The left is very clever about accepting “compromise,” so long as the result is a larger burden of government.
This is one of the reasons why I’m so concerned about Senator Cruz’s proposal for a value-added tax. Even though he wants a VAT for good reasons (to finance lower tax rates and also to reduce the tax bias against saving and investment), my fear is that the statists will say yes, then quickly use the VAT to finance a big expansion of the welfare state.
Which is exactly what happened in Europe.
Some folks think I’m being paranoid, to which there are two responses. First, there’s the old joke that even paranoid people have enemies.
But the second and more serious response is to point out that lots of statists openly say they want a VAT to make government bigger.
Indeed, some of these folks already are semi-embracing Cruz’s VAT because of their desire to have a new source of revenue for Washington. Consider, for instance, these excerpts from an editorial in USA Today.
The VAT is a kind of national sales tax used by virtually every other nation in the world because it can raise lots of money …partly because deficits are set to explode again as Baby Boomers retire, the VAT is back. Texas Republican Ted Cruz, winner of the Iowa GOP caucuses, is proposing a VAT… The concept has a lot going for it. …Cruz’s plan is flawed, but he’s on to something. A more progressive, phased-in VAT deserves to be part of any future conversation
You don’t have to read between the lines to understand that the editors at USA Today want a VAT to expand the public sector. The editorial even favorably cites Senator Cardin and former Treasury official Michael Graetz.
Do they want a VAT for the same reasons as Senator Cruz?
Not exactly. Senator Cardin acknowledges that the VAT could lead to a spigot of new tax revenue (“enacting a consumption tax could mean enacting a new and easy-to-adjust lever to raise taxes irresponsibly”), but he claims to have a mechanism that supposedly will guard against ever-higher tax burdens.
The Progressive Consumption Tax Act addresses this concern with a circuit breaker that returns overages from the PCT to taxpayers when revenues exceed predetermined levels.
This is a joke. The politicians in Washington get to set the “predetermined levels,” so it goes without saying that those levels will go from predetermined to redetermined in a blink of an eye, just as we’ve seen in other nations.
And what about Michael Graetz’s plan? Well, here are a few excerpts from an article he wrote.
…tax increases will be necessary to…address the nation’s unsustainable fiscal condition fairly… With this plan in place, our ability to raise additional revenue would be increased…
To be fair, Graetz is not a leftist. He basically wants a VAT because it’s a less-destructive way of financing bigger government.
I agree. It’s highly likely that a $100 billion VAT hike would do less damage than a $100 billion increase in income taxes, but why on earth would anyone want higher taxes to fund bigger government, particularly when we know sensible entitlement reforms could fix the nation’s long-run fiscal problem?
No wonder Avik Roy, writing for Forbes, is so worried about a VAT.
Sen. Ted Cruz…favors replacing the corporate income tax with what Cruz calls a “business flat tax,” and what Canadians and Europeans call a “value-added tax.” But the real debate isn’t about terminology; it’s about whether or not Cruz’s approach would drive an explosion of government taxes—and spending—over the mid- to long-term.
One reason it’s a money machine is that it’s actually a hidden tax on wages and salaries.
…businesses would no longer be able to deduct the cost of labor. As my colleague Ryan Ellis has detailed, that amounts to a “16 percent wage tax withheld at the employer level under the Cruz plan.”
And that creates a very large tax base, so any increase in the tax rate transfers a lot of money from the private sector to Washington.
…the most important problem with the Cruz plan is how Democrats would take advantage of it. Cruz envisions a VAT tax rate of 16 percent. But his plan would hand progressives a simple tool to raise taxes to far higher rates in the future. …the vast majority of federal revenue will hit voters indirectly, because it will come from businesses. From a political standpoint, Cruz’s plan would pave the way to higher tax rates in the future. …every one percent increase in the VAT would yield $1.6 trillion in new revenue over a decade. The temptation for a Democratic president and Congress to raise VAT rates to higher levels will be enormous.
And Avik echoes one of my concerns, warning that a VAT will greatly undermine and perhaps even kill any opportunity for genuine entitlement reform.
Under Cruz’s tax system, there would be absolutely no pressure on Washington to reform Medicare and Medicaid. Why reform entitlements when you can simply increase the “business flat tax” rate from 16 percent to 17 percent to 18 percent to 19 percent? This is exactly what has happened in Canada and Europe, where VAT rates started out low, and have gone up and up over time.
