt holders and will never, ever, get the "free quality health care" that Krugman thinks is theirs "by right".

Every now and then, someone points out: "Hey wait. Economies are not dimensionless points in space." Since macroeconomists, like most modelers (including, most recently, climate modelers), become enchanted by their models to the point that they confuse models for reality with reality itself, think "Hey. He's right! This guy must be brilliant!" And they recommend him for something called the "Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne" (mistakenly called the "Nobel Prize in Economic" -- in reality, there is no such thing).

Prof. Krugman relaxed one of the "spherical cow" assumptions as relates to trade. For which he deserves credit. But remember Erasmus's aphorism: "In the land of the blind the one eyed man is king." I am not sure that he was thinking about macroeconomics when he said this, but it certainly fits.

Now, since he won the riksbanks pris, Krugman has demonstrated the aphorism that "all laureates should have their tongues cut out". As Robery Barro, the distinguished Harvard economist, points out, Krugman now is unconstrained in his cherry picking of data to make points that fit his progressive political ideology. Quoting Barro, Krugman "just says whatever is convenient for his political argument. He doesn't behave like an economist."

Indeed he does not any longer. Which is why Paul Krugman should these days never be quoted by anyone trying to make a point about anything about economics. Certainly not about the virtue of taxes. And absolutely certainly not about climate.


I favor a VAT, but only if it

I favor a VAT, but only if it replaces the income tax. The problem with introducing a VAT as a supplement to other forms of taxation is that it will lead to a justification for more spending rather than greater fiscal prudence. For the most part, this has been the case for any such tax increases in the past. California might provide a good example. Taxes were raised in the name of fiscal prudence, but spending also rose as self-centered politicians viewed the additional revenue as an opportunity. When advocating additional revenues over spending cuts, we need to be careful not to overestimate the government's ability to reign itself in in the face of additional revenues.


VAT

One possible selling point of a VAT may be that it could relieve companies and workers of supporting the entire budget. Do you think this may in a small way make American manufacturers slightly more competitive?

We cant levy import duties, but this could be a way to tax all sales and thus shift some of the tax burden to foreign made goods. If this works, perhaps we could reduce either the corporate income tax, unemployment tax or payroll tax.


Here's what I think will happen.

We will levy incremental tax increases on businesses and the wealthy for some years. Eventually, Republicans will support a VAT as a pure tax reform to replace the incremental taxes on businesses and the rich. That way they can rationalize that they are not raising taxes with a VAT, only reforming the tax system. But in fact what they will be doing is raising taxes retroactively. I think it makes more sense to do now what is inevitable and avoid all of the unnecessary economic pain we will put ourselves through by waiting.


VAT and underground economy

How well do VAT countries do at deriving revenue from people getting money under the table or through illegal means?

Obviously, some such people will just find illegal VAT-avoiding sources for some of their purchases, but some of the income will end up being collected as VAT.

It seems like the US has no means of doing this at the Federal level.

Has anyone worked out how much that might amount to in the US, if we had a VAT?


underground

I thought it was kind of hard to hide from a VAT. You can buy your raw materials for $10 and sell them for $12 on the street tax-free, but you are still paying the tax on the $10 you bought.

For a modest VAT, evading it becomes more trouble that its worth.




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