Feeds:
Posts
Comments

Archive for the ‘Tax Increase’ Category

What’s the Laffer Curve?

It’s the simple, common-sense observation that there’s not a linear relationship between tax rates and tax revenue.

Folks in the private sector understand this principle. No restaurant owner, for instance, would double meal prices and assume that revenues would climb by 100 percent.

Yet that’s basically the methodology used by the Joint Committee on Taxation when estimating the revenue impact of changes in tax rates.

Which helps to explain why Washington is so often wrong about revenue implications of personal tax rates and corporate tax rates.

The Laffer Curve also applies to tobacco taxation.

Patrick Gleason of Americans for Tax Reform points out in the Wall Street Journal that greedy politicians in New York have pushed cigarette taxes so high that the main beneficiaries are smugglers.

Rampant cigarette smuggling isn’t the problem in New York. It’s a symptom of the problem: sky high tobacco taxes. …New York state levies the highest cigarette tax in the nation, $4.35 per pack, and New York City tacks on an additional $1.50 local tax. All told, the cost of one pack there can run to $12 or more. …The result? Most of the cigarettes smoked in New York, 58%, are smuggled in from out of state… The higher that revenue-hungry politicians raise tobacco taxes, the more profit smugglers can make.

Which means, of course, that the higher tax rates don’t lead to more tax revenue.

…revenue from increases in cigarette taxes often falls short of expectations. Washington, D.C., experienced this firsthand after cigarette taxes were raised by 25%, to $2.50 per pack from $2, in October 2009. City leaders claimed the hike would generate a windfall of additional revenue. By February of 2010, D.C.’s chief financial officer reported that projections were off by $15 million. Revenue from the cigarette tax actually fell by $7 million after the hike. New Jersey should have learned the same lesson. In 2007 the Garden State raised cigarette taxes to $2.575, from $2.40. The new tax generated $52 million less than expected, and revenue from cigarette taxes fell by $22 million. But in 2009 New Jersey raised the tax by another 17.5 cents.

By the way, don’t believe the fall-back excuse that politicians don’t care about revenue because they’re motivated by public health concerns.

Lawmakers can claim they’re raising taxes on cigarettes to reduce smoking and improve public health. That talking point is belied by the recent imposition of taxes on electronic cigarettes, which are saving lives by delivering nicotine in puffs of water vapor instead of chemical-filled smoke. There are more than 15 tax bills pending across the country for currently untaxed e-cigarettes. Hawaii is proposing a tax of 80%, New York of 75%, Oregon of 65% and Ohio of 60%. For politicians, cigarette taxes are—and have always been—about one thing: money.

One last thing. Gleason reports that New York is suing UPS because the company ships cigarettes to New York customers.

New York state and New York City in February announced a $180 million lawsuit against the shipping company UPS over what officials allege was unlawful delivery of nearly 700,000 cartons of cigarettes from 2010-14. …New York state officials claim that the cigarette smuggling via UPS cost the treasury $29.7 million in lost tax revenue. That’s less than 0.03% of the state budget. The $4.7 million allegedly lost by New York City represents less than 0.006% of its budget. For a mere rounding error, state and city officials want to grab $180 million from UPS. That’s $180 million UPS could use to hire new workers, give employees raises, or invest back into its business. The leaders of New York and New York City should drop this silly lawsuit and find a more productive use of their time.

They shouldn’t merely drop the lawsuit. They should be condemned for engaging in a thuggish shakedown.

Returning to the main topic, here’s a video from the Center for Freedom and Prosperity that reviews real-world examples of the Laffer Curve.

P.S. If local officials are greedy, state officials are ever greedier, and federal officials are greediest, then you can imagine how awful it would be to let international officials impose tobacco taxes.

Read Full Post »

When writing about the Organization for Economic Cooperation and Development, an international bureaucracy based in Paris, my life would be simpler if I created some sort of automatic fill-in-the-blanks system.

Something like this.

The OECD, subsidized by $____ million from American taxpayers, has just produced a new _________ that advocates more power for governments over the _________ sector of the economy.

But this may not be sufficiently descriptive.

So maybe I should create a multiple choice exercise. Sort of like when students take tests and get asked to circle the most appropriate answer.

