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Posts Tagged ‘VAT’

I’m a supporter of a single-rate tax regime, especially if there’s no double taxation of income that is saved and invested.

That’s why I like the flat tax.

But I’ve expressed concern about the national sales tax, even though it’s basically the same as a flat tax (the only real difference is that the flat tax takes a bite out of your income when it is earned, while the sales tax takes a bite of your income as it is spent).

The reason for my skepticism is that I don’t trust politicians. I fear that they will adopt a sales tax, but never replace the income. As a result, we’ll wind up like Europe, with much bigger government.

And also much more red ink – even though politicians claim tax hikes and new taxes will lead to balanced budgets.

I’m not just being paranoid. Not only is this what occurred in Europe, the same thing is now happening in Japan.

Here’s some of what the Wall Street Journal has to say about “reforms” to the value-added tax in the land of the rising sun.

Japan on Tuesday increased its consumption tax to 8% from 5%. An increase to 10% is written into the law for next year, and don’t imagine for a minute that this will be the last. Welcome to the value-added-tax ratchet, which only goes in one direction—up. Tokyo first imposed a 3% consumption tax in 1989, after politicians had tried for a decade to enact one. …The new tax was billed as part of a tax reform, but the reform never materialized.

And as I warned in a prior column, the VAT has become a recipe for bigger government in Japan.

The new tax didn’t solve Japan’s deficit woes, as the debt to GDP ratio climbed to 50%, so in 1997 politicians increased the rate to 5%. Again politicians promised the increase would be offset by income-tax reforms. Again the reform proved illusory. …The additional revenue still didn’t satisfy Tokyo’s spending ambitions, and debt has since climbed well above 200% of GDP despite the VAT increase. …So now the rate is going up again in the name of, you guessed it, shoring up government finances as the population ages.

The OECD likes this development, which is hardly a surprise, but it’s bad news for those of us who favor growth and opportunity.

Japan’s experience points up the broader political problem with a value-added tax wherever it has been imposed. Economists tout the VAT for generating revenue without creating disincentives to work and invest. But in practice the consumption levy merely becomes one more tax in addition to current taxes and thus one more claim by the political class on the private economy. …The lesson for tax reformers elsewhere, not least in America, is to beware the VAT because once it is imposed it is only going up.

And it’s worth noting that the Europeans also have been increasing the VAT in recent years.

Simply stated, this is a levy to finance bigger government.

I elaborate in my video on the VAT.

P.S. You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. I also very much recommend what George Will wrote about the value-added tax.

P.P.P.S. I’m also quite amused that the IMF accidentally provided key evidence against the VAT.

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It’s no secret that I dislike the value-added tax.

But this isn’t because of its design. The VAT, after all, would be (presumably) a single-rate, consumption-based system, just like the flat tax and national sales tax. And that’s a much less destructive way of raising revenue compared to America’s corrupt and punitive internal revenue code.

But not all roads lead to Rome. Proponents of the flat tax and sales tax want to replace the income tax. That would be a very positive step.

Advocates of the VAT, by contrast, want to keep the income tax and give politicians another big source of revenue. That’s a catastrophically bad idea.

To understand what I mean, let’s look at a Bloomberg column by Al Hunt. He starts with a look at the political appetite for reform.

There is broad consensus that the U.S. tax system is inefficient, inequitable and hopelessly complex. …a 1986-style tax reform — broadening the base and lowering the rates — isn’t politically achievable today. …the conservative dream of starving government by slashing taxes and the liberal idea of paying for new initiatives by closing loopholes for the rich are nonstarters.

I agree with everything in those excerpts.

So does this mean Al Hunt and I are on the same wavelength?

Not exactly. I think we have to wait until 2017 to have any hope of tax reform (even then, only if we’re very lucky), whereas Hunt thinks the current logjam can be broken by adopting a VAT and modifying the income tax. More specifically, he’s talking about a proposal from a Columbia University Law Professor that would impose a 12.9 percent VAT while simultaneously creating a much bigger family allowance (sometimes referred to as the zero-bracket amount) so that millions of additional Americans no longer have to pay income tax.

Hunt likes this idea.

The Graetz initiative offers something for both sides. It starts, he suggests, with countering the observation once offered by former Treasury Secretary Larry Summers that liberals fear a value-added tax because it’s regressive and conservatives fear it because it’s a money machine. Graetz’s measure overcomes both objections.

Regarding the final sentence of that excerpt, he’s half right. Folks on the left will be happy to know that there will be a lot more redistribution through the tax code.

Graetz addresses the regressivity of most sales taxes, not by exempting food, drugs and other necessities as most of the older European systems do, but with a system of credits and offsets… He provides a payroll tax cut and expanded child-care credits focused on low- and moderate-income workers.

But what do advocates of small government get out of the deal?

Well, they do get something in the short run. Graetz wants to use the VAT money to reduce the burden of the income tax. Rates for households are lowered, with the top rate falling to 31 percent. And the best part of the plan may be that it reduces America’s uncompetitive corporate tax rate to 15 percent.

But I’m more worried about the long run, particularly after looking at evidence from Europe and Japan.

What’s in the plan, for instance, that would prevent the VAT from becoming a “money machine”? Or what guarantees would be put in place to prevent politicians from re-expanding the income tax?

Unfortunately, there don’t appear to be any safeguards. Professor Graetz has expressed some support for supermajority rules to protect against tax hikes, but he’s quoted in the article explicitly stating that a VAT could be used to generate more money to prop up the welfare state.

The Tax Policy Center found that his proposal succeeds in raising the same amount of revenue as current law. If revenue is to be part of any longer-term deficit reduction, Graetz observes, the value-added tax or the income taxes could be tweaked. “Actually, this would put us in a better situation to address the fiscal crunch down the road,” he says.

That statement scares the heck out of me. We desperately need the right kind of entitlement reform to save America from becoming another doomed welfare state. But what are the odds of getting good changes if politicians think they can continuously kick the can down the road by raising the VAT every couple of years.

Before you know it, we’re Greece!

If you don’t believe me about the VAT being a money machine, perhaps you’ll be more trusting of analysis from the International Monetary Fund. That bureaucracy actually supports the VAT, but the IMF inadvertently revealed in some research last year that the VAT is far more effective at generating new revenue than the income tax.

And that’s true for poor nations and rich nations.

This video from the Center for Freedom and Prosperity, narrated by yours truly, explains why the VAT would finance the road to serfdom.

Last but not least, it’s worth pointing out that Professor Graetz’s proposal has become more punitive over time. Check out this portion of a Tax Policy Center study showing that the VAT rate has been increased and that a new class-warfare tax rate has been added to the proposal.

VAT Graetz

So if the proposal has become more onerous on paper, imagine how much worse it will get once politicians get their hands on it.

P.S. If you want short explanations of the flat tax, sales tax, VAT, and current system, check out these Heartland Institute videos.

P.P.S. To be fair, there’s very little indication that Prof. Graetz wants bigger and more expensive government. He’s proposing a VAT for the same reason Cong. Paul Ryan has proposed a VAT. They think the revenue can be used to reduce the burden of the income tax. They’re not wrong in theory. They just don’t appreciate the danger of giving politicians a new source of revenue.

P.P.P.S. George Will correctly warns that the VAT should be off the table until and unless the 16th Amendment is repealed. And Robert Samuelson gives several reasons why this levy should be rejected.

P.P.P.P.S. Some advocates say the VAT is needed to forestall higher income tax rates, but that certainly hasn’t been the case in Europe.

P.P.P.P.P.S. You can enjoy some amusing VAT cartoons by clicking herehere, and here.

