Posted in Big Government, Fiscal Policy, Obama, Taxation, Value-Added Tax, VAT, tagged Big Government, Obama, Taxation, Value-Added Tax, VAT on April 23, 2010|
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His article doesn’t completely slam the door on a value-added tax, but Robert Samuelson’s piece in the Washington Post does highlight some of the very serious problems with a VAT – including more government spending, burdens on families, additional complexity, and more corruption:
Almost every pro-VAT argument is exaggerated, misleading, incomplete or wrong. The VAT is being merchandised as an almost-painless way to avoid deep spending cuts. The implicit, though often unstated, message is that a VAT could raise so much money it could eliminate future deficits by itself. This reasoning, if embraced, would create staggering tax burdens and exempt us from a debate we desperately need. …From 1970 to 2009, federal spending averaged 20.7 percent of the economy (gross domestic product). By 2020, it could reach 25.2 percent of GDP and would still be expanding, reckons the Congressional Budget Office’s estimate of President Obama’s budgets. In 2020, the deficit (assuming a healthy economy with 5 percent unemployment) would be 5.6 percent of GDP. To cover that, taxes would have to rise almost 30 percent. A VAT could not painlessly fill this void. Applied to all consumption spending — about 70 percent of GDP — the required VAT rate would equal about 8 percent. But the actual increase might be closer to 16 percent because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. Together, they account for nearly half of $10 trillion of consumer spending. There would also be other upward (and more technical) pressures on the VAT rate. Does anyone believe that Americans wouldn’t notice 16 percent price increases for cars, televisions, airfares, gasoline — and much more — even if phased in? As for a VAT’s claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment. That’s unlikely because it would require implausibly steep VAT rates. Chances are we’d pay both the income tax and the VAT, making the overall tax system more complicated. Europe’s widespread VATs aren’t models of simplicity. Among the European Union’s 27 members, the basic rate varies from 15 percent (Cyprus, Luxembourg) to 25 percent (Denmark, Hungary and Sweden). But there are many preferential rates and exemptions. In Ireland, food is taxed at three rates (zero, 4.8 percent and 13.5 percent). In the Netherlands, hotels are taxed at 6 percent. An American VAT would stimulate ferocious lobbying for favorable treatment. …what’s wrong with the simplistic VAT advocacy is that it deemphasizes spending cuts. The consequences would be unnecessarily high taxes that would weaken the economy and discriminate against the young. It would become harder for families to raise children.
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Posted in Big Government, Brain drain, Bureaucracy, Competitiveness, Economics, Fiscal Policy, Government Spending, Jurisdictional Competition, New Jersey, Reagan, States, Tax Competition, Taxation, tagged Big Government, Christie, Government Spending, Laffer Curve, New Jersey, States, Tax Competition, Taxation on April 23, 2010|
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He’s only been Governor for a couple of months, and we have seen other elected officials start strong and then get captured by the special interests, but it certainly appears that Governor Christie of New Jersey genuinely intends to rescue his state from becoming the Greece of America. Here’s an excerpt of what George Will just wrote, which included some spot-on analysis of the role of tax competition as a tool for constraining greedy politicians:
At the Pennsylvania end of the bridge, cigarette shops cluster: New Jersey’s per-pack tax is double Pennsylvania’s. In late afternoon, Gov. Chris Christie says, the bridge is congested with New Jersey government employees heading home to Pennsylvania, where the income tax rate is 3 percent, compared with New Jersey’s top rate of 9 percent. There are 700,000 more Democrats than Republicans in New Jersey, but in November Christie flattened the Democratic incumbent, Jon Corzine. Christie is built like a burly baseball catcher, and since his inauguration just 13 weeks ago, he has earned the name of the local minor-league team — the Trenton Thunder. He inherited a $2.2 billion deficit, and next year’s projected deficit of $10.7 billion is, relative to the state’s $29.3 billion budget, the nation’s worst. Democrats, with the verbal tic — “Tax the rich!” — that passes for progressive thinking, demanded that he reinstate the “millionaire’s tax,” which hit “millionaires” earning $400,000 until it expired Dec. 31. Instead, Christie noted that between 2004 and 2008 there was a net outflow of $70 billion in wealth as “the rich,” including small businesses, fled. And he said previous administrations had “raised taxes 115 times in the last eight years alone.” …New Jersey’s governors are the nation’s strongest — American Caesars, really — who can veto line items and even rewrite legislative language. Christie is using his power to remind New Jersey that wealth goes where it is welcome and stays where it is well-treated. Prosperous states are practicing, at the expense of slow learners like New Jersey, “entrepreneurial federalism” …competing to have the most enticing business climate.
Meanwhile, a column from the Wall Street Journal makes some of the same points, noting that productive people will move across borders when they reach a tipping point. This underscores the value of tax competition – which is made possible by federalism, and also shows the Laffer Curve in action:
Mr. Christie has started spreading the news that the Garden State aims to compete once again for businesses, jobs and residents. He notes that for years the state offered a better tax environment than New York, which encouraged city dwellers to discover New Jersey’s beautiful suburbs. Mr. Christie says that he recently bumped into former New York Gov. George Pataki, who noted that he’d been shocked to learn that New Jersey now has an even higher burden than its tax-crazy neighbor. “See what happens when you’re not looking?” he said to Mr. Pataki. “Snuck right up on ya.” The governor aims to move tax rates back to the glory days before 2004, when politicians lifted the top income tax rate to its current level of almost 9% from roughly 6%. Piled on top of the country’s highest property taxes, as well as sales and business income taxes, the increase brought the state to a tipping point where the affluent started to flee in droves. A Boston College study recently noted the outflow of wealthy people from the state in the period 2004-2008. The state has lately been in a vicious spiral of new taxes and fees to make up for the lost revenue, which in turn causes more high-income residents to leave, further reducing tax revenues.
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