The bureaucrats at the Paris-based OECD, working in cooperation with union bosses/class-warfare advocates/other tax-free international bureaucrats/politicians, have released a new report/study/paper urging more power/control/authority for governments in order to increase regulation/taxes/spending/redistribution/intervention.

You may think I’m trying to be funny, but this is totally serious.

How else would you describe a bureaucracy that consorts and cooperates with leftist groups like Occupy Wall Street and the AFL-CIO and routinely published propaganda in favor of Obama’s agenda on issues such as global warming, government-run healthcare, so-called stimulus, and class-warfare taxation.

And never forget that American taxpayers finance the biggest chunk of this bureaucracy’s budget.

Adding insult to injury, the bureaucrats at the OECD get tax-free salaries, which makes their relentless support for higher taxes on the rest of us even more obnoxious.

Now we have some new examples of the OECD’s statist mischief.

Here’s some of what the Center for Freedom and Prosperity recently uncovered.

At its sixth annual conference, the George Soros-founded Institute for New Economic Thinking will feature prominent left-wing economists Thomas Piketty, Joseph Stiglitz, and self-described Marxist and Greek Finance Minister, Yanis Varoufakis. By itself that wouldn’t be remarkable, but the meeting will come with the implicit endorsement of the U.S. taxpayer thanks to the sponsorship of the Organization for Economic Cooperation and Development (OECD), which gets over 20 percent of its funding from the United States.

So why is the OECD subsidizing a left-wing gabfest and giving publicity to way-out-of-the-mainstream characters like Piketty?

Part of the answer, one suspects, is that the bureaucracy has a bloated budget.

But the bigger reason is presumably that the bureaucrats want to push a statist ideological agenda.

…tax collectors have hijacked the OECD… Over the last decade and a half, they have threatened and cajoled low-tax jurisdictions into counter-productive reforms that make their economies less attractive to those suffering under the excessive taxes required to fund European welfare states. …They have essentially turned the OECD into a global tax cartel, or an OPEC for politicians.

None of this is a surprise because it’s part of a bigger pattern.

The OECD gets its money from governments. Most of those governments are European welfare states. The bureaucrats at the OECD get very generous tax-free salaries.

So of course they’re going to pump out whatever propaganda is needed to please their political (and pay) masters.

Here are some other recent examples, both of which were disseminated by the OECD’s Washington Center, which mostly exists to make sure that Congress and the White House maintain the gravy train of handouts to Paris.

Our first example of economic malpractice is this nonsense about a so-called gender wage gap. Note that the OECD is forced to admit the numbers are “unadjusted.”

That’s because lots of research shows that the wage gap disappears once you adjust for factors such as hours worked, types of professions, and work history.

By the way, just in case you think I’m only citing pro-market sources, it’s very much worth noting that even one of President Obama’s economic advisers confessed that the left’s gender-gap numbers are bogus.

Now let’s look at another chart.

I’ve previously explained that what matters most for the poor is economic growth.

Yet statists prefer to focus on the rich-v-poor gap because they want to mislead folks into thinking the economy is a fixed pie (as depicted here) and the income of the rich is at the expense of the poor.

And that’s the purpose of this OECD chart.

This very much reminds me of the OECD’s laughably dishonest research on poverty, which purports to show that there is more poverty in the United States than there is in economically distressed nations such as Greece, Turkey, Hungary, and Portugal.

As you can see from this video, statism is now the OECD’s chief product.

Which is why Republicans in Congress, if they actually on the side of taxpayers, should defund this destructive bureaucracy.

Read Full Post »

With tax day looming, let’s wallow in misery by contemplating the burden on America’s taxpayers.

But we’ll ignore the angst caused be dealing with an indecipherable tax code and an oppressive IRS and simply focus on the amount of money that gets extracted from our income each year.

The bad news is that the federal government is collecting a record amount of money, even after adjusting for inflation. Here’s a chart, based on the latest numbers from the Office of Management and Budget.

But there is some good news. This isn’t a record tax burden when measured as a share of economic output.

Federal taxes are projected to consume 17.7 percent of GDP this year. That’s higher than the post-WWII average of 17.2 percent of GDP, but there have been several years in which the federal tax burden has been higher than 17.7 percent, most recently in 2007, when it reached 17.9 percent of economic output.