P.P.P.P.P.P.S. Al Hunt has always been a nice guy on the few occasions I’ve interacted with him, but it didn’t help my reputation when he wrote in the Wall Street Journal back in 1994 that I was a “responsible economic expert on the right.” That sounds like praise, but folks on the left generally only say nice things about their opponents when they’re being incompetent or selling out.

P.P.P.P.P.P.P.S. I’ll close with some good news. The U.S. Senate overwhelming rejected the concept of a VAT back in 2010, though I think the 85-13 vote overstates the level of opposition. Many left-wing Senators only voted no because it was a non-binding measure. But we don’t get many victories in Washington, so I’ll take it.

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I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse – 94th out of 100 countries according to a couple of German economists – when you look at details of how corporate income is calculated.

And I applaud anyone who supports the right of low-tax nations to have competitive tax policy. This is a real issue in Europe. I noted back in 2010 that, “The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.” And the pressure remains today, with Germany wanting to coerce Ireland into hiking its corporate rate and the OECD pushing to undermine Ireland’s corporate tax system.

All that being said – and before anyone accuses me of having a man-crush on Bill and/or of being delusional – let me now issue some very important caveats.

When Clinton says we should increase “the burden on consumption taxes,” that almost surely means he would like to see a value-added tax.

This would be a terrible idea, even if at first the revenue was used to finance a lower corporate tax rate. Simply stated, it would just be a matter of time before the politicians figured out how to use the VAT as a money machine to finance bigger government.

Indeed, it’s no coincidence that the welfare state in Europe exploded in the late 1960s/early 1970s, which was also the time when the VAT was being implemented. And it’s also worth noting that VAT rates in recent years have jumped significantly in both Europe and Japan.

Moreover, Clinton’s position on fiscal sovereignty has been very weak in the past. It was during his tenure, after all, that the OECD – with active support from the Clinton Treasury Department – launched its “harmful tax competition” attack against so-called tax havens.

In other words, he still has a long way to go if he wants to become an Adjunct Fellow at the Cato Institute.

P.S. Just in case anyone want to claim that the 1993 Clinton tax hike deserves credit for any of the good things that happened in the 1990s, look at this evidence before embarrassing yourself.

P.P.S. There’s very little reason to think that Hillary Clinton would be another Bill Clinton.

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If you have any long-term Japanese investments, sell them soon.

How do you say “Barack” in Japanese?

In part, that’s because the Japanese Prime Minister announced another Keynesian spending binge earlier this year – even though several so-called stimulus plans in Japan have flopped over the past two decades (Keynesian economics doesn’t work anywhere, but that’s a topic for another day).

Adding to the burden of government spending is not exactly prudent behavior for a nation that already has the highest level of debt among all industrialized countries.

But the main reason I’m so pessimistic about Japan is that the government has decided to deal with the problem of runaway government spending by imposing  permanently higher taxes on the private sector.

I’m not kidding. Let’s look at parts of a recent Reuters report.

Japan’s Prime Minister Shinzo Abe will…raise the national sales tax to 8 percent in April from 5 percent, a final draft of the government economic plan, seen by Reuters, shows.

Cartoon Fiscal Cliff 3

Japan’s government isn’t even pretending to restrain spending!

And to make a bad situation even worse, some of the money will be used for yet another faux stimulus package.

Abe ordered his government to compile the stimulus package to be announced on Tuesday. It features public-works spending for the 2020 Tokyo Olympics.

The main problem, though, is that Japan’s real fiscal problem is an ever-increasing burden of government spending. The tax increase won’t solve that problem. Indeed, it will give politicians an excuse to postpone much-need reforms.

Surprisingly, the Reuters report acknowledges these problems.

The government has done little to rein in spending…, so some critics doubt Tuesday’s move will be enough to get Japan on track to achieve its goal of halving the budget deficit – excluding debt service and income from debt sales – by the fiscal year to March 2016 and balance it five years later. …any improvement in government revenue from the tax increase is likely to be quickly overwhelmed by expenditures in a country where a rapidly ageing society and generous public services are blowing an ever-bigger hole in the budget.

Time to “decisively” raise taxes!

So why is the Prime Minister doing something that won’t work? Apparently this shows he is decisive. This is not a joke.

…pressing ahead with the tax hike bolsters the image Abe has sought to foster of a decisive leader, withstanding opposition from his advisers and some of his own party.

Gee, isn’t it wonderful that Japan’s Prime Minister decisively wants to do the wrong thing and decisively put his nation deeper in a ditch.

While rational people are puzzled by the Japanese government’s self-defeating decision to raise taxes, there is one group that is cheering. Here are some excerpts from Tax-News.com about the head bureaucrat from the OECD applauding the greed of Japan’s political class.

The Secretary General of the Organization for Economic Cooperation and Development Angel Gurria has warmly welcomed the announcement from Japanese Prime Minister Shinzo Abe that the nation will raise its consumption tax from its current five percent levy to eight percent from April 2014. …”As Abe himself has noted, this increase is essential to maintain confidence in Japan and establish a social security system that is sustainable for future generations. I congratulate Prime Minister Abe for this important step and also encourage the government to complete the second hike in the consumption tax rate to 10 percent in 2015.”

So the OECD wants a hike in the VAT now…and another one in just two years. I’m sure Japanese taxpayers are overjoyed to be subsidizing a bunch of bureaucrats in Paris (who get tax-free salaries!) who urge more taxes on other people.

But, to be fair, the OECD wants higher taxes for everybody – including more Obama-style class-warfare taxes in America. The bureaucrats even argue that VATs are good for growth and job creation!

My view, for what it’s worth, is that this is another piece of evidence showing that the VAT is a money machine for big government. Not just in Japan, but also in Europe.

And the same would be true in America. This video explains further.

P.S. Here are some examples of how the Japanese government wastes money, though regulation of coffee enemas is my favorite example of government stupidity from Japan.

P.P.S. Click here, here, and here to enjoy some very good cartoons on the VAT.

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The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.

The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.

So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*

And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.

Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.

VAT EU Increase

As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.

Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.

For more information, here’s my video that describes the VAT and explains why it’s a bad idea.

*The same thing is now happening in Japan.

P.S. I don’t know if you’ll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.

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The value-added tax is a pernicious levy.

It’s basically a hidden form of national sales tax, imposed every time a transaction occurs at any stage of the production process.

But what irks me about the VAT is not its design (indeed, it shares some key characteristics with the flat tax). What gets me agitated about the VAT is the fact that politicians always seem to treat the tax as a way of financing a larger burden of government spending.

That’s certainly what we’ve seen in Europe, both when the VAT was first implemented beginning about 45 years ago and more recently when many nations increased the rate to finance bailouts and faux Keynesian stimulus.

With this background, you’ll understand why I get excited whenever I see signs of anti-VAT fervor. Even in tiny and largely unknown British colonies such as the Turks and Caicos Islands.

Here are some excerpts from Tax-News.com.

On February 1, 2013, at a lengthy House of Assembly session, the newly elected Government backed a bill proposed by the opposition to block the introduction of the 11% VAT from April. TCI VAT Mutiny16 members backed the measure, with just 2 in favor of proceeding with the implementation of VAT. Since the announcement that VAT would be introduced, Turks and Caicos citizens and business groups have vehemently contended that VAT is inappropriate for the islands and is being “forced through” by the interim Government, at the behest of UK authorities.

Not surprisingly, given the pervasive statism in London (where the VAT rate was recently boosted to 20 percent), the U.K. government is on the wrong side of the issue, demanding that the VAT be imposed.

Last month, the UK’s Minister for the Overseas Territories, Mark Simmonds, rebuffed a request from the Turks and Caicos Islands’ new Premier, Rufus Ewing, that the implementation of the islands’ new value-added tax regime be deferred to allow time for the development of an alternative. He suggested that the islands review the regime in April 2014, a year after it is implemented.

