Why the GOP shouldn’t embrace calls for a VAT

October 7, 2009

You can add New York Times economics columnist David Leonhardt to the parade of liberals, Democrats, Obama allies and fellow travelers — such as John Podesta, Nancy Pelosi, Paul Volcker, and Robert Rubin — calling for higher taxes, preferably a value-added tax.

But Leonhardt goes those folks one better in his new column. He extensively quotes conservative (and controversial) economic analyst Bruce Bartlett, a VAT proponent, who says Republicans are no longer credible on economic policy. That is, of course, another way of saying Leonhardt no longer thinks the GOP or conservative economics (hardly the same thing) are credible, assuming he ever did. And that seems unlikely given the tone and substance of his column.

Yes, let’s talk about credibility and start with a few howlers by Leonhardt:

1) “Most Democrats now acknowledge the central idea of supply-side economics: tax rates matter.” Have Democrats really conceded this point? Have they accepted the necessity of the Reagan supply-side tax cuts back in the 1980s? Doubtful. President Obama, for instance, has stated that he doesn’t think the high, unindexed-for-inflation tax rates of the 1970s were a disincentive to work, savings and investment. He concedes only that they may have “distorted” investment decisions by encouraging people to seek out tax-shelters. Not surprisingly, the Obama tax cuts were typically Keynesian, short-term and consumer demand focused.  The job tax credit that the White House is considering would be more of the same.

(And I’ve lost count of the number of times I’ve heard Democrats and liberal economists get wistful about the 1950s and its 90 percent top marginal tax rate. These also tend to be the same folks who credit the 1980s economic boom to falling oil prices, Paul Volcker’s inflation fighting, Jimmy Carter’s deregulation and typical cyclical rebound after a deep recession. In short, every possible explanation other than Reagan’s tax cuts.)

2) “Taxes are supposed to rise as a country grows richer.” Ah yes, Wagner’s Law, named after 19th century economist Adolf Wagner. Smart guy. Except that Americans decided to break Wagner’s Law starting in 1978 with the property tax revolt in California and deep cuts in the national capital gains tax rate, followed by the Reagan tax cuts. You might say that Laffer’s Law (as in Arthur Laffer) and the experience of the 1970s superseded Wagner’s Law by demonstrating how high taxes rates can choke economic growth and productivity.

Wagner is probably correct that richer societies demand more services, but who says that government has to provide them? They can be privatized, such as Indiana did with its toll road. And there is scant evidence that American desire higher taxes, as evidenced by recent election results in California (voters rejected higher taxes) and little support for higher energy taxes.

3) “But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.” Or the government could cut spending. Pushing back the retirement age on Social Security and tweaking its benefits formula turns a $5 trillion present-value deficit into a $5 trillion surplus, for instance. That’s just one idea. It is not an unalterable, incontestable reality that government spending cannot be reduced.

Give voters a choice between a) more government programs and a 33-50 percent increase in their tax burden and b) low taxes and free-market approaches to problems like healthcare. Let’s see which they choose.

And as far as the impact of tax increases on economic growth, let me quote a paper co-written by Christina Romer, chair of Obama’s Council of Economic Advisers: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.” There you go.

4) “One of the country’s two political parties has no answer to an enormous economic issue — the fact that the federal government cannot pay for its obligations.” Must have missed the memo on how Democratic healthcare reform solves America’s deficit problems since, at best, the various plans are only roughly deficit neutral over the next decade. Also, Democrats have recoiled at the idea of taxing healthcare plans to pay for expanded coverage, an idea that many economists say also is necessary to reduce overuse of pricey, premium medicine.

And recall how Democrats harpooned Republican attempts to reform Social Security during the Bush administration, with many also refusing even to acknowledge that the system was in crisis.

Not that Republicans have much to crow about when it comes to spending. The GOP defense of out-of-control Medicare spending is completely political, as was the Bush administration’s decision to expand Medicare without paying for it.

Bottom line: Ultimately what tax-hike proponents fail to persuasively argue is why they believe that once government had access to greater revenue, especially via a VAT, it wouldn’t just spend the additional dough?

Americans know how that game works.

Moderate Democrats like Sen. Mark Warner have made the case that unless spending is cut and government reformed, big tax increases are fantasy policy. That’s right. First cut spending, then raise taxes if absolutely necessary.

13 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

[...] JAMES PETHOKOUKIS: Why The GOP Should Reject Calls For A VAT. [...]