So while it’s bad news that the IRS is collecting a record amount of revenue in inflation-adjusted dollars, I guess we should consider ourselves lucky that it’s not a record share of GDP.

I discuss the growing federal tax burden in this CNBC debate with Jared Bernstein.

A few points are worth emphasizing from the interview, two of which deal with corporate taxation.

First, it’s silly to talk to compare “taxes by individuals” to “taxes paid by corporations.” That’s because all taxes on business ultimately are paid by individuals, whether as workers, consumers, or shareholders. To be blunt, corporations may collect taxes, but the burden inevitably falls on people.

Second, the fact that corporate tax receipts are lagging is a sign that tax rates are too high rather than too low. In other words, there’s a Laffer Curve effect, and there’s lots of evidence that a lower corporate rate will generate more revenue. Which is precisely what happened when personal tax rates were reduced on the “rich” in the 1980s.

Third, if we want a balanced budget, the only responsible approach is spending restraint. As I’ve noted before, our long-run fiscal challenge is because of a rising burden of spending. Indeed, spending is more than 100 percent of the long-run problem.

By the way, let’s not forget about the role of state and local governments. WalletHub just released a report on state and local tax burdens.

Here are the 10 best states.

I’m mystified to see California in the top 10.

Though maybe this is a Laffer Curve-based result. In other words, perhaps taxes are so high that people are paying less?

Moreover, the Golden State drops to 30 if you adjust for the cost of living (see column on far right).

Now here are the 10 worst states.

I’m not surprised to see Illinois in last place, but who knew that Nebraska was a hotbed of taxaholism?

And if you look at the right-most column, you’ll see that New York and Connecticut could be considered the worst states. Both jurisdictions are richly deserving of that designation.

P.S. Don’t forget that Puerto Rico is a secret tax haven for American citizens, particularly when considering federal taxes, so it deserves honorary first place recognition.

P.P.S. The best (i.e., least worst or least destructive) approach to taxation is the flat tax.

P.P.P.S. Though the ideal scenario is to have a very small federal government so that there’s no need for any broad-based tax whatsoever. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed.

Read Full Post »

I warned just last week about the dangers of letting politicians impose a value-added tax.

Simply stated, unless the 16th Amendment is repealed and replaced with a new provision forever barring the re-imposition of any taxes on income, a VAT inevitably would be a new source of revenue and become a money machine to finance ever-larger government.

Just look at the evidence from Europe if you’re not convinced.

That’s why the VAT is bad in reality.

Now let’s talk about why the VAT (sometimes called a “business transfer tax”) is theoretically appealing.

First and foremost, the VAT doesn’t do nearly as much damage, per dollar raised, as our current income tax. That’s because the VAT is a single-rate tax (i.e., no class warfare) with no double taxation of income that is saved and invested.

In some sense, it’s a version of the national sales tax, except the revenue is collected on the “value added” at each stage of the production process rather than in one fell swoop when consumers make their purchases.

And it’s also conceptually similar to the flat tax. Both have one rate. Both have no double taxation. And both (at least in theory) have no special preferences and loopholes. The difference between a flat tax and the VAT is that the former taxes your income (only one time) when you earn it and the latter taxes your income (only one time) when you spend it.

In other words, the bottom line is that it is good (or, to be more accurate, less bad) to have a tax system with a low rate and no double taxation. And in the strange world of public finance economists, a system with no double taxation is called a “consumption-base tax.” And the flat tax, sales tax, and VAT all fit in that category.

So why, then, if supporters of limited government prefer a consumption-base tax over the internal revenue code, is there so much hostility to a VAT?

The answer is simple. We don’t trust politicians and we’re afraid that a VAT would be an add-on tax rather than a replacement tax.

Which explains why it’s better to simply turn the existing tax code into a consumption-base tax. After all, the worst thing that could happen is that you degenerate back to the current system.

But if you go with a VAT, the downside risk is that America becomes France.

There’s a story in today’s Wall Street Journal that illustrates why consumption-base taxation is both a threat and opportunity. Here are some introductory excerpts.

U.S. lawmakers on both sides of the aisle increasingly are finding appeal in an ambitious concept for overhauling the nation’s income-tax system: a tax based on consumption, a tool long used around the world. …As the name implies, consumption-style taxes hit the money taxpayers spend, rather than income they receive. One prominent feature of consumption systems is that they generally tax savings and investment lightly or not at all. That, in turn, encourages more investment and innovation, and ultimately more growth, many economists contend.