The suggestion to “review” the VAT after one year is laughable. Sort of like asking someone to review their heroin usage after a year of addiction.

For those of us anchored in the real world, the only way to stop the VAT is to block it from ever being implemented. Because once politicians get hooked on a new source of revenue, there’s almost no hope of getting them to voluntarily relinquish those funds.

All that being said, I’m not a fan of the TCI government. Just like happened in the Cayman Islands (discussed in detail here), the government of the Turks and Caicos Islands spent too much money and put too many people on the payroll and paid them above-market wages (gee, sound familiar?).

They got in financial trouble, which led to intervention by the mother country.

But getting help from England on fiscal policy is like asking for dining advice from Hannibal Lecter.

The old TCI government was guilty of overspending, and now the U.K. thinks the answer is overtaxing.

I hope the new TCI government is able to somehow thwart the VAT. But if they’re serious about stopping that odious tax, then they better take some genuine steps to restrain government spending and prune bureaucratic expenses.

I’m not sure what lesson we have for the United States, other than the fact that we should fight to our last breaths before we let this awful tax get imposed in America. This video has more details.

P.S. Here are three very good cartoons on the VAT (here, here, and here).

P.P.S. Richard Teather of Bournemouth University in the United Kingdom has produced an independent report on whether a value-added tax is appropriate for TCK.

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What’s the worst thing about Delaware?

No, not Joe Biden. He’s just a harmless clown and the butt of some good jokes.

Instead, the so-called First State is actually the Worst State because 100 years ago, on this very day, Delaware made the personal income tax possible by ratifying the 16th Amendment.

Though, to be fair, I suppose the 35 states that already had ratified the Amendment were more despicable since they were even more anxious to enable this noxious levy (and Alabama was first in line, which is a further sign that Georgia deserved to win the Southeastern Conference Championship Game, but I digress).

Let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.

The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.

But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.

Here’s a chart, based on data from the Office of Management and Budget, showing the burden of federal spending since 1789.

Since OMB only provides aggregate spending data for the 1789-1849 and 1850-190 periods, which would mean completely flat lines on my chart, I took some wild guesses about how much was spent during the War of 1812 and the Civil War in order to make the chart look a bit more realistic.

But that’s not very important. What I want people to notice is that we enjoyed a very tiny federal government for much of our nation’s history. Federal spending would jump during wars, but then it would quickly shrink back to a very modest level – averaging at most 3 percent of economic output.

Federal Spending 1789-2012

So what’s the lesson to learn from this data? Well, you’ll notice that the normal pattern of government shrinking back to its proper size after a war came to an end once the income tax was adopted.

In the pre-income tax days, the federal government had to rely on tariffs and excise taxes, and those revenues were incapable of generating much revenue for the government, both because of political resistance (tariffs were quite unpopular in agricultural states) and Laffer Curve reasons (high tariffs and excise taxes led to smuggling and noncompliance).

But once the politicians had a new source of revenue, they couldn’t resist the temptation to grab more money. And then we got a ratchet effect, with government growing during wartime, but then never shrinking back to its pre-war level once hostilities ended (Robert Higgs wrote a book about this unfortunate phenomenon).

The same thing happened in Europe. The burden of government spending used to be quite modest on the other side of the Atlantic, with outlays consuming only about 10 percent of economic output.

Once European politicians got the income tax, however, that also enabled a big increase is the size of the state.

But Europe also gives us a very good warning about the dangers of giving politicians a second major source of revenue.

Here’s a chart I prepared for a study published when I was at the Heritage Foundation. You’ll notice from 1960-1970 that the overall burden of government spending in Europe was not that different than it was in the United States.

That’s about the time, however, that the European governments began to impose value-added taxes.

The rest, as they say, is history.

VAT and Govt Spending in EU

I’m not claiming, by the way, that the VAT is the only reason why the burden of government spending expanded in Europe. The Europeans also impose harsher payroll taxes and higher energy taxes. And their income taxes tend to be much more onerous for middle-income households.

But I am arguing that the VAT helped enable bigger government in Europe, just like the income tax decades earlier also enabled bigger government in both Europe and the United States.

So ask yourself a simple question: If we allow politicians in Washington to impose a VAT on top of the income tax, do you think they’ll use the money to expand the size and scope of government?

If it takes more than three seconds to answer that question, I suggest you emigrate to France as quickly as possible.

P.S. You probably won’t be surprised to learn that the crazy bureaucrats at the Paris-based OECD think the VAT is good for growth and jobs. Sort of makes you wonder why we’re subsidizing those statists with American tax dollars.

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Since I routinely spread a message of doom and gloom about the ever-expanding welfare state and warn about the potential for European-style fiscal collapse, I guess I shouldn’t be surprised that I’ve received several emails asking me variants of this question: “Do you think the United States can be rescued?”

Or sometimes, I get questions that I think are somewhat related, such as “Doesn’t Washington drive you crazy” or “Why haven’t you given up?”

I’m not sure I’m good at introspection, but I’ll try to answer, and we’ll start with the main question and then deal with the secondary queries.

To be blunt, if I had to place a bet on the outcome, I think the United States will become a failed European-style welfare state. The burden of government spending already is far too high and our long-run outlook is terrible, as shown by these OECD and BIS numbers, and I don’t think the callow politicians in Washington will fix the problems because they rarely think past the next election cycle.

This doesn’t necessarily mean that we’ll have a Greek-style fiscal collapse. Perhaps we’ll simply descend into permanent stagnation, with anemic growth (at best) and widespread dependency and joblessness.

That being said, even though I would bet on a bad outcome, I think there’s a genuine opportunity to save the country.

My job: Putting my finger in the dyke, trying to hold back the flood of big government

No, I’m not talking about creating a libertarian Nirvana, with the federal government consuming only three percent of economic output. But I think we can at least hold the line and prevent government from becoming bigger than it is today. Sort of a watered-down version of Mitchell’s Golden Rule.

The key is the right kind of entitlement reform. Our long-run fiscal nightmare is entirely the result of programs such as Social Security, Medicare, and Medicaid, so the solution is obvious.

But is it achievable?

As I’ve already indicated, I wouldn’t bet on it. We definitely know there won’t be any good reforms for the next four years, but let me give you a plausible scenario for what might happen beginning in 2017.

We’ll start with the fact that the House of Representatives already voted for Medicaid reform and Medicare reform as part of the Ryan budget in 2011 and 2012. We also know that Republicans retained the House in the most recent election and there seems to be a political consensus that voting to fix the healthcare entitlements was not a political liability.

There was no Social Security reform in Ryan’s budget, but we also know that George W. Bush (for all his other faults) supported personal accounts in 2000 and 2004 and didn’t suffer any political backlash. Indeed, personal accounts still seem to be reasonably popular.

With this in mind, I think it may be possible to fix entitlement programs in 2017 assuming that the 2014 and 2016 elections lead to pro-reform lawmakers in the House, Senate, and White House.

That may not be likely, but it’s definitely possible.

My job, simply stated, is to help inform and educate people so that the climate is favorable to reform.

Which brings me to the secondary questions about whether Washington drives me crazy and whether I should give up.

The short answer is that I’m intellectually pessimistic but operationally optimistic.

In other words, my brain tells me that things will probably deteriorate but my heart tells me that this is a battle worth fighting.

So, yes, Washington does drive me crazy. It is both an immoral town and an amoral town, pervasively corrupt and filled with people who seem to think that it is perfectly okay to steal so long as it happens through the legislative or regulatory process.

And, yes, I may decide to give up if something really horrible happens, such as adoption of a value-added tax. Giving politicians a big new source of revenue, after all, would cripple any incentive for fiscal restraint.

But until that happens, I think I’m very lucky that I get to wake up every day and be part of the Cato Institute’s fight to preserve (and restore) American exceptionalism.