Democrats and too many wishy washy RINOs always make the claim that because of (insert any runaway entitlement) taxes must be raised. Spending cuts are never considered. The virtual ponzi scheme nature of entitlements is not acknowledged. The basic truth of the Laffer curve is not discussed. Liberals don’t debate-they have tantrums. They are un-moved by the mountain of evidence that shows their policies hurt those they claim to help.

Bruce Bartlett is a hack. If he were a politician he’d be a John McCain clone.

What is missing from all of this is true free market politicians. The GOP has largely sold out. Big business has decided that it is easier to buy off the Democrat party. They will sacrifice principles to garner favors for their special interest-ignoring the long-term consequences that are playing out right now with government interference in many industries and outright takeover in others.

Posted by Pat Duggan | Report as abusive

While the point that Republicans should fight every ill-advised policy put forward by Democrats is well taken, may I ask a question? Assume that we weaned America off the so-called progressive income tax (IRS) and replaced it with a VAT.

Would that not then imply that the 47% of Americans who now pay no taxes would have to start paying some taxes? I mean, isn’t a VAT essentially a national sales tax?

And if so, why don’t we jump on it and promote it if we could couple the VAT with the elimination of the progressive income tax (and the flat tax, etc)?

I’m just asking.

Assume that we weaned America off the so-called progressive income tax (IRS) and replaced it with a VAT….

hahahahahahahaha

Sorry for laughing, Paul, but I’ve never seen the word weaning and taxes used together before. There is zero indication the politicians would consider giving up the income tax and replace it with a consumption tax.

Of course, they’ll keep BOTH and continue turning the screws until the golden goose either dies or flies away.

Posted by Concerned Citizen | Report as abusive

Let the VAT come

there is more chance in the medium term of spending cuts if a large majority of people are paying higher taxes

Posted by vic | Report as abusive

I am just goin to laugh out loud and move to a cave if this happens!

Posted by Ian | Report as abusive

So much I’d like to say but it would most likely fall on deaf ears. Over-taxation is dangerous, but slashing taxes and then calling for some generic spending cuts (from where and what is of course never mentioned, or really even contemplated – it’s enough to say it’s possible) is equally so. Sad to say but it’s the government that’s holding up the economy right now, and I can think of no corporation, or group of companies, or industry that could possibly, in any way, shape or form replace that right now. America is in the ICU and you wanna pull the plug. Well… at least you’re taking a position.

Also, I’m more than slighty offended by the idea that the great play to save the day should be accounting gimmickery – changing the terms of Social Security pensions. It’s essentially stealing, to the tune of $10 trillion dollars, and you seem totally ok with it as long as you can cut taxes for businesses that already cut every tax corner possible. WOW.

And lastly, if the universal healthcare package offered is essentially deficit neutral as you put it, how can you possibly rag on it? If 47 million (or 30 million, what the number du jour is) more people are being covered and it doesn’t effect the budget, uhm, errr, where’s the problem?

Posted by the Shah | Report as abusive

[...] Then again, if you’re good with double-digit inflation for more than a decade but lots and lots of government control, then the VAT is probably right up your alley. [...]

Here in “Doity Joisey” the VAT is known as “The Tony Soprano Full Employment Initiative”.
These congress critters must think this stuff up when they are on drugs. They are clueless.

Posted by Pixelkiller | Report as abusive

I suspect that Congress would spend the VAT leaving the deficit, at best, unchanged. Quite possibly they’d spend it on programs whose cost overruns would actually increase the deficit.

Never in my life have I had less respect and more contempt for America’s political class: both major parties. The more incompetent they become, the more power they demand.

Posted by gs | Report as abusive

Shah-the government is not now nor have they ever held the economy up. Government first taxes then spends. If they keep it to low and necessary levels the economy thrives. When they take too much it chokes the economic engine. We are suffering fallout from several fed pumped bubbles and years of hideous liberal housing policy that created false and unsustainable demand. The stimulus didn’t stimulate because it was just more pork. The fed printing money is just causing inflation.

Every penny ever collected for Social Security has been spent but the promise to pay (the unfunded liability) is still out there. Medicare has an even bigger gap.

The only solution is to admit that we’ve been scammed by congress since FDR. Shift Social Security to private now. Stop taking that money. Congress can’t be trusted with it. The young can start paying into private plans. The old should be paid only after means testing. Shift to the FairTax and eliminate all the other choking taxes including, FICA corporate and capital gains. Eliminate the education and energy departments and keep slashing until budget is balanced then keep it that way. Slowly grow our way out of debt. To increase tax revenue start drilling in US for oil and gas immediately. You get the bonus of real jobs. Not pie-in-the-sky “green jobs.” Spain tried that. Like all liberal plans it failed.

We keep hearing that we’re handing our children and grandchildren a bunch of debt. It’s more urgent than that. We may be handing them a completely destroyed economy, hyper inflation and a world with nuclear armed terrorists. We are going to be dealing with our mess while our children are still children. It’s only fair. We did it.

Posted by Pat Duggan | Report as abusive

In discussions with liberals over the years I’ve suggested abolishing businesses taxes and Social Security Taxes — taxes passed on to consumers in the cost of the products they buy — with a revenue neutral VAT tax. The advantage of a VAT is that it is charged on imports and rebated on exports. This tax change would help make US products and US labor more competitive in the world market. I was always told by liberals that the tax is regressive. But I now hear that as a new tax piled on all the old taxes it is “fair.”

A year ago I suggested dropping business and payroll taxes to lower the cost of labor, put money in consumers pockets, and to help business cash flow. That would be a stimulus that would actually stimulate. Then slowly introduce a “revenue neutral” VAT. Of course, the current crop of D.C. thieves cannot be trusted, so I’m not even supportive of the idea (though I think it would likely work).

Posted by hdgreene | Report as abusive

“Ultimately what tax-hike proponents fail to persuasively argue is why they believe that once government had access to greater revenue, especially via a VAT, it wouldn’t just spend the additional dough?”

Maybe because federal spending hasn’t risen for the past 40 or so years as compared to GDP?

http://msnbcmedia4.msn.com/i/msnbc/Compo nents/Art/NEWS/050204/Federal_spending_G DP.gif

The growth of the federal government is a conservative myth. What we’ve had since the time of Reagan is tax cut after tax cut and no decrease in spending. The course is clearly unsustainable. Conservatives live in a fantasy land where they can have their cake and eat it too – when pressed for what government services they want to cut, they always reply with something vague so that they don’t have to explain. When they offer something specific, it’s usually a trivial amount of the budget that won’t even begin to bridge the deficit gap. We need to DEMAND SPECIFICS on WHAT they would cut BEFORE we let them talk about tax cuts.

And shifting from public taxation to private taxation, like you suggested in the Indiana example, is merely an accounting trick and does not actually reduce the burden on the individual taxpayer. In fact, it probably increases over the long run.

Posted by Anthony O'Neal | Report as abusive

[...] second is by James Pethokoukis at Reuters who criticises Leonhardt’s article. The key quote for me is his quoting of [...]

The thing I don’t get is why the richest country in world history needs a much bigger government. Government’s job is to do things that private actors can’t do for themselves. With our wealth, we should be less dependent on others…

“Over-taxation is dangerous, but slashing taxes and then calling for some generic spending cuts (from where and what is of course never mentioned, or really even contemplated – it’s enough to say it’s possible) is equally so.”

It’s true the Reps have an obligation to fix the fiscal mess, but they’re not doing meaningfully worse than Dems at it. Our system is busted…

“Also, I’m more than slighty offended by the idea that the great play to save the day should be accounting gimmickery – changing the terms of Social Security pensions. It’s essentially stealing”

We have changed those terms over and over across the decades. We’re living longer than ever before, and in better health. There’s no reason we need to retire earlier than ever before, unless we can afford it, which we manifestly cannot.

“federal spending hasn’t risen for the past 40 or so years as compared to GDP?”

Yes, but don’t forget that what’s really happened is that we’ve shifted what government buys from the military to entitlements. At this point, if we cut defense to 0, we’d still be in a huge hole.

“What we’ve had since the time of Reagan is tax cut after tax cut and no decrease in spending. The course is clearly unsustainable.”

Actually, we’ve cut and raised and cut and raised and cut again. However, you’re right that our current course is unsustainable. Given that Reps are unwilling to talk about cutting even Medicare at this point suggests that taxes will rise rather than spending fall. It’s also true that taxes as a % of GDP are quite low vs most of the Bush years, mostly because they’re so progressive and investment-oriented that when those 2 buckets ran dry, the jig was up.

“We need to DEMAND SPECIFICS on WHAT they would cut BEFORE we let them talk about tax cuts.”

That’s completely fair, and only a few budget balancers are willing to go there, sadly. But most Dems are equally unwilling to talk about tax increases to pay for their spending. The saddest thing is that we’re getting the government that we’re willing to vote for. We haven’t found anybody on either side with the combination of political skills and courage to put things to rights. Look at Obama’s shifting stances on taxing health insurance, auctioning and rebating carbon permits, etc.

Posted by Larry | Report as abusive

Thank you for providing your perspective.

Here is a recent action alert, from Americans for Tax Reform, regarding this issue:

http://www.atr.org/tell-congress-dont-wa nt-vat-tax-a3991