The reporter is wrong about consumption systems, by the way. Income that is saved and invested is taxed. It’s just not taxed over and over again, which can happen with the current system.

But he’s right that there is bipartisan interest. And he correctly points out that some politicians want an add-on tax while others want to fix the current system.

The tax-writing Senate Finance Committee is giving new consideration to the consumption-tax idea with the hope that its promised boost to economic growth would ease the way to a revamp. …Some of these proposals would have consumers pay another tax in addition to existing state and local sales taxes, while others would merely reshape the current system to tilt it more toward consumption. …Enactment of a broad-based federal consumption tax would align the U.S. with a global trend.

A Democratic Senator from Maryland wants to augment the current tax code by imposing the VAT.

Mr. Cardin introduced legislation last year to create a type of consumption tax known as a value-added tax and at the same time lower business taxes and scrap income taxes completely for lower-income Americans.

While some GOP Senators want to modify the current system to get rid of most double taxation.

Republicans on the working group also are interested in the concept, including a proposal put forward recently by GOP Sens. Marco Rubio of Florida and Mike Lee of Utah. That plan would make several changes to the tax code that would move the nation closer to a consumption-based system. …Many GOP members “believe that there are economic benefits to moving away from taxation of income and toward taxation of consumption,” a Senate aide said.

And the story also notes the objections on the left to consumption-base taxation, as well as objections on the right to the VAT.

Some liberals are concerned that consumption taxes affect poor people disproportionately, while unduly benefiting the rich, unless adjustments are made. For their part, conservatives fear that some types of consumption tax—particularly value-added taxes—would make it too easy to dial up government revenue collection.

So what’s the bottom line? Is it true, as the headline of the story says, that “Proposals for a consumption tax gain traction in both parties”?

Yes, that’s correct. But that’s not the same as saying that there is much chance of bipartisan consensus.

There’s a huge gap between those who want a VAT as an add-on tax and those who want to reform the current system to get rid of double taxation.

This doesn’t mean we shouldn’t worry about the prospect of an add-on VAT. As I warned last year, there are some otherwise sensible people who are sympathetic to this pernicious levy.

Which is why I repeatedly share this video about the downside risk of a VAT.

And you get the same message from these amusing VAT cartoons (here, here, and here).

Read Full Post »

Last week, I applauded the Chairmen of the House and Senate Budget Committees for proposing budgets that complied with my Golden Rule, which means the burden of government would grow slower than the private sector.

But my praise was limited because neither budget is ideal from the perspective of libertarians and small-government conservatives.

Even though the two proposals satisfy my Golden Rule, that’s simply a minimum threshold. In reality, there’s far too much spending in both plans, and neither Chairman proposes to get rid of a single Department. Not HUD, not Education, not Transportation, and not Agriculture.

Heck, the budgets don’t even go after low-hanging fruit such as the Small Business Administration, National Endowment for the Arts, Corporation for Public Broadcasting, or Legal Services Corporation.

And it turns out that there’s another reason to be semi-disappointed with the GOP budgets.

Stephen Ohlemacher of the Associated Press has a story on the Republican plans and he looks at one of the GOP’s most prominent claims.

The new House and Senate Republican budgets make a big boast: They both balance the federal budget within 10 years, without raising taxes.

But there are two problems with this assertion.

First, the GOPers are assuming that certain “temporary” tax breaks will expire. And this means more money for the government.

…millions of American families and businesses would have to pay more in taxes to make the math work…current law assumes that more than 50 temporary tax breaks that expired at the start of the year will not be renewed. …All together, the tax breaks add up to $898 billion over the next decade, according to CBO. …Most Republicans in Congress have voted numerous times to temporarily extend them. And over the past year, the Republican-controlled House has voted to make some of the more popular ones permanent.

Second, Republicans say they want to repeal Obamacare, but they want to keep all the revenue currently associated with the Obamacare tax hikes.

…they rely on more than $1 trillion in tax revenue from the health law that would supposedly be repealed. …In 2012, CBO said repealing the president’s health law would reduce tax revenues by $1 trillion over the following decade. That number has certainly gone up as more of the law’s tax increases have come into effect. But despite calling for the health law to be repealed, both budget resolutions include all the revenue that would come from the law’s taxes.