P.S. This is the second “Question of the Week” in two days, but I neglected to answer a question last week, so I had to catch up and get back on track. Yesterday’s question and answer generated a lot of interest, so I hope this one is equally thought-provoking.

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Regular readers know I’m not a fan of the Organization for Economic Cooperation and Development. Heck, just take a look at some of the examples in this post and you’ll understand why.

Well, the Secretary-General of the Paris-based bureaucracy just pontificated about the value-added tax. Let’s see whether my knee-jerk hostility is warranted.

“Night is day, up is down, and higher taxes boost growth”

Here is the basic hypothesis from the OECD’s head bureaucrat.

Our VAT policies are important tools to foster growth and employment, but also to build stronger, cleaner and fairer economies.

That’s a bold sentence, so let’s dissect it. Starting with the last part, I’m not sure what he means by “cleaner,” so let’s set that aside. I assume “fairer” is a code word for class warfare, though it doesn’t make sense in this context since a VAT – for all its other flaws – is a proportional levy.

So what does he mean by “foster growth and employment” and making an economy “stronger”? Does that mean the OECD is recommending big reductions in VAT rates? That would make sense since the VAT is similar to the income tax in that it drives a wedge between pre-tax income and post-tax consumption.

But you have to remember we’re dealing with the OECD, and on policy matters the Paris-based bureaucracy inevitably supports statism. So you won’t be surprised to learn that the OECD thinks higher VAT rates are good for growth! I’m not joking. Let’s look at what the Secretary-General of the OECD said.

VAT policies are playing a strategic role in our recovery efforts, but they could do more. Many countries are seeking to raise additional revenues from VAT as part of their fiscal consolidation strategies. Between 2009 and 2012, sixteen OECD countries increased their VAT rates. Six more increased their VAT rates. This is reflected in the OECD average standard VAT rate that has risen from 17.7% in 2008 to 19% today. This is quite remarkable considering that the OECD average had remained stable for over ten years before 2008. Raising the standard rate is the easiest way to increase revenue. …Another option for governments is to consider broadening the tax base, such that goods and services that are now exempt or subject to reduced rates would gradually be taxed at the standard rate.

In other words, he’s bragging that the VAT is easy to raise and he’s happy that the average VAT rate has jumped significantly.

But what’s really amazing is that he claims this is pro-growth, part of “our recovery efforts.” So the OECD is just as clueless as the Congressional Budget Office and is embracing the view that higher tax burdens are good for the economy.

This is par for the course for the OECD, as you can see from this video.

Something to keep in mind for lawmakers who are looking for an easy way to save $100 million without taking away any goodies from American voters.

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I’m not a big fan of the International Monetary Fund, largely because the folks in charge oftentimes advocate toxic policies such as bailouts, higher taxes, and currency devaluation.

But there are some top-rate economists working at the IMF, and the bureaucracy has published some good studies about the economic benefits of reducing government spending and others warning that tax increases can be self defeating (by the way, too bad we can’t get the Joint Committee on Taxation to also acknowledge the Laffer Curve).

Now the IMF has a new study about the relationship between economic growth and different types of taxes. Those finding are interesting, and I may even write about them in the next few days, but I want to focus on some amazing data from this research that shows exactly why proponents of limited government should resist the value-added tax.

These charts are taken from page 10 of the IMF study and they depict changes, over the past several decades, for both personal income tax (PIT) revenues and consumption tax revenues, both measured as a share of economic output. The charts are divided to show trends in low-income countries, middle-income countries, and high-income countries.

These are remarkable numbers. They basically show that politicians have been unable to squeeze more money out of the income tax. We don’t know if that’s because of the Laffer Curve, tax competition, electoral resistance, or all of the above. But we can say with considerable confidence that the income tax has not been a money machine over the past 40 years.

I’m not saying it’s a good tax. Far from it. The income tax is unfair. It’s punitive. It’s discriminatory. It’s corrupt. And, when it was first adopted, it did generate a big new pile of revenue for the politicians.

But that was 100 years ago. In recent decades, by contrast, it hasn’t been a piggy bank for statists seeking to expand the burden of government spending.

The data for the VAT and other consumption taxes, by contrast, shows just the opposite. With each passing decade, the VAT burden climbs, and that’s true for nations at all stages of development.

This is one of the reasons why a VAT would be a disaster for the United States. Politicians might make promises about repealing or reducing other taxes in exchange for a VAT, but it is a 99-percent certainty that politicians would pull a bait-and-switch. We’d still be stuck with the awful income tax system and the IRS, but the crooks and clowns in Washington would have a new source of revenue to feed their spending addiction.

Isn’t that wonderful? We’d be taxed when we earn our income (often more than one time), and then taxed again when we spend our income. Just like Europe.

Here’s my video explaining why a value-added tax would be a fiscal disaster.

One final point. I don’t care if you like Mitt Romney or dislike Mitt Romney. But, given his less-than-sound views on the VAT, I want everybody to be prepared to hold his feet to the fire if he happens to prevail on November 6.

P.S. You’ll be delighted to learn that the pampered bureaucrats at the IMF get tax-free salaries, just like their cousins at the OECD and the rest of the international bureaucracies.

P.P.S. I just shared these a few days ago, but if you didn’t get a chance to see them, you can enjoy some good anti-VAT cartoons herehere, and here.

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The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos on Obama’s economic policies.

Now we have a new addition to the list. Here’s Mattie Duppler of Americans for Tax Reform, narrating a video that eviscerates the President’s tax agenda.

I like the entire video, as you can imagine, but certain insights and observations are particularly appealing.

1. The rich already pay a disproportionate share of the total tax burden – The video explains that the top-20 percent of income earners pay more than 67 percent of all federal taxes even though they earn only about 50 percent of total income. And, as I’ve explained, it would be very difficult to squeeze that much more money from them.

2. There aren’t enough rich people to fund big government – The video explains that stealing every penny from every millionaire would run the federal government for only three months. And it also makes the very wise observation that this would be a one-time bit of pillaging since rich people would quickly learn not to earn and report so much income. We learned in the 1980s that the best way to soak the rich is by putting a stop to confiscatory tax rates.

3. The high cost of the death tax – I don’t like double taxation, but the death tax is usually triple taxation and that makes a bad tax even worse. Especially since the tax causes the liquidation of private capital, thus putting downward pressure on wages. And even though the tax doesn’t collect much revenue, it probably does result in some upward pressure on government spending, thus augmenting the damage.

4. High taxes on the rich are a precursor to higher taxes on everyone else – This is a point I have made on several occasions, including just yesterday. I’m particularly concerned that the politicians in Washington will boost income tax rates for everybody, then decide that even more money is needed and impose a value-added tax.

The video also makes good points about double taxation, class warfare, and the Laffer Curve.

Please share widely.

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For years, I’ve been warning that a value-added tax (VAT) would be a terrible idea. Simply stated, politicians would have no reason to control spending or reform entitlements if they had a new source of tax revenue.

In this video, I explain why this European-style national sales tax is a money machine for bigger government.

Japan’s politicians are confirming my argument. Here are some details from a new report in the Wall Street Journal.

Japan’s parliament passed a landmark tax bill Friday, finalizing the legal framework to double the nation’s sales tax by 2015 as a step toward fiscal reconstruction. The upper house enactment of the contentious bill marks the end of Prime Minister Yoshihiko Noda’s tortuous 12-month road to raise the tax to 8% in April 2014 and 10% in October 2015. …The sales tax hike will be the first since 1997, when the rate was raised to the current 5% from 3%.

Wow, more than tripling the tax between 1997 and 2015. I wonder how long it will take Japan’s political class to boost the rate to 20 percent?

But that’s only part of the story.