I should point out (as he does in his column) that Avik supports Marco Rubio, so he has a political motive to trash the VAT.
Indeed, he even makes some anti-VAT arguments that strike me as unfair, so I’ve omitted them from this analysis.
But the parts I have shared are completely accurate and they are more than adequate to make a very powerful case against giving Washington a new source of revenue.
Let’s close with some wisdom from the 1980s. I wrote that one of America’s worst presidents wanted a VAT to expand the welfare state. And I also mentioned that one of the best presidents in American history was on the right side of the issue. And it’s worth listening to the Gipper’s wisdom on this issue.
P.S. Here’s a short update to my recent post about the craziness of Keynesian economics. You may recall that the economic illiterates at the International Monetary Fund said diverting money from the private sector to finance government outlays on refugees would be good for growth.
Well, we now have estimates of how much will be spent on this so-called stimulus.
Shelter, medical care and integration policies for refugees will cost the German state €22 billion in 2016, and €27.6 billion in 2017.
Gee, according to the perpetual motion machine of Keynesianism, maybe the German government should put the entire population on welfare and the economy will really boom.
[…] The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need to […]
[…] The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need […]
[…] I want lower taxes. I want to reform taxes. And I want to abolish existing taxes and block new taxes. […]
[…] Needless to say, it also would be a catastrophic mistake to give Washington several new sources of revenue to finance this scheme. A big value-added tax would be especially misguided. […]
[…] All you need to know about the VAT is that Reagan was against it and Nixon was for […]
[…] fact that a VAT is less destructive than an income tax is definitely not an argument for enacting a VAT. That would be akin to arguing that it would be fun to break your wrist because that wouldn’t […]
[…] such a program, but I view that as a feature, not a bug. We’re also the only advanced nation without a value-added tax. Does that mean we should join other countries and commit fiscal suicide with that onerous […]
[…] Europe starting about 50 years ago. Politicians in nations like France approve of this tax because it is generally hidden, so it is relatively easy to periodically raise the […]
[…] Europe starting about 50 years ago. Politicians in nations like France approve of this tax because it is generally hidden, so it is relatively easy to periodically raise the […]
[…] Europe starting about 50 years ago. Politicians in nations like France approve of this tax because it is generally hidden, so it is relatively easy to periodically raise the […]
[…] such a program, but I view that as a feature, not a bug. We’re also the only advanced nation without a value-added tax. Does that mean we should join other countries and commit fiscal suicide with that onerous […]
[…] Value-added taxes […]
[…] The clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to […]
[…] Back during the debate on tax reform in the 1980s, Reagan also opposed the VAT. Helps to explain why I admire the Gipper so […]
[…] Back during the debate on tax reform in the 1980s, Reagan also opposed the VAT. Helps to explain why I admire the Gipper so […]
[…] Let’s also not forget that Reagan opposed the value-added tax. The rejection of a bad policy doesn’t belong on the above list, but it’s a notable piece of […]
[…] Let’s also not forget that Reagan opposed the value-added tax. The rejection of a bad policy doesn’t belong on the above list, but it’s a notable […]
[…] The bottom line is that Sanders, in one fell swoop, would saddle America with a European-sized government. And that would mean European-level taxes. The only thing that’s missing is he didn’t propose a value-added tax. […]
[…] My clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to […]
[…] My clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to […]
[…] But the granddaddy of new taxes would be the value-added tax, a money machine for bigger government. […]
[…] EITC have combined in recent decades to take millions of households off the tax rolls. And since the U.S. thankfully does not have a value-added tax, lower-income people are largely protected from […]
[…] And my clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to […]
[…] And my clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to […]
[…] some of them are even talking about very bad ideas, such as a value-added tax or carbon […]
[…] The “border adjustability” in the plan is contrary to the rules of the World Trade Organization (WTO) and there’s a significant risk that politicians might try to “fix” the plan by turning it into a value-added tax. […]
[…] The “border adjustability” in the plan is contrary to the rules of the World Trade Organization (WTO) and there’s a significant risk that politicians might try to “fix” the plan by turning it into a value-added tax. […]
[…] of the many reasons to oppose a value-added tax is that the tax almost always is hidden from consumers. When taxpayers make purchases in Europe, […]
[…] of the many reasons to oppose a value-added tax is that the tax almost always is hidden from consumers. When taxpayers make purchases in Europe, […]
[…] income taxes into DBCFTs, which presumably will happen? We’re than back where we started and misguided people will say we need our own VAT to balance out the VATs in other […]
[…] value-added tax is a very dangerous levy for the simple reason that giving a big new source of revenue to Washington almost certainly would […]
[…] value-added tax is a very dangerous levy for the simple reason that giving a big new source of revenue to Washington almost certainly would […]
[…] value-added tax is a very dangerous levy for the simple reason that giving a big new source of revenue to Washington almost certainly would […]
[…] Oh, and I should mention that there are no payroll taxes in Hong Kong. Nor is there a value-added tax. […]
[…] Oh, and I should mention that there are no payroll taxes in Hong Kong. Nor is there a value-added tax. […]
On the subject of abolishing the IRS. No system will abolish the need for tax collection, which, at the corporate level, is a complicated process. We can however get the IRS off the backs of individuals. This can even be done with a flat tax on earned income, by tasking businesses with accurate withholding and income filing.