Both of these criticisms are valid.

Regardless of what you think about temporary tax provisions (some of them are good and some are special interest junk), letting these “extenders” expire is a way to boost the long-run revenue haul of the federal government. In an ideal world, by contrast, the good provisions would be made permanent and the bad ones would be repealed and the money used to finance good tax changes.

Similarly, while Republicans say they want to repeal the specific Obamacare tax hikes, that they don’t plan on letting go of the money. Which is just a way of saying that they are letting Obamacare boost the long-run revenue stream going to Washington.

By the way, this doesn’t mean that the GOP budgets are bad compared to current law. It simply means that they could – and should – be better. Specifically, they could incorporate lower tax levels and lower spending levels.

Which brings me to the part of the AP article that rubs me the wrong way. The headline, at least the one picked by Business Insider, says that eliminating red ink without a higher tax burden is “probably not possible.” And the language in the report is similar.

Balancing the federal budget is hard. Doing it without more tax revenue is even harder.

So why am I irked by this passage? Well, balancing the budget without new money for DC may be “harder” in the sense that it would require more spending restraint. And someone might be correct if they predicted that achieving balance is “probably not possible” because politicians are reluctant to exercise fiscal discipline.

But that doesn’t mean it can’t be done.

Earlier this year, I shared this chart showing how modest spending restraint can quickly balance the budget. As you can see, it’s actually very simple to get rid of red ink if politicians simply exercise a modest bit of fiscal discipline.

But I’ll admit that I used the Congressional Budget Office’s January projections of revenue, which assumed (like the GOP budgets) that the government would get revenues from the Obamacare tax hikes, as well as revenues from expiring provisions.

So does that mean that it’s impractical to balance the budget without all this added money going to DC?

Nonsense.

Let’s look at the numbers (and we now have new revenue projections from CBO, but they haven’t changed much) and see what happens if you remove the $2 trillion of revenues (over 10 years) associated with Obamacare and the extenders.

Since the revenue numbers climb over time, let’s assume that this means revenues will be $250 billion lower in 2025.

Does that cripple any hope of balancing the budget?

Hardly. It simply means that spending over the next 10 years could grow only about 2.7 percent per year rather than (as assumed in the House and Senate budgets) 3.3 percent per year.

So the bottom line is that we don’t need more revenue in Washington. We simply need more spending restraint.

P.S. By the way, this video explains why our goal should be smaller government, not fiscal balance.

That being said, there’s overwhelming evidence from nations all over the world that spending restraint is the best way to quickly reduce red ink.

Read Full Post »

The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy with the self-proclaimed mission to “promote policies that will improve the economic and social well-being of people around the world.”

But if there was a truth-in-advertizing requirement, the OECD would instead say that its mission is to “promote policies that will increase the size, scope and power of government.”

Here are just a few examples of statist policies that are directly contrary to the interests of the American people.

The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes in the United States.

The bureaucrats are advocating higher business tax burdens, which would aggravate America’s competitive disadvantage.

The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.

It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

It even concocts dishonest poverty numbers to advocate more redistribution in the United States.

And, most recently, the OECD published a report suggesting numerous schemes to increase national tax burdens.

And here’s the insult on top of injury. You’re paying for this nonsense. American taxpayers finance the biggest share of the OECD’s budget.

And I’m sure you’ll be happy to know that the OECD is now pushing for a massive energy tax.

Here are some relevant passages from an article in the OECD Observer.

…it’s prime time to introduce a tax on carbon… “Every government will need to explain how their policy settings are consistent with a pathway to eliminate emissions from fossil fuel combustion in the second half of the century,” says OECD Secretary-General Angel Gurría. This means looking at all policy measures to assess if they are effective in reducing CO2 emissions and in line with governments’ climate change objectives. An OECD report, Climate and Carbon: Aligning Prices and Policies outlines specific actions.

By the way, you can access the Climate and Carbon report by clicking here. But since I assume few if any people will want to read a turgid 57-page paper, let’s stick with excerpts from the short article in the OECD Observer.

All you really need to know is that the OECD (like the IMF) wants governments to boost energy prices, both explicitly and implicitly.