Mr. Noda also had to promise to dissolve the lower house “in the near term” in exchange for…endorsement of the bill in the opposition-controlled upper house.

Wow, if I’m reading that passage correctly, it sounds like Prime Minister Noda is willing to lose power in order to impose this new tax. This shows an amazing amount of greed for new revenue.

I’m surprised, though, that his party didn’t kick him out and elect a new leader. They must be as politically incompetent as the supposedly right-wing party in Slovakia that surrendered power to the socialists in order to get support for the Greek bailout.

However, the WSJ article also suggests that the tax is not a done deal.

The bill includes a provision making an “economic upturn” a condition for implementing the rate hike. The government refused to specify in the bill exactly what an upturn entails, and lawmakers have different interpretations. DPJ tax policy chief Hirohisa Fujii told Dow Jones that only an economic shrinkage of 3% or more should prevent the tax increase from taking place.

Isn’t that remarkable. This onerous tax hike can only go into effect if there’s an “economic upturn,” and one of the sleazy politicians from the ruling party is defining an economic contraction of -2.99 percent as meeting that test.

Sound like Mr. Fujii should become friends with the Obama Administration officials who relied on Keynesian economic theory to concoct an infamous prediction that unemployment would never rise above 8 percent if Washington squandered more than $800 billion on a faux stimulus.

But if he’s smart, Mr. Fujii will grab as much loot as possible and emigrate. Japan’s long-term finances are a disaster, and the VAT increase is a pretty good sign that politicians have no intention of turning the ship of state before it rams the fiscal iceberg.

And now you’ll understand even more why I’m worried about the pro-VAT sympathies of Mitt Romney and Paul Ryan.

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At the start of the year, I predicted Obama would be reelected, largely because of my assumption that the unemployment rate would drop below 8 percent.

But my prediction on jobs is looking quite shaky, so this discussion about the economy and the election with Fox Business News is very timely.

I argued, unsurprisingly, that the economy is anemic because Obama’s been pursuing an agenda of wasteful spending and class warfare.

So if he loses, he has nobody to blame but himself.

That doesn’t mean Romney would be an improvement, especially if the warning signs are correct and he saddles the country with a value-added tax, so the American people may be tossed from one frying pan to another.

P.S. Hadley Heath may look familiar because she narrated this video about the damaging impact of welfare programs for the Center for Freedom and Prosperity.

P.P.S. On the completely separate topic of the Greek elections, I am more peeved than ever that the idiots in the media are reporting the results as a victory for the pro-bailout parties over the anti-bailout parties. That is nonsense. All the parties favored bailouts. As I wrote earlier this year, the election was a fight between parties that want no-strings bailout money and parties that at least pretend they are willing to implement reforms as a condition of getting bailout money.

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I’ve written before how “The Value-Added Tax Would Be a Money Machine for Big Government.”

Writing for Bloomberg, Josh Barro has a piece entitled, “Value-Added Tax Would Raise Tons for U.S. Coffers.”

So you might think we see eye to eye on this issue, but that would be a rash assumption. While I see a giant new tax as a dangerous step on the road to serfdom, Josh thinks it’s a necessary and desirable reform.

…it is time to reconsider a VAT. It would be both substantively better and more politically palatable. Here’s why: A value-added tax raises a ton of money. The base (the total amount of goods that would be subject to tax) would range from one-third to one-half of gross domestic product. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of GDP. A 10 percent VAT with a relatively broad base could raise $750 billion a year, enough to pay for about a fifth of the federal budget.

This is the point where I could make a snarky comment about how I want to cut “a fifth of the federal budget, ” not figure out how to pay for it, but that would take away from much more important concerns.

What really worries me about a VAT is that it will enable politicians to increase the burden of government spending. And that’s not good for the economy, regardless of whether that new spending is financed by the VAT, by income taxes, by borrowing, or by energy taxes. Heck, even if the spending is financed by little green men from outer space, more government spending will undermine prosperity by causing resources to be allocated to less productive uses.

I also think Josh is a bit naive in thinking that a VAT will enable reductions to other taxes. The European experience suggests that VATs are associated with higher tax burdens of income and profits (in part because VAT increases are matched with class-warfare tax hikes to make sure “the rich” pay their fair share).

I touch on some of these issues in this short video on the value-added tax.

For further information, I would suggest perusing my testimony to the House Ways & Means Committee.

George Will and Robert Samuelson also have written good columns on the issues.

I’ll close with a rhetorical question that helps explain my skepticism: We know that entitlement reform is desperately needed to save America from becoming like Europe, but do we think such reform will be more likely or less likely if politicians are given a new tax that generates lots of revenue and is easy to raise because the cost is hidden from taxpayers?

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Why are taxes so much higher in Europe, consuming 46 percent of economic output compared to 32 percent of GDP in America? Is it because nations such as France, Greece, and Sweden have adopted the kind of class-warfare policies that Obama wants for the United States?

Surprisingly, the answer is no.

As explained by Veronique de Rugy, the United States actually has a more “progressive” tax code than European nations. The corporate tax rate is higher in the United States than in any European country, and the double taxation of dividends and capital gains also is far above the European average. Western European nations tend to impose higher tax rates on personal income, so the overall tax burden on the “rich” is roughly comparable on both sides of the Atlantic.

Since the United States and European nations impose somewhat similar tax burdens on upper-income taxpayers, what accounts for higher tax collections in Europe? Simply stated, the Europeans collect a lot more from the middle class.

  • The value-added tax, which averages 21 percent in Europe, is a huge shadow income tax on lower-income and middle-income European taxpayers.
  • Europeans pay higher payroll tax burdens.
  • Energy taxes in Europe are much higher than they are in the United States.
  • European nations impose much higher income tax rates on middle-income taxpayers – as seen in the chart, which doesn’t even include the punishing impact of the value-added tax.

The Europeans squeeze the middle class because that’s the only way to finance big government. That’s the point I made in this interview on Fox News.

To elaborate, European politicians have learned that there’s a limit to the amount of revenue that can be obtained by taxing the rich. In part, this is because there aren’t enough rich people to finance a bloated public sector.

But it’s also because Laffer Curve effects are very powerful at higher income levels. Simply stated, rich taxpayers usually have much more control over the timing, level, and composition of their income.

It’s quite likely that European nations maxed out on the amount of revenue they can collect from the rich, which is why they started going after the middle class.

The same is true in the United States. The New York Times already has admitted they want higher taxes on the middle class. And as you saw in the clip above, Senator Schumer views higher taxes on the rich as a “start.”

People probably get tired of me warning against the value-added tax, but that’s going to the key fight at some point in the future. If the left (with the help of foolish Republicans) succeeds in imposing this hidden tax, I fear that the fight will be over and that America is doomed to become another Greece.

After all, why would politicians reform entitlements if they have the option of slowly but surely pushing up the VAT rate?

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With the clock ticking ever closer to the tax-filing deadline, this is the time of year we should be especially cognizant of America’s awful tax system.

Disdain for the corrupt tax code certainly motivates me. As such, even though the panel was stacked against me with three proponents of Obama’s class warfare approach, I hope I did a decent job of defending good tax policy against the statists in this debate on government-subsidized TV.

My most effective moment (I think) was when I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent.

I also had a couple of good lines when discussing the value-added tax.

Nonetheless, I think I was disadvantaged by the editing process since many of my comments from our hour-long taping got cut out. If you are sufficiently masochistic, you can listen to the entire program at this link.

I’ll close with an observation. If you support freedom and liberty and work in public policy, you better get used to being outnumbered. When I testified to the Ways & Means Committee about the VAT, I was a lone voice against this pernicious tax while the other four witnesses supported making America more like Greece.

And when I appeared on an English-language French TV program to debate tax havens, I had to battle three statists.

