Posted on 12/04/2004 2:16:46 PM PST by Ernest_at_the_Beach
POLICY
Tax Advice for Mr. Bush: Consider the VAT
The logic of a value-added tax is compelling and may soon be overwhelming.
FORTUNE
Wednesday, December 1, 2004
By Bruce Bartlett
President Bush has pushed through some delightful changes in the tax code over the past four years: lower income tax rates, rebates, and increased business depreciation allowances, to name a few. It's been great. Except for one thing: When you consider those measures as a whole, they don't make much sense. Bush's tax policy--although "policy" may be stretching the meaning of the word--is a haphazard mess.
What's scary is that the President has never spelled out anything resembling a guiding philosophy of taxation. Is it more important to the President that we fundamentally restructure the tax system into something coherent and efficient? Or does he simply believe that taxes must be lower, period, and damn the consequences? Who knows? Without a principled view of tax reform the White House and Congress are too easily led astray into ad hoc policies. And that's how we find ourselves with the kind of unholy hairball of a tax code that we so enjoy today.
Meanwhile, all the President's tax cuts are a reason the federal deficit is getting out of control. Political pressure hasn't yet built to the point where the administration might, say, do something about the deficit. But it's building. And there are reasons to believe that financial markets will force Washington to take action, which is what happened in the 1980s. The sharply falling dollar and rapidly rising current-account deficit mean that something will have to be done soon to reduce America's dependence on foreign capital. Reducing the budget deficit is the quickest and easiest way to do that.
But even if financial markets somehow fail to demand action on the deficit, the economy-devouring effects of America's long-term entitlement obligations will. According to the Congressional Budget Office's most likely scenario, Medicare and Medicaid spending alone will rise from 4% of GDP to 11.5% in 2030 and 21.3% in 2050. Today, by contrast, all federal spending consumes just under 20% of GDP. On the revenue side, the federal government is taking in only 16% of GDP, the lowest percentage since the 1950s and well below the postwar average of 18%. Yet Bush has proposed making all expiring tax cuts permanent, and everyone knows that the alternative minimum tax (AMT) will have to be fixed, which will further erode revenue growth.
Putting all that together yields an inescapable conclusion: The government must increase federal revenue as a share of GDP. In other words, raise taxes. The only question is how? Although Bush's position is essentially that the country needs more taxes the way it needs more liberals, the idea that the growing deficit can be ignored or that it can be dealt with solely on the spending side is simply wrong and getting wronger.
One clue to where Bush may end up comes from his days as governor of Texas. He appointed a tax-reform commission that recommended a form of value-added tax, or VAT, for the state. Bush endorsed the proposal and worked to get it passed, although the legislature ultimately voted it down.
Many economists, including this one, believe that the time has come for the U.S. to seriously consider a national VAT. We are the only major industrialized country without one. A broad-based VAT could raise half a percent of GDP in revenue for every percent of tax. A 10% VAT, therefore, could raise revenue equal to 5% of GDP. That would be more than enough to fix glaring problems in the tax code such as the AMT, make Bush's tax cuts permanent, and still leave money for deficit reduction.
There's no doubt that a VAT would be controversial. But it has the enormous virtue of raising large revenues at a low economic cost--discouraging less economic output per $1 raised than any other tax that economists know of. Trying to raise substantial additional federal revenues by increasing income tax rates would be far more costly to the economy.
A VAT has other virtues as well. If it were used to replace the corporate income tax, it would unquestionably improve the competitiveness of American businesses because world trade rules allow a VAT to be rebated on exports, whereas corporate income taxes may not. That is one reason European businesses have remained competitive despite tax burdens sharply higher than those here.
There is no indication that Bush will propose a VAT, either for deficit reduction or tax reform. But the logic for it is compelling and may soon become overwhelming. It's the least bad way out of this morass.-F
Here are some of the political and economice requirements of serious fundamental tax reform. You will notice that the FairTax is the only proposal that even comes close to meeting all of the criteria:
1) Simplicity
2) Revenue neutrality
3) Efficiency/cost effectiveness
4) Noninvasiveness/maintains citizen privacy
5) Visibility/transparency
6) Fairness/Treats all Americans equally
7) Removes mechanisms for political manipulation/divide and conquer politics/social engineering
8) Advantages American goods and services in world markets
9) Taxes foreign made goods and services in our markets (finally!)