Explicit carbon pricing mechanisms, such as carbon taxes… other policies affect a country’s CO2 emissions and can effectively place an implicit price on carbon. …It’s time for governments to ramp up the development of alternative energies and to nail a price onto every tonne of CO2 emitted.

The article also includes other recommendations that are very worrisome. It suggests other fiscal changes that would boost taxes on the energy sector.

Needless to say, this means higher costs on energy consumers.

…carbon pricing should also include a review of the country’s fiscal policy to ensure that budgetary transfers and tax expenditures do not, directly or indirectly, encourage the production and use of fossil fuels.

By the way, when the OECD talks about “budgetary transfers” and “tax expenditures,” that’s basically bureaucrat-speak for back-door tax hikes such as changes to depreciation rules in order to force companies to overstate their income.

And since we’re deciphering bureaucrat-speak, check out this passage from the article.

…compensatory or other measures to mitigate the regressive impacts of reforms without losing the incentive to reduce emissions.

What the OECD is basically saying is that an energy tax will be very painful for the poor. But rather than conclude that the tax is therefore undesirable, they instead are urging that the new tax be accompanied by new spending.

Maybe this means higher welfare payments to offset increased energy prices. Maybe it means some sort of energy stamp program.

The details aren’t important at this point, particularly since the OECD isn’t making a specific proposal.

But what is important is that the OECD is using our tax dollars to advocate bigger government. So maybe the moral of the story is that we should stop subsidizing the OECD.

P.S. On a related topic, and in the interest of fairness, I have to give the OECD credit for being willing to publish an article on tax competition by my Australian friend, Professor Sinclair Davidson.

Sinclair points out that the OECD’s anti-tax competition campaign is based on the premise that bad things happen if labor and capital have some ability to migrate from high-tax nations to low-tax jurisdictions.

Yet the OECD has never been able to put forth any evidence for this assertion.

High income economies have tended to follow irresponsible fiscal policies over an extended period of time. …governments have been trying to access new sources of revenue. …The OECD has been campaigning on “harmful tax practices” since the late 1990s. …The report itself was a somewhat wordy affair that actually failed to define what ‘harmful tax practices’ constitute.Most damning of all, however, is that the OECD was unable to produce any actual evidence of these dire consequences, arguing instead: “A regime can be harmful even where it is difficult to quantify the adverse economic impact it poses”. The dog had eaten their homework.

What’s really going on, as Sinclair explains, is that politicians want a tax cartel to enable bigger government.

It turns out that governments and politicians, like business, don’t always appreciate having to work at improving themselves and offering a more attractive mix of services and taxation in order to attract business. …It is perfectly understandable why governments would want to establish a tax cartel. …countries, rather than respond to such competition by competing themselves, have chosen instead to engage in fiscal imperialism – bullying and cajoling sovereign nations to change their domestic policies.

Again, kudos to the OECD for allowing a contrary viewpoint.

I guess the bureaucrats are more relaxed now than they were back in 2001, when the OECD threatened to cancel an entire conference simply because I was present, or in 2008, when the OECD threatened to have me thrown in jail for giving advice to low-tax jurisdictions at another conference.

P.P.S. For additional information on why American taxpayers shouldn’t be subsidizing a left-wing bureaucracy in France, here’s my video on the OECD.

Now you can understand why eliminating handouts for the OECD should be a gimme for congressional Republicans.

Read Full Post »

Even though I fret about a growing burden of government and have little faith in the ability (or desire) of politicians to make wise decisions, I somehow convince myself that good things will happen.

Here’s some of what I wrote two years ago, when asked whether I thought America could be saved from a Greek-style fiscal collapse.

I think there’s a genuine opportunity to save the country. …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.

But in that same article, I also issued this warning.

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.

To be blunt, imposing a big national sales tax – in addition to the income tax – would be a horrible defeat for advocates of limited government. A VAT would lead to more spending and more debt.

And that’s when folks might consider looking for escape options because America’s future will be very grim.

Here’s a video I narrated on why the value-added tax is awful public policy.

Thankfully, I’m not the only one raising the alarm.

In a recent editorial, the Wall Street Journal wisely opined on the huge downside risk of a value-added tax.

It’s the hottest trend among tax collectors, raising a gusher of revenue for spendthrift governments worldwide. …a new report from accounting firm Ernst & Young says that VAT “systems are spreading” around the world and “rates are rising.”