But at least I have truth on my side, so that compensates.

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There are several semi-permanent fiscal policy fights in Washington, most of which somehow are related to the big issue of whether government should be bigger or smaller.

Today, I want to focus on two of those battles, and point to developments in Japan to make the case that the left is wrong.

First, let’s look at a couple of sentences from a Wall Street Journal story about Japanese fiscal policy.

Top officials from Japan’s government and ruling party formally endorsed a revised bill to double the country’s sales tax, despite strong objections from other party members, in a sign of their determination to rein in the nation’s soaring public debt. …The legislation will double the current 5% sales tax in two stages by 2015 as a way to help pay for the nation’s growing social welfare costs as the population ages.

I realize I’m a strange person and I look at everything through a libertarian lens, but I think this story provides strong support for my viewpoint on two important issues.

1. Higher taxes lead to higher spending – Just like in the United States, politicians in Japan claim that they have to raise taxes to deal with deficits and debt. Indeed, the excerpt above includes that assertion, reporting that the VAT increase would be “to rein in the nation’s soaring debt.”

I think this is nonsense. Politicians are motivated by a desire to finance bigger government. And that’s what’s happening in Japan. Later in the article, we see that the real purpose of the tax hike is to “pay for the nation’s growing social welfare costs.”

2. The VAT is a money machine for big government – I’ve cited the European evidence to show that small VATs become big VATs in part because it is a hidden tax. My statist friends often respond by saying I need to look at Japan, Canada, and Australia, where VATs haven’t been increased. I then respond by saying it’s just a matter of time. So, even though I would like to be wrong, Japan is confirming my fears.

That being said, I must acknowledge the possibility that Canada and Australia may prove me wrong. And I will be happy if that’s what happens. Both nations have done a pretty good job of restraining the growth of government (see Table 25 of this OECD data), and I don’t see any immediate threat of VAT hikes. But I’m not holding my breath for what happens 10 years from now.

Last but not least, I’ve decided the title of this post is inaccurate. The left isn’t wrong. They know the higher taxes lead to higher spending, and they know the VAT is a money machine for big government. They just don’t publicly admit these are the results they want.

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What do the flat tax and national sales tax (and even the value-added tax) have in common?

As I explain in this Senate Budget Committee testimony, they are all single-rate, consumption-base, loophole-free tax systems that fulfill the key principles of good tax policy.

But good theory doesn’t operate in a vacuum, which is why I make several additional points.

1. Echoing George Will, something like a VAT should never be implemented unless the income tax is completely abolished.

2. It’s impossible to have good tax policy if government is too big.

3. A proper definition of taxable income is necessary to understand what’s a loophole and what’s not.

4. Tax revenues already are projected to significantly increase over the next few decades because of “real bracket creep,” meaning than a rising burden of spending accounts for more than 100 percent of America’s long-run fiscal challenge.

5. If you want the rich to pay more tax, keep tax rates reasonable.

On a personal note, I’m irked that my jacket is riding up on my shoulders. I’ve been trained to sit on the tail of my jacket when doing TV interviews, and I should have remembered that lesson during my testimony.

But at least I’m wearing my Bulldawg tie, so that compensates.

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In a recent column for the Wall Street Journal, I explained why Mitt Romney’s interest in a value-added tax is deeply troubling.

One of my key points was that the VAT is a money machine for big government.

But don’t believe me. Look at Japan, where the politicians see increases in the VAT as a way of financing a much larger burden of government spending. Here’s some of what is being reported by Bloomberg.

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015… Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P… Japan’s aging population is also weighing on Noda’s struggle to achieve fiscal health. Social-security expenses have more than doubled in two decades and will account for 52 percent of general spending for the year starting in April, according to a budget proposal the cabinet approved last month.

The key point in this excerpt is that the VAT is a substitute for entitlement reform. Without the VAT, politicians might actually reform the welfare state. But because of the VAT, they want to take the easy (but extremely destructive) route and boost the tax burden.

This is why I get so agitated about the threat of a VAT in America, as illustrated by this recent appearance on Larry Kudlow’s show.

By the way, you won’t be surprised to know that the fiscal pyromaniacs at the International Monetary Fund support a bigger tax burden in Japan. Here’s another passage from the Bloomberg story.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”

Isn’t it nice that we give these international bureaucrats big tax-free salaries so they can run around the world pushing for bailouts and higher taxes.

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My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.

In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.

… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.

Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.

First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.

Third, I debunked the foolish notion that a VAT creates a “level playing field” for American exporters.

…some manufacturers are willing to overlook the VAT’s flaws because the tax is “border adjusted.” This means that there is no VAT on exports, while the tax is imposed on imports. For mercantilists worried about trade deficits, this is a positive feature that they claim will put America on a “level playing field.” But that misunderstands how a VAT works. Under our current tax system, American goods sold in America don’t pay a VAT—but neither do German-produced goods or Japanese-produced goods that are sold in America because their VAT tax is rebated on exports. Meanwhile, any American-produced goods sold in Germany or Japan are hit by a VAT, as are all other goods. In other words, there already is a level playing field. To be sure, there will also be a level playing field if America adopts a VAT. But it won’t make any difference to international trade. All that will happen is that the politicians in Washington will get more money whenever any products are sold.

But I didn’t limit myself to economic analysis. I also warned that Mitt Romney might be an even greater threat on this issue than Barack Obama.

Unsurprisingly, President Obama is favorably inclined toward a VAT, having recently claimed that it is “something that has worked for other countries.” And yet it’s unlikely that the president would propose a VAT, in large part because he is fixated on class-warfare tax hikes. If he did, almost every Republican in Congress would be opposed, even if only for partisan reasons. But what if a VAT sympathizer like Mr. Romney wins next November and decides that his plan for a lower corporate tax rate is only possible if accompanied by a VAT? There will be quite a few Republicans who like that idea because they want to do something nice for their lobbyist friends in the business community. And there will be many Democrats drawn to the plan because they realize that they need this new source of revenue to enable bigger government. That’s a win-win deal for politicians and a terrible deal for taxpayers.

This point deserves some elaboration. Why is the VAT a do-or-die issue?

Simply stated, the United States is in grave danger of becoming a European-style welfare state. Indeed, that will automatically happen in the next few decades because of demographic changes and poorly designed entitlement programs.

This is why there is a desperate need to reform programs such as Medicare and Medicaid. But politicians almost certainly won’t adopt the needed reforms if they have the ability to instead confiscate more money from taxpayers – especially if they have a new tax like the VAT, which is a money machine for bigger government.

Ironically, it appears there’s more danger of that happening with Romney in the White House.

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There’s been a lot of discussion about Mitt Romney’s appeal – or lack thereof – among supporters of limited government.

To put it mildly, many libertarians and conservatives are underwhelmed by his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

Notwithstanding this dismal track record, some advocates of free markets argue that anybody would be better than Obama.

But that’s not necessarily the case. Economic history shows that the burden of government often expands the most under Republicans, with Nixon and Bush (either one) being obvious examples.

On the other hand, even a skeptic like me has admitted that Romney’s record in Massachusetts is difficult to assess because he was governor of a very left-wing state and he had to deal with a state legislature with heavy Democratic majorities.

That being said, there’s a new development that suggests Romney may be an unacceptable alternative to Obama. In an interview with the Wall Street Journal, he basically said he is willing to consider a value-added tax for the United States. Here’s the relevant passage.

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. This video explains how it works and why it is a money machine for big government.

Simply stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend to European-style stagnation, eventually leading to fiscal crisis.

Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.

But what about Barack Obama, you may be asking. Hasn’t he said nice things about a VAT?

Not surprisingly, he has been sympathetic, appointing VAT sympathizers to high office and remarking that a VAT is “something that has worked for other countries.”

