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
This guy is a JACKASS! The VAT SUX!
Bartlett is just being practical. He knows that a "no veto" president who wants to be a Republican FDR isn't going to cut spending.
And your Degree in Economics is from WHICH university?
That's because the tax cuts were done to buy votes, not to help the economy.
They help the economy....which gets my vote and many others....
Yes they do, but some tax cuts help the economy more than others. My comment was addressing the philosophy of the tax cuts, which is the subject that Bartlett brought up.
In the USA, a VAT might make sense for the states, allowing them to tax the portion of final value "added" in their state. But nationally there is no need for it. A Federal retail sales tax would capture the tax on the entire value of goods no matter in which state they were sold.
Not only is a Federal VAT unnecessary, as compared with a retail sales tax, it's a bad idea because the tax would be hidden. One of the virtues of a retail sales tax is that the taxpayer realizes it's being paid.
I once discussed the VAT with an economist from Vienna. He was complaining that trucks carrying goods from Germany to Italy used Austrian roads, but paid no taxes. I pointed out to him that according to the Austrian School of Economics (unfortunately there are no members of the Austrian School left in Austria), the trucks were adding value to the goods by moving them from where they weren't wanted to where they were, and Austria should apply a VAT. I don't know if he ever made the recommendation to the Austrian government. Nevertheless, that illustrates why the VAT makes sense in Europe.
Sure, and tank the economy. Riiiight
You've only provided arguments for one side of your basic premis.
I see no reason why a VAT should not work in the USA, regardless of how much or how little of the value is added within country or in imports.
The fact that the "Tax is Hidden" is the big boogieman that everyone trots out, but nobody substanciates, and nobody seems to come up with much else.
No need to "substanciate" the fact that the VAT is a hidden tax...because it IS a hidden tax...LOL...
Some things are so basic and self-evident that they don't need substantiation.
The real question is: "Are hidden taxes a bad thing"?
And the only answer reasonable people can arrive at when they examine that question is that they are bad. Very bad.
Transparent government is what is needed. Not more room for politicians and bureaucrats to play their insidious game of playing off one set of citizens and taxpayers against one another.
That is one of a plethora of reasons why I support the 100%
transparent and visible FairTax.
EV
Bartlett has his head where the sun don't shine on this one. VAT is Euro-weasel Socialist-crat crp.
Keep it simple. Flat or consumption.
Moron.
What the President inherited was an out of control Federal Reserve Chairman and the beginnings of a business spending depression (not a recession). Two problems he didn't recognize and cared to do nothing about. It was the 9/11 attacks that turned things around (take a look at a chart of the major stock market indices). They brought Greenspan around to his senses, but the President didn't come around until he saw the soft economy would threaten his reelection.
You don't need a degree in economics to recognize the poison label on the VAT.
That's ridiculous.
First of all, over 80% of sales taxes are collected by large corporate retail businesses. All that will be required for them to implement the FairTax will be to reprogram their cash registers. That's it.
Secondly, as a former small retail businessman, I assure you that the sales tax is by far the simplest tax to collect and pay. A couple of lines in the form: Gross sales. Percentage collected and owed. Bam. Finished.
The idea that somehow the enforcement mechanism for enforcing this tax would in any way come anywhere close to the invasiveness of the income tax is a total crock.
And under the FairTax, the individual would have exactly 0% obligation at all to do or show anything.
Amen.
Keep it simple.
Yep.
Flat or consumption.
The consumption tax is the only way to go.
If you flatten a cowpie, it's still a cowpie, and it still stinks.
Income taxes are fundamentally flawed from their conception, flat or otherwise.
As a CURRENT small retailer I agree. But what have you EVER in your ENTIRE LIFE seen the US government get involved with that remains that simple.
There will be forms, and paperwork, and require proof, and audits, and source-of-Supply documentation, and waste documentation.
Its Naieve to think it won't be so, and be so in VERY short order.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.