10) Promotes thrift
11) Taxes the underground economy/Removes advantages enjoyed by criminals over lawabiding Americans
12) Promotes savings, investment, capital formation and therefore productivity, while removing the impediments to these fundamental prosperity-causing factors caused by the current system.
I'm sure I could come up with more if it wasn't so late and I wasn't so tired....
Again, the FairTax is the ONLY proposal that makes any sense at all.
Read the FairTax bill, and I'm sure your objections will be allayed.
Every tax reformer I know, and I know many, shares those exact concerns.
These things were debated ten years ago, and everyone agreed with you.
It is part of the strategy, believe me.
I heard Bartlett speak on this subject today on CSPAN. The primary virtue of the VAT as he identified it is that it can be used to increase revenues easily. IOW, the percentage can be incrementally increased frequently and presumably with minimal pain while bleeding the taxpayer for big government spending.
He was surprisingly open about his agenda. I didn't get the venue except that other speakers were also socialistic in their inclinations. It was enough to convince me that the VAT is a pig in a poke.
I agree with all of your criteria. That's why I supported Fair Tax. APT Tax does everything Fair Tax does, and beyond. By taxing financial transactions instead of commerce, it expands the tax base one hundred fold. This means a revenue neutral tax rate would be one percent of what it is now. This is a real paradigm shift, even for Fair Tax advocates. APT Tax is a hundred miles wide (tax base), and a half a percent deep (tax rate). APTTAX.COM home page has a real nice concise description. I encourage all Freepers to check it out and see for yourself.
Again, it doesn't meet the critically important criteria of visibility/transparency.
You don't. You missed a biggie.
I think I'm still missing it. I thought one huge biggie for tax reform was to get away from filing a tax return. The only real restraint for government spending is where they reach the point of choking off more revenue by over burdening the economy. A high growth economy gives the government abundant revenue, and opportunity and prosperity to the people. I don't think it gets any better than that. Other than that, I think we're in total agreement.
The concept you linked is about as hidden as a tax can be.
This is a very bad thing, because when politicians can keep the tax bite hidden from human eyes, they are free to play any insidious game they please.
Capiche?
The VAT is evil and insidious because it is a hidden tax. For just that reason, it is understandable that the political class would prefer it. Such a tax allows it to take unlimited amounts of money from the people whose only indication that they are being taxed is that goods and services are expensive. I will oppose the VAT and any other new system of taxation that doesn't include a dramatic reduction in the size and scope of government.
Agreed that consumption is the way to go.
No need to "substanciate" the fact that the VAT is a hidden tax...because it IS a hidden tax...LOL...This is a common misunderstanding of a VAT. To the consumer, a VAT would be no different than a NRST. They will see the price, the percentage tax, and tax paid right there on the receipt. Just like a sales tax. The only difference is the collection method.
Added
Credit
Price
VAT
Payment
(Tax - Credit)Raw Materials Manufacturer Wholesaler Distributor Retailer
Bartlett has his head where the sun don't shine on this one. VAT is Euro-weasel Socialist-crat crp.A flat tax is a consumption tax, as is a VAT and a NRST.
Keep it simple. Flat or consumption.
Moron.
You're right about VAT and NRSt being consumption taxes. It's just that VAT isn't simple. I lived in Europe for several years and had to deal with that nightmare of a VAT they had.
Flat tax, in the sense I meant it, would signify a tax on income and that's the way I think it is thought of here with general discussions about taxes.
A flat tax is still a tax on incomes, and therefore still
requires every american to file income tax returns.
And a flat tax is paid on income that is never spent, such as put into savings. Therefore, only my the most unbelievably reaching arguments can you claim a flat tax is a tax on consumption.
Your example also lays to rest the other myth of a VAT, that it is a tax on tax. But as you show, the tax is removed at each step with the vat credit, before the tax is calculated anew.
But the problem I see is that would require a major adjustment of almost everybody's sales systems, cash registers, and computer programs wouldn't it?
To properly calculate the total amount of vat to the end customer, each step of the process would have to track two prices, the price they paid and the vat they paid, so that they can deal with the vat credit column, and have documentation of their vat credit calculations.
Most order processing and inventory management systems in this country do not do that, because even existing Sales Taxes are not charged on goods for resale.
On the other hand, with a NRST Right now, most sales systems, registers, and software are already set up to handle multiple sales tax authorities, (city, state, county, etc). Adding one more would in most cases not require any changes what so ever to the software, simply adjusting a setting.