By the way, the comment about “rates are rising” is an understatement, as illustrated by the table prepared by the Heritage Foundation.

Politicians love VATs both because they generate huge amounts of revenue and because the tax is hidden in the price of products and thus can be increased surreptitiously.

The WSJ explains.

The VAT is a sort of turbo-charged national sales tax on goods and services… Politicians love it because it is the most efficient revenue-raiser known to man, and its rates can be raised gradually to finance new entitlements or fill budget holes. The VAT is typically introduced with a low rate but then moves up over time until it swallows huge chunks of national economies. …Because VATs are embedded in the price of products, they can often rise unnoticed by the consumer, which is why liberals love them as a vehicle for periodic stealth tax hikes.

And in this case, “periodic” is just another way of saying “whenever politician want more money.”

And if recent history is any indication, “whenever” is “all the time.”

E&Y says standard VAT rates now average a knee-buckling 21.6% in the European Union, up from 19.4% in 2008. Average standard rates in the industrial countries of the Organization for Economic Cooperation and Development have climbed to 19.2% from 17.8% in 2009. Japan is another example of the VAT upward ratchet. The Liberal Democratic Party tried to introduce the tax for years and finally succeeded with a 3% rate in 1989. Eight years later the shoguns raised it to 5%. Last year it climbed to 8%, whacking consumption and sending the economy back to negative growth.

The Japanese experience is especially educational since the VAT is a relatively new tax in that nation.

And here’s a chart showing what’s happened in the past few years to the average VAT rate in the European Union.

Now let’s look at another chart that is far more worrisome.

It shows that the burden of government spending in Europe, before VATs were adopted, wasn’t that much different than the fiscal burden of the public sector in the United States.

But once the VAT gave politicians a new source of revenue, spending exploded.

By the way, you won’t be surprised to learn that politicians increased spending even more  than they increased taxes.

So not only did VATs lead to more spending, they also led to more debt. I guess that’s a win-win from the perspective of statists.

Let’s now return to the WSJ editorial. Proponents sometimes claim that VATs are neutral and efficient. That may be somewhat true in theory (just as an income tax, in theory, might be clean and simple), but in the real world, VATs simply make it possible for politicians to auction off a new source of loopholes.

…while VAT systems are often presented as models of simplicity that theoretically treat all goods and services alike, politicians can’t resist picking winners and losers, creating higher or lower rates for industries at their whim. “The politicians always start running with exemptions,” says E&Y’s Gijsbert Bulk.

Here’s the bottom line.

Americans, be warned. …don’t think it can’t happen here. Liberals campaign on soaking the rich, but they know there’s only so many rich to soak. To finance the growing entitlement state, they need a new broad-based tax that hits the middle class, where the big money is. That means either a VAT or a new energy tax, like the BTU tax Bill and Hillary Clinton proposed in 1993 or the cap-and-tax scheme that President Obama wanted.

The WSJ is correct. We need to be vigilant in the fight against the VAT.

But what makes this battle difficult is that some putative allies are on the wrong side.

Tom Dolan, Greg Mankiw, and Paul Ryan have all expressed pro-VAT sympathies. The same is true of Kevin Williamson, Josh Barro, and Andrew Stuttaford.

And I’ve written that Mitch Daniels, Herman Cain, and Mitt Romney were not overly attractive presidential candidates because they expressed openness to the VAT.

P.S. Some of you may be asking why leftists are so anxious for a VAT since they traditionally prefer class-warfare based tax hikes that extract revenue from the rich.

But here’s one of the dirty secrets of Washington. They may not admit it in public, but sensible leftists understand that there are Laffer-Curve constraints on extracting more revenue from upper-income taxpayers.

They’re familiar with the evidence from the 1980s about the sometimes-inverse link between tax rates and tax revenue and they are aware that “rich” people have substantial control over the timing, level, and composition of their income.

So if you want to collect more money, you have to go over lower-income and middle-income taxpayer.

Which is exactly what the IMF inadvertently revealed in a study showing that VATs are the “effective” way of financing bigger government.

P.P.S. I should have written that leftists generally don’t admit that they want higher taxes on the general population. Because every so often, some of them confess that their goal is to rape and pillage the middle class.

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

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,735 other followers

%d bloggers like this: