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.
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 here, here, 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.
[…] unless that happens, I’m unalterably opposed because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and […]
If a VAT is enacted, you will see an increase in prices by definition…you cannot have it any other way. So, a VAT will cause citizens’ earnings to remain depressed (due to income taxes remaining in place) and purchasing power to shrink thanks to the VAT. Spending will increase, no matter what (this is due to the operations of the Modern Monetary System) and inflation will FURTHER erode purchasing power and living standards.
I would only favor a VAT if the 16th Amendment is FULLY repealed and people get to keep ALL of their income. What this would do to defined contribution benefit plans, mortgage interest deduction, municipal bond interest and health insurance premiums, I really do not know. But eliminating income taxes would be a great start.
[…] Another Misguided Plan to Burden America with a Value-Added Tax … […]
[…] Another Misguided Plan to Burden America with a Value-Added Tax … […]
taxes always start low… and grow with the limitless ambition of the political class… any sane and reasonable person will oppose new mechanisms to siphon resources from the productive sector of the economy… and redistribute it to feckless nitwits running our government…
“read my lips… no new taxes…”
PPS. Once the VAT mechanism is in place, at whatever low levels, the inevitable national emergency resulting from now endemic slow growth rates and approaching default, will trigger a sudden jump in VAT by emergency decree and a few congress “compromise” all nighters. Temporarily, of course, until the crisis brought upon by flattening the effort-reward curves is fixed by … you guessed it…. the further flattening of effort-reward curves brought upon by an even higher VAT.
With VAT rates above 20%, Europe is now braking through another VAT threshold. With the desperation of a significant growth deficit now driving Europe into an ever accelerating decline, in ten years, Europe will have 30% VAT rates, as it gets closer and closer to collapse — if it makes that far, of course. Europe is the Soviet Union of the 21st century. Of course, the world keeps accelerating, so Europe will not last the whole century. Not by far. Growth deficit is relentless in its compounding, and Europe will dissolve one way or another. The sooner that happens, the sooner the diversity of various economic approaches across Europe will emerge, and at least some European nations will escape the fate of complete decline. Under the relentless weight of compounding growth deficits, nothing is sustainable. It’s only a matter of *when* you eventually but inevitably cry uncle.
P.S. VAT will start low, and slowly cook the voter-lemming in his/her own juice.
How do People suppose decline would manifest itself? With Chinese soldiers marching by the Washington monument? No, With the inevitability of VAT imposition and other measures that effectively lower the net standard of living. And this is only the beginning…
Because, no matter how one slices and dices it, the effort-reward arithmetic is that:
An increasing proportion of the rich are been taxed around the Laffer point. Most are actually invisible amongst the ranks of the famously rich since they drop out and head to the Carribbean, or the Golf course, before reaching the punitive wealth level that would bring them into the limelight. Unknown oligomilionaires who are having fun with their French brethren in the Carribean. Unknowns who never created the “jobs” you were hoping for since they judged that getting stressed out beyond a certain point was not worth growing millions into billions, and the prosperity that would add never materialized.
With the most competent against the Laffer ropes, (not to mention the even more corrosive enthusiasm deficit compared to the emerging world masses) there is no other way to finance the increasing government autopilot spending, but to suppress the standard of living of the middle class and poor with some form of flat tax, in a last ditch futile effort to raise revenue for a few more short years.
I.e. Socialism returns to eat the very children that created it at the polls.
Meanwhile, all this debate and red-herring discussion takes place with western democracies further and further away from the Rahn point, while the world on average continues expanding along a relentless 4-5% annual growth trendline. The inevitable net arithmetic of all this is an inexorable growth deficit which predictably but relentlessly compounds western voter-lemming democracies into relative decline.
Decline is here. We are living through it folks. There is no turning back from this point. The standard trajectory has now kicked in and the desperation of decline will bamboozle American voter-lemmings into ever more suicidal electoral choices, just like in virtually a of Europe where growth is forever suppressed down to a 1-2% trendline — to decline.
In desperation, enough voter-lemmings will keep playing the last cards if hope and keep hoping that some perpetual motion machine shortcut to prosperity will lead the collective cumbaya boat to a prosperity with less effort. To a prosperity through flatter effort-reward curves, where the exceptional will be heavily taxed to insulate the low performers from the consequences of mediocrity, and everyone will work with enough enthousiasm to outcompete the seven billion of this planet — so that every American can live his entitlement of being in the top 10% of worldwide prosperity.
Such electorates cannot survive. Actually it would be unfair if they did.
Observing Europe, the big problem with VAT taxes is that they are hidden from the public. Unless something has changed, when I was in France and Germany several years ago, there was no indication what the tax rate was when buying items. They rates have been rising and are now a whopping 19%-24%!
In the above comment, production costs include: labor, materials, and profits.
Ultimately, all taxes are paid by those who buy products or services. Adding a VAT will not change that.
Increases in taxes have a disastrous impact on prices. For example, a 25% flat tax increases prices over production costs by 33%. However, a 50% flat tax increases prices over production cost by 100%.
True tax reform must include provision for those currently trapped in poverty by means-tested programs. If we’re going to “fix” the tax code, let’s begin with poverty level support and allow everyone to keep a substantial portion of additional income earned.
Reblogged this on Public Secrets and commented:
File this under: “Bad Idea” The only way we should have a VAT or national sales tax is if the amendment authorizing an income tax is repealed. Otherwise, Washington will greedily raise both. For the public good, of course.
Obamacare is a Value Subtracted Tax.