--have totally missed the point of a pretty good working paper, and that's the shame.
Sure, I'll disagree with Kotlikoff's goofy bankruptcy scenario but I'll be forgiving because he is right with the idea that there are a few course corrections that definately are in order (Social Security for one). I'll also disagree with the idea that somehow the only solution is flipping to a flat tax --IMHO that's a different solution for a different problem. Once again I'll be forgiving because Kotlikoff is in fact right that we need solutions that simply aren't 'in the box'. (Good commentary here).
But to say the reason we're bad off is because of China? --because of our manufacturing sector? Sheesh. Next thing we'll be hearing them telling us we want to bring back the gold standard or something...
I agree. I always laugh when panic-mongers conflate external debt with unfunded liabilities. External debt may require tax hikes which could reduce national or household wealth.
I'd like someone to explain how taxing a 25 year old to pay the Social Security of a 65 year old reduces total national wealth. If Social Security is canceled tomorrow does that somehow boost national wealth?
The tax proposed by Kotlikoff is not a VAT at all but the FairTax which is a national retail sales tax differing substantially from a VAT and it's surprising that one presumably versed in economics would fail to notice the difference. It operates nothing like a VAT (which taxes everything at every stage of production and embeds tax costs in the prices of goods and services much like the present income tax), but is a single-stage tax at the end-consumption (retail) level only, taking a thing once and only once. It is far simpler, less expensive, and less prone to abuse that either a VAT or an income tax.
The "33%" rate Kotlikoff names is based upon his assumption of none of the savings of the costs of the present income tax system operating to reduce prices but instead going entirely to benefit workers (along with the employer part of the payroll taxes) and causing prices to rise to a higher level because of it (along with no compliance cost savings), Other economists make the opposite assumptions and believe prices will drop 22 - 24% and workers will have only their existing takehome pay. Obviously the truth is somewhere between these two extremes.
Most economic studies find the 23% tax inclusive rate (which is the rate presently in the bill and is 29.87% tax exclusive) to result in some reduction in prices due to removal of the income tax costs and compliance costs with workers getting their full paycheck (not counting the ER payroll portion which would go toward reduced costs). Done this way, prices will decline somewhat with the income tax removal, workers will receive their full pay which - along with the prebate they may receive - will more than compensate them for the new prices after FairTaxes are added. IOW, a purchasing power increase for most taxpayers. Some will be greatly helped, some less so, but after all, the tax is designed to be revenue neutral so there should be very little change for most but removing the hidden costs of the income tax will raise disposable personal income somewhat overall.
Kotlikoff's bankruptcy scenario is based mainly upon the walloping and massive increase in social entitlement costs which are not sustainable under the present tax system as he clearly points out.