Corporate taxes are a different matter. Under a flat tax on corporate profits, there will still be the need to identify legitimate expenses. Under a flat tax on revenues, where expenses other than gross incomes are deductible, you have the same problem, compounded by the increased benefit of hiding revenues. As more or all of the tax burden is shifted to the corporation, the incentive to cheat increases.
Michael:
Two more points:
On the question of marginal businesses, I completely agree with you. You cannot increase take-home pay and then have corporations make up the tax difference without increasing overall costs, which will be reflected in prices for goods and services. It is not only those that have trouble raising prices that will run into difficulty. Those that cater to people on fixed incomes will see the number of purchases decline as they raise prices.
Second point: Our society must become more dynamic, with a fluid workforce that can move with the times. This means that healthcare and pensions must move with the worker. Companies that want to keep good people should focus on an attractive work environment and relatively higher salaries. They should not lock workers in place with the threat of lost benefits.
Michael
In point 2, you have missed the fact that wages are not a deductible expense for corporate tax purposes. Therefore, in addition to the 10% flat tax on salaries, the corporation pays an additional 16% on gross wages, effectively making the cost of an employee 19% higher than that employee’s gross wages, because of embedded tax compounding.
Ignoring the standard deduction, the total tax on gross salaries than is 29%, 10% paid by the individual and 19% paid by the corporation.
Regarding your point 4, after the “tax-free” (see above) $36,000 the employee keeps 90% of gross wages. It is reasonable to expect that at such a low flat rate, the deductible would also be low.
jstefano1
The Cruz corporate tax is a flat tax, in that it has a non-progressive single tax rate. However, it is also a VAT in that the tax is based on revenues minus purchases.
Compared to a sensible, transparent, low, flat income tax code I’d agree that the VAT is less desirable. But, compared to what we have now? I’m not so sure.
Also, it might be true that the VAT would raise lots of money, but that’s not necessarily a bad thing. For example, it could be done by growing GDP or improving tax collection efficiency. So, again, I think the arguments above leave out a “compared to what” angle.
This article acts as if there is not currently a Corporate Income Tax. All of his fears of a VAT are being accomplished with the current system.
Only a FAIR TAX will completely abolish the IRS. The collection is simple, as retailers already collect sales tax. You may pay more for goods, but the money saved by no income taxes is much greater. This is a no brainer!
I’ve heard that Ted Cruz is exceptionally smart, but his “Simple Flat Tax” makes me doubt that. Here’s his own description:
“Under the Cruz Simple Flat Tax, all income groups will see a double-digit increase in after-tax income. The current seven rates of personal income tax will collapse into a single low rate of 10 percent. For a family of four, the first $36,000 will be tax-free. The IRS will cease to exist as we know it, there will be zero targeting of individuals based on their faith or political beliefs, and there will be no way for thousands of agents to manipulate the system.”
https://www.tedcruz.org/issues/jobs-and-opportunity/
1. What good is a “double-digit” increase in income if it is parallel by a double-digit increase in prices? Answer, none.