I write this kind of software for a living, so I can tell you its neither simple quick to add tracking for new cost elements to existing inventory systems.
And a flat tax is paid on income that is never spent, such as put into savings.If you don't spend it, it is savings and you don't pay taxes on it.
Therefore, only my the most unbelievably reaching arguments can you claim a flat tax is a tax on consumption.Sorry, but a flat tax is a tax on consumption.
To many Americans, consumption taxes are those collected at the cash register- such as the state sales tax--or value-added taxes like those they might encounter on a trip to Europe. Few Americans consider the flat tax a consumption tax because it would be levied on personal income. Economists and public finance experts, however, do consider the flat tax a consumption tax. The confusion revolves around the current tax code's policy of imposing greater penalties on income that is saved and invested than on income that is consumed. A tax code that does not discriminate against savings and investment is considered a consumption-based tax system, regardless of whether taxes are collected at the paycheck or at the cash register. In this respect, the flat tax is a version of a consumption tax.
Both the flat tax and a national sales tax also could be considered examples of an income tax, but one in which "income" is properly defined. The current tax system, by contrast, should not be referred to as an income tax; rather, it is an excessively complicated amalgamation of income and wealth taxation.
source
A tax code that does not discriminate against savings and investment is considered a consumption-based tax system, regardless of whether taxes are collected at the paycheck or at the cash register.
It turns out you justification for this claim is merely that you have made the claim, and nothing more. "Is considered a comsumption tax" Thats it? Thats the extent of your economic argument?
Clearly the reasoning is flawed, a classic example of circular reasoning, and its obvious the emperor has no clothes.
Further your assertion that "if you don't spend it it is savings and you don't pay taxes on it" is TOTALLY false with regard to a Flat tax, which is (as every one knows) an INCOME tax, which gives not a hoot in hell about what you do with your money, as long as you pay taxes on it.
So once again: The flat tax is an income tax, and it still requires that we be maintain the IRS and every citizen has to file tax returns. Simply saying it is not so, does not change these facts.
It turns out you justification for this claim is merely that you have made the claim, and nothing more. "Is considered a comsumption tax" Thats it? Thats the extent of your economic argument?I could show you a hunderd examples. A flat tax taxes consumption. It is a consumption tax. The authors of the flat tax, Robert E. Hall and Alvin Rabushka, even say "The flat tax, by expensing investment, is precisely a consumption tax."
I really don't mean to test your patience, and I don't think we're really that far apart. To me the present income tax is the most visible tax there is, because of the filing requirement. Personally, for the benefit of eliminating virtually every other form of taxation at all levels, and paying a less than one percent tax on transactions only, I don't care if it's invisible. There are enough public records, and concernd citizen organizations, and media sources, to keep tabs on the spending. I know it's got a long way to go yet to gain acceptance, but APT tax is something to be taken serious.
To: APT Project Director
I've railed against the Tobin Tax and its relatives, and its adherents, here and elsewhere ever since that goofball academic first mentioned it. It is unquestionably the single most unsound taxation method ever conceived, in terms of the side effects that will be produced immediately.
While such a tax -- 0.6% of the gross value of the transaction is usually the figure mentioned -- will not cause a halt in investment, it will reduce trading liquidity in its tracks, in every market affected (here, meaning anything trading in NYC, Chicago, Philly, Boston, or on any domestically-run electronic exchange. Why? That's such a cinch to answer that even today I find it hilarious that any marginally informed or sane person doesn't see the answer as pellucidly as looking out the window at the sunrise.
The person purchasing shares for the long term won't much care about a 0.6% inside tax...but that person is NOT the bulk of the marketplace, merely a small fraction of it, and in any case there are many other things trading than shares of common stock, whether on or off exchange floors.
See if you can follow the addition, boyo -- then, tell me in all your expert (cough) wisdom why you won't kill off, literally kill right off, an enormous number of markets. Ready? Here we go with a nice, everyday, real-world (I know that's not your favourite world, but one has to start someplace) example.
Light Sweet Crude Oil for January 2005 is trading on NYMEX at $42.70/bbl as I write this. The gross transactional value of 1 contract -- 1000 bbls per contract -- is of course therefore $42,700. 0.6% of that is exactly $256.20. A typical commission on one side of a crude trade is $15-18, including floor fees and whatnot, and, of course, the trader will have to dispose of the contract at some point in future, costing another commission. Let's say, for convenience, that total commission and price slippage cost the trader $50.00 round-turn, thus something on the order of $310 in transaction costs for each contract traded.