But there’s no way a VAT will happen if Obama gets reelected. Republicans will be overwhelmingly opposed, even if only for shallow reasons of partisanship.

But if Romney wins and decides to push a VAT, many Republicans will say yes because of loyalty (much as many GOPers went along with Bush’s statist agenda) and many Democrats will say yes in order to get a new source of revenue to expand government.

The consequences, as explained here, would be disastrous.

P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).

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I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

I particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.

This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.

Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.

Please share widely…before it’s too late.

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The Secretary of the Treasury, Tim Geithner, is infamous for conveniently forgetting to pay tax on $80,000 of income and then getting kid-glove treatment from the IRS when his crime was uncovered.

Not only did Geithner avoid even a slap on the wrist, he was confirmed to head the department that includes the IRS. So you can understand why a clever person came up with this t-shirt mocking the Treasury Secretary.

But it appears that Geithner’s elitist disdain for the law is shared by high-level left-wing political figures in other nations. Here’s a very similar story from the United Kingdom, where a cabinet official got caught for not complying with the value-added tax.

Here are some excerpts from the UK-based Independent.

Mr Cable was hit with a £500 penalty from HM Revenue and Customs (HMRC) after the blunder over a VAT bill of up to £15,000 on his media work. The Business Secretary – who has criticised firms which seek to avoid tax – admitted it was a “bit embarrassing” that his VAT liability “wasn’t spotted earlier”. But he insisted that he “made no attempt to avoid tax” and the “oversight” had happened in good faith. Downing Street said it regarded the incident as “closed”, adding that Mr Cable retained the Prime Minister’s full confidence.

If you recognize Mr. Cable’s name, there’s a good reason. He is member of the parasite class in England most associated with the push for higher tax rates on capital gains – which led to a clever set of posters attacking his destructive proposal.

Makes you wonder if there is some secret fraternity of politicians, with initiation rites involving the chant: “Taxes for thee, but not for me.”

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Actually, the title of this post should probably read, “The Good, Good, Good, Bad, and the Ugly.”

That’s because Herman Cain’s 9-9-9 tax plan has low tax rates, it eliminates double taxation, and it wipes out loopholes, and those are three very big and very good things.

The bad part, as I explain here, is that Cain would let politicians impose a national sales tax at the same time as an income tax.

And the ugly part is that he also would let them impose a value-added tax as well, as I discuss here.

I pontificate on all these issues in the latest Coffee and Markets podcast, which you can listen to by clicking here.

In closing, I will admit that it’s been very frustrating to deal with Cain’s plan. Supporters of Cain accuse me of being too critical and opponents of Cain accuse me of being too nice.

Normally, I don’t like being in the middle of the road, but that seems to be the only logical place to be since 9-9-9 has some really good features and some really bad features.

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I’m very enthusiastic – but also a little worried – about Herman Cain’s tax plan.

So when I got the opportunity to write a short column for the New York Times, I explained that his proposal was very good tax policy, in large part because it is based on the same principles as the flat tax.

The flat tax is desirable for a wide range of reasons, including simplicity, fairness and transparency. It also would end the widespread and corrupt process of inserting loopholes and preferences in the code in exchange for campaign cash and political support. But public finance economists generally like the flat tax for different reasons, most notably the pro-growth impact… For the same reasons, people should like Herman Cain’s 9-9-9 tax plan. …It is based on the idea that the tax rate should not penalize people for being productive, and even an ardent supply-side sympathizer like me can’t complain too much about a 9 percent rate. Another key principle is the repeal of most forms of double taxation… Cain also takes a chainsaw to the underbrush of credits, deductions, shelters, loopholes, exemptions, and other distortions in the tax code.

But I then expressed my concern that the 9-9-9 plan might morph into something we don’t want.

This doesn’t mean Cain’s tax plan is perfect. The biggest concern, at least from many on the right, is that he would allow the crowd in Washington to simultaneously impose a flat tax, a national sales tax and (apparently) a form of value-added tax. This might not be a problem if there was some way of guaranteeing that none of the rates could ever climb above 9 percent. Unfortunately, the European experience (especially with VATs) does not leave much room for optimism. Sooner or later, politicians who want bigger government can’t resist pushing tax rates higher. And when the dust settles, you become Greece. Which is why Cain should not have reinvented the wheel. If he wants a low rate, no double taxation and no loopholes, the flat tax has all the upsides and none of the downsides of the 9-9-9 plan.

My basic message is that 9-9-9 should be turned into a postcard because the flat tax is a safer way of achieving the same goals.

The worst thing that can happen with a flat tax, after all, is that politicians begin to re-install loopholes and re-impose discriminatory rates and we wind up with something that looks like the current system.

But that’s a lot better than being Greece.

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I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.

But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.

After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.

But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means – for all intents and purposes – that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan – the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

This doesn’t make Cain’s plan bad from a theoretical perspective. The underlying principles are still sound – low tax rates, no double taxation, and no loopholes.

But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.

Here’s my video on the VAT, which will help you realize why this pernicious tax would be a big mistake.

Again, this doesn’t make Cain wrong if we’re grading based on economics or philosophy. My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so they can waste more money trying to buy votes.

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I’m normally disappointed when religious figures comment on economics, particularly since they often turn the individual call to charity into a blank check for government-coerced redistribution. This runs contrary to individual choice, free will, and morality.

So I’m delighted that Ettore Gotti Tedeschi, writing for  L’Osservatore Romano, the quasi-official newspaper of the Vatican,  persuasively explains how higher taxes simply encourage a downward spiral of more spending, more debt, and economic despair. Here’s the key segment from his column.

…taxation in all its forms only permits further growth in public spending… During a prolonged crisis, inheritance taxes, new forms of taxation or similar alternatives reduce or wipe out resources for investments, discouraging the trust of investors, penalizing the cost of the public debt and the possibilities of its renewal at its expiration. In this context, imposing taxes on property and on income is equivalent to a suicidal anti-subsidiarity of the state to the citizen. Those who legally possess assets, on which they have paid the proper taxes, have contributed to creating wealth and, thanks precisely to these assets, continue to produce them with investments and consumption. Further forms of taxation would not be synonymous with solidarity but only with greater public spending and, perhaps, a higher debt and more widespread poverty. High taxes penalize saving, generate distrust in the ability to stimulate recovery, hit families and prevent the formation of new ones, as well as creating uncertainty and precariousness in employment. In short, they lay the foundations for another phase of unsustainable development.

What makes the editorial so remarkable is that Mr. Tedeschi not only understands economics – as illustrated by his discussion of how higher tax rates discourage productive behavior, but his grasp of real-world politics. He recognizes that higher taxes will simply lead to higher spending.

But maybe that’s an easier lesson for honest Europeans to grasp. For the past several decades, they have seen politicians – over and over again – play the bait-and-switch game of raising taxes, supposedly to reduce red ink, only to have the money used to expand already bloated public sectors.

The value-added tax, not surprisingly, has played a key role in Europe’s fiscal nightmare.

Forty years ago, southern European nations had medium-sized governments and large deficits and northern European nations had medium-sized governments and small deficits.

Today, southern European nations have had large-sized governments and large deficits and northern European nations have had large-sized governments and small deficits.

The only big change is that all these nations now have VATs and the burden of government spending is much higher. But the deficits generally have stayed the same, consistent with the political culture of the respective regions.

In other words, Milton Friedman was correct many years ago when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

And Mr. Tedeschi is correct today with a similar observation.

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The White House has announced that it is nominating Alan Krueger, a professor at Princeton, to be the new Chairman of the Council of Economic Advisers.

In a Freudian copy-editing slip, the Fox News story (at least as of 8:44 a.m.) says “Krueger’s job will be to provide policy prescriptions on ways to spur unemployment.”