2. You don’t need a PhD in accounting to realize that single flat 10% tax isn’t going to bring in as much money as the current system. The reason follows.
3. Raise that 10% as a solution to insufficient income? Ah, but that flat rate means that everyone’s rate has to go up the same. You’ll either squeeze badly people who’re barely getting by or make life a bit too easy for Bill Gates. One size tax for all is as stupid as one size of shoes for all. It allows no flexibility.
4. The “first $36,000 will be tax-free” for a family of four. What planet does Cruz come from? In some places, $36,000 won’t even cover the rent on a cheap two-bedroom apartment. Yes, that could be fixed by adjusting that tax-free income down to the Zip code or less, but if you do that it’s bye-bye to simple taxation. You’ve got something far more complex than anything around today.
Sadly, when I look at these scheme, all I can think of is that Cruz has spent too much time talking to a particularly narrow-minded group, business people whose politics consists solely looking for ways of reducing their own taxes and the regulation of their business. They seem unaware of any other ideas. He’s a bit too eager to please them.
—-
One additional remark. If I understand it right, Cruz and Co. are trying to distinguish this tax from a VAT by claiming it’s on business income rather than sales. The difference hardly matters. Almost all business income comes from the sale of products and services.
Where this scheme is toxic to both businesses and jobs is that it is taxing income not profits. Marginal businesses, those barely getting by, will be bled dry. Those making fat profits on a smaller cash flow, will make out like bandits. That’s what you get when you flat-tax income rather than tax profits after costs.
And forget those additional jobs and wages Cruz is claiming. The strain resulting from more tax on marginal businesses means they’ll face a nasty choice: either go out of business or slash wages and employment to survive. And my hunch is that this country has far more marginal businesses than lucrative ones.
Like I said, this tax challenges all I’ve heard about Cruz being smart, and that’s being considerate. If he knows what this tax means, he’s a jerk.
There are other problems on that webpage. Delinking “health insurance from employment,” will remove one key way employers attract good workers and savvy workers improve their lives. And the gold plans those employers provide subsidize medical care for others. There, as elsewhere, Cruz seems out of touch with the realities.
–Michael W. Perry, author of My Nights with Leukemia
Rule one: Government NEVER shrinks, until it collapses.
Cruz does not propose a value added tax (VAT). He proposes a flat tax. The VAT accusation is a canard coughed up by Marco Rubio during one of the debates. Why someone would produce an essay criticizing Cruz for a nonexistent issue is puzzling. Read about the flat tax here:
https://www.tedcruz.org/issues/jobs-and-opportunity/
THE other point is that the employer as well as employees would no longer be paying payroll taxes. That amounts to almost 10% of the 16 % of the tax on employers paid wages.
The bill changing could also require a supermajority to raise the business tax.
I would be in favor of the Cruz VAT if it means the IRS is essentially abolished.
I understand what Mitchell is saying here; however, there is another calculation he neglects. The tax code is being manipulated for the benefit of the politically connected. Washington politicians use the tax code to pick winners and losers and to shower benefits on the political class.
A simple tax gets rid of this corruption. We will always have to fight against bigger government. I don’t know if Mitchell has been paying attention but we are losing–and having an income tax has not kept government small. It has grown larger and larger.
A check and balance against runaway taxes and regulations of most any sort would be to evolve ALL public pensions (unions/burrOcrats/Politicians) into defined contribution (401k) pensions that are market sensitive to increased taxes and regulations.
The reality is one reason our grubermint has become so bloated and economy so stagnated is directly related to how the grubermint folks of all sorts have little skin in the game when it comes to private sector prosperity of most any sort.
Establishing VAT mechanism in exchange for four years of Cruz has to be the mother of all Faustian deals.
Reagan hit the nail on the head, when he indicated that taxes raise the price of goods to the consumer. This is true whether the tax is a tax on income, sales, or value-added.
For the latter two, the FairTax and VAT; the reason for the cost increase is hidden. It could result from increases in base costs, “greedy” corporate profits, or taxes. Taxes on income are more on display, in every paycheck. However, even there the effect is somewhat hidden, in that few consumers pay the highest marginal rates, but yet they are affected by final product cost increases that would result from increasing the highest marginal rates.
Under a Flat Tax on income, everyone would be sensitized to an increase in the flat rate.