Boy, what slick geniuses you people are. That's 31 points per contract, and I'm here to tell you right now that NO -- absolutely NO -- retail trader is going to deal in that kind of market, with such excessive costs. Kiss 'em goodbye from day 1 of the implementation of your asinine tax. But wait (as good ol' Ron Popeil always says), there's more.
Guess who else won't play, at that level of cost? The floor traders, the chaps who make the market. Ordinarily their costs are a couple of dollars -- that's right, putznagel, $2.00, $3.00, $4.00 or less -- per contract. You're going to hit them with a 12,250% increase in their daily business costs? The hell you will, pal -- the price of every exchange seat in the country will be down 80% or more before you can turn around. And, I wouldn't give real short odds on your continued existence should you happen to bump into one of them after implementing your little fantasy world, either.
Stick around, dimwit -- I'm just warming up on this topic, and, unlike you and your fantasy world, I deal in the real world. Typically, you clowns will attempt to brush off the argument so-far-made with something like, ''Well, that's just the commodity futures markets. That's just a gambling game, and we'd probably be better off if those markets were sharply curtailed in the public interest.'' Or some set of words to that effect, right?
Now, if it happens that you're somehow bright enough to NOT make that economically illiterate argument, please skip down to the next graf. How valuable are futures markets to the US? Oh, I'd say fairly valuable. Generals Grant and Sherman, and President Johnson, after the Civil War, made a special trip to the Chicago Board of Trade to thank the members, and the exchange, for their assistance in seeing that the Union armies had timely deliveries of oats (and other feed) for their horses, and also for preventing a food panic in the Eastern cities. That's just one of several dozen major examples, btw -- many more on request.
However, the futures markets aren't even the principal instance of the havoc your and your fellows' lunatic scheme will create. Let's just talk about debt for a moment.
The US gov't, and many of the states, and too many of the counties and cities, RUN on debt -- they quite literally can't exist without the issuance of debt. 0.6% is 60 basis points, chief; do you really believe that those who finance this government, especially increasingly the Japs and the ChiComs, are going to EAT 60 bp just because they're such nice chaps and admire your brain-damaged idea so much? Yah, right. Got some oceanfront property in the Sahara for ya, too. They're going to DEMAND that 60 bp back -- and even a bit more -- before the buy the bloody bonds in the first place. Sheesh. So, cleverly, your dingbat scheme immediately forces interest rates higher all along the yield curve, on a cost-plus basis. Why cost-plus? Because guess what, junior, Goldman and Solly and Paribas and Barclay's and every other investment bank in the world aren't going to accept your little haircut either. Their spreads will ALSO change immediately, to cover YOUR imposed cost. So, the gov't will pay more for money, not once but twice, and guess who foots the bill? Right you are, every taxpayer in the land will get, directly or indirectly, a tax increase. Ah, the marvels of static economic analysis, as practiced by incompetents!
Now, markets aren't going to shut down because of you and your dipstick notions (well, a few will -- but what the hell, you don't care), but what WILL happen, absolutely as quickly as can be arranged, is that every, and I mean EVERY, trading company will shift their emphasis elsewhere, meaning out of NY, out of Chicago, out of the US. They'll trade crude on IPE and SIMEX, Eurodollars on EUREX and SIMEX, corn and beans in Tokyo f'Heaven's sake, coffee and cocoa on LIFFE, US bonds in half a dozen places...and every damned bit of that volume will come right straight out of the US. That'll be just fine for the economy, won't it?
But you dorks will love it, because the revenues you anticipate from your little Frankensteinian adventure WILL NOT MATERIALISE, and you'll get another chance to tax the kwap out of everyone with another idea from Dildoes 'R Us.
The good news here is only that the markets have SO much more clout than paretic academics like you and Tobin that your crackhead plan hasn't the slightest chance of making it into law, even incrementally.
And, by the way, I haven't yet even gotten to what your faex-like idea will do to the dollar middle-term AND to retirement accounts immediately, whether SS or otherwise, throughout the nation. Nor will I withdraw one single ad hominem remark in this message; intellectually, you deserve every one of them.
62 posted on 12/06/2004 2:38:34 AM EST by SAJ
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