That’s obviously tailor-made for a joke about the Obama Administration not needing any help when it comes to stimulating joblessness.

On a more serious note, though, I’m worried about Krueger’s sympathy for a value-added tax (VAT). Here’s what he wrote back in 2009.

…a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.

To be fair, Krueger was very careful to leave himself some wiggle room, even going so far as to write that, “I’m not sure it is the best way to go.”

But it seems rather obvious that Krueger, like other leftists, wants this giant new source of revenue. Heck, President Obama also has semi-endorsed a VAT, saying it is “something that has worked for other countries.”

The President’s assertion is especially foolish. After all, European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt – and now several nations are on the verge of bankruptcy.

If that’s “something that has worked,” I’d hate to see the President’s idea of failure.

The real lesson is that the United States should not copy Europe’s mistakes. This short video has the key arguments against this European-style national sales tax.

P.S. For a humorous perspective on the VAT, take a look at these clever cartoons (here, here, and here).

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I testified before the House Ways & Means Committee earlier today. As always, my trip inside the belly of the beast was an interesting adventure.

The tax-writing committee was holding a hearing on the value-added tax. I was on a panel with five other witnesses, and all of the other people testifying were sympathetic to a VAT. But since I had truth on my side, that made it a fair fight (though it did cross my mind that it’s not a good sign when a Republican-controlled committee stacks the witnesses in favor of a European-style tax system).

I made two points. First, a VAT is less destructive than the current income tax. As such, if we somehow repealed the 16th Amendment and replaced it with something ironclad that would prevent the income tax from ever again haunting the land, I would gladly make a trade.

But that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I pointed out that Europe adopted VATs beginning in the 1960s and that hasn’t stopped welfare states such as Greece and Portugal from spending themselves into a fiscal crisis.

This chart, which is similar to what I included in my testimony, compares spending and debt levels in EU-15 nations (Western Europe) and the United States. As you can see, the burden of spending and debt is onerous in America (red columns), but even worse in Europe (blue columns).

That doesn’t prove that a VAT causes bigger government and more debt, to be sure, but it certainly seems to suggest that the other side is smoking dope when they claim a VAT will lead to deficit reduction. Instead, it seems like Milton Friedman was right when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

I made some of these points in my VAT video.

P.S. Here are three very good cartoons on the VAT (here, here, and here).

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The main political goal of the left is to seduce Republicans into supporting higher taxes. Bluntly stated, all of their fiscal policy goals require more tax revenue coming to Washington.

The most important factor (from their perspective) is that they can’t make government much bigger than it is right now without a major tax increase. Sure, they can finance spending with borrowing, but it appears that we’ve finally gotten to a point – both politically and economically – where higher deficits are no longer an option.

But here’s the problem for the left. Higher taxes generally are not popular with voters and politicians who campaign for higher taxes do not fare very well. This is why Democrats, if they want to get more tax revenue and avoid political fallout, need to somehow convince GOPers to be part of the process (indeed, The Hill has reported that “the Democratic playbook has changed, with a key goal: get Republicans to violate the Americans for Tax Reform (ATR) pledge not to raise taxes.”

It’s easy to understand why the left wants the GOP to give up the no-tax-increase pledge. Voters today think Democrats want to raise their taxes and Republicans want to protect them. That’s political gold for the GOP.

But if dumb Republicans can be convinced to sell out, then the political dynamics get completely reversed. All of a sudden, voters have a big incentive to make sure they’re not the ones who get hit, so they are prone to support higher taxes on the rich. This is where the Democrats have a home-field advantage.

Democrats already are willing to endorse higher tax rates on upper-income taxpayers, to be sure, even without getting cover from Republicans. But it’s much better to lure the GOP into a tax deal. After all, even soak-the-rich tax hikes generate a lot of opposition. Simply stated, voters wisely suspect that higher taxes on the so-called rich eventually will translate into higher taxes on everybody else.

But even if they could unilaterally impose class-warfare taxes on upper-income taxpayers, that still doesn’t solve the left’s problem. They would never admit it publicly, but smart left wingers understand that there are two very powerful reasons why soak-the-rich tax increases won’t raise much revenue.

    1. There are not enough rich people to finance big government. According to the latest IRS data (from 2008), there are only about 321,000 households with income greater than $1 million of annual income. And they have aggregate taxable income of only about $1 trillion. That’s a lot of money, of course, but it wouldn’t balance the budget even if the government confiscated every penny (which would have catastrophic consequences on the incentives of rich people to earn and report income in future years).

    2. Rich taxpayers will change their behavior to avoid the tax increases. This is the “Laffer Curve” effect, and it basically means that higher tax rates don’t raise as much revenue as expected because people respond to incentives and reduce the amount of income they are willing to earn and report. The Laffer Curve is especially strong for upper-income taxpayers because rich people have much greater access to lawyers, lobbyists, and accountants. Moreover, rich people are far more likely to earn capital income (interest, dividends, capital gains, etc), and it is much easier to control the timing, level and composition of capital income.

This doesn’t mean the left won’t push for class-warfare tax increases. They will. But their main motive will be politics, not raising revenue.

This is why, looking at the long-run fiscal situation, the left needs a value-added tax. The VAT is the only realistic way to collect the huge amount of revenue that would be necessary to finance promised entitlement benefits. As I’ve noted before, the VAT is a giant source of tax revenue, so the left no longer would have to worry about financing a European-sized welfare state. After all, a VAT would give America a European-style tax system.

But a VAT would generate a firestorm of opposition. The Democrats would be committing political suicide to push such a tax scheme, especially since it would be a huge burden for the poor and middle class. This is why the left desperately needs to trick gullible Republicans into going along with a tax hike.

Enacting a VAT would be a win-win situation for the left. The torrent of new revenue would make it much easier to preserve the welfare state, so it’s easy to understand why they want to make it happen from a policy perspective. But the political benefits for the left are equally large. Here are a couple of inevitable consequences if GOPers get tricked into participating in a budget summit and wind up getting seduced into supporting a VAT.

    1. There will be civil war inside the Republican Party. The vast majority of GOP politicians have pledged to vote against higher taxes. Some of them are insincere, of course, but many of them genuinely believe if defending taxpayers. A tax-increase deal would create a divisive fight, similar to what happened in 1990. This is a very nice fringe benefit for the left.

    2. Conservative voters will rebel against the GOP establishment. When Republicans do the wrong thing, “base” voters get disillusioned. Some inside-the-beltway GOPers say this doesn’t matter because these voters have “no other options.” But they have the option of staying home, like they did in 2006 and 2008. Or sometimes they have a third party option, like in 1992. This is a very nice fringe benefit for the left.

    3. Putting a VAT on the table will give the left a perfect opportunity to impose additional class warfare taxes. Because of the zero-sum mindset on Capitol Hill, there is strong bias to maintain the existing “distribution” of the tax burden. This means that a VAT, which is perceived as discriminating against the poor and middle class, almost surely will be married with some punitive taxes that target the nation’s most productive taxpayers. This is a very nice fringe benefit for the left.

To summarize, the VAT would be a fiscal policy disaster. It would single-handedly guarantee that the United States would turn into a Greek-style welfare state. And for those who care about the political future of the GOP, it would cripple the party in the eyes of voters.

Fortunately, there is a very simple way of stopping this horrible outcome. Republicans merely need to say no. At the risk of stating the obvious, there is no way that a VAT would be imposed without the GOP giving political cover to the Democrats. Indeed, it is highly unlikely that any significant tax increase, from this point forward, could be enacted without Republicans providing the margin of victory.

They may be the “Stupid Party,” but it’s an open question whether they are that self-destructively foolish. Especially when there is no legitimate argument for higher taxes.

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