VAT Attack! The value-added tax, Bruce Bartlett, the GOP and deficits

October 8, 2009

I have been exchanging emails with economic analyst Bruce Bartlett, a supply-side economist who has come out for higher taxes.  (See the NYTimes article on him earlier this week.) Bartlett (who blogs at the wonderful Capital Gains and Games) thinks Uncle Sam will never cut spending, thus taxes must go up, preferably in the form of a VAT.  He also has book coming out next week, The New American Economy: The Failure of Reaganomics and a New Way Forward.

Here a bit of what he has been telling me:

Bartlett on how much revenue a VAT would raise:

If we only need to raise taxes by a percentage point or two, to say 20% of GDP, then we don’t need a VAT unless we want to use it as a pure tax reform. We could use the revenue to abolish the AMT, abolish the estate tax, maybe abolish the corporate tax, whatever. That would be fine with me because we don’t need the revenue today. But I think we will need it in the future because I don’t see any natural limit to spending or any appetite in either party for significant spending cuts. Therefore, unless we want deficits of 10% of GDP forever we have to raise revenue. When the day comes that the political class finally agrees to raise net new revenue it will be better to raise it through a VAT a percent or even fraction of a percent at a time. If the VAT is already in place that will be easy—too easy, you probably think. But the only other alternative is to raise tax rates, which is worse.

Bartlett on a tax system he likes better than the VAT:

My ideal tax system is a Hall-Rabushka flat tax, always has been. One reason I like it is because it is essentially a subtraction-method VAT. But I think the time for it has passed. At this point I think it is inevitable that if we adopt a VAT it will basically be as an add-on to all the other taxes—that’s the way it is in every other country. If we can get rid of some worse taxes as part of the deal, that’s great. But to make that deal, conservatives have to play the game. If Democrats have to raise taxes on their own, they will do it in the worst possible way, economically. But if the Republican alternative is to do nothing, then Democrats will do what they have to do as they did in 1993. If they decide to do a VAT they would undoubtedly be very amenable to using some of the revenue for tax cuts that would enhance growth. But, again, if Republicans refuse to play the game and won’t commit themselves to support the final package, then Democrats will do it on their own and we will end up with something worse—multiple rates, exemptions that create inefficiency, and higher income tax rates to boot.

Bartlett on Republicans and budget deficits:

At some point, conservatives have to realize that they have to make a choice. Refusing to make one by living in a dream world where truly massive spending cuts are enacted to keep spending and taxes as a share of GDP in their historical range is not an option, in my opinion. If conservatives think I am wrong about the need for significantly higher taxes, then I think they have a responsibility to put plans on the table to seriously cut Social Security, Medicare and Medicaid and put real effort into getting them enacted.  But I don’t see it.  All I see are pie-in-the-sky plans to privatize these programs and somehow magically cut spending without reducing anyone’s benefits. Those aren’t going to happen, ever. So if we are going to live in the real world, how will spending be cut enough to prevent the need for higher taxes. If you find out, let me know.

Me: I would rather push hard for Hall-Rabushka, a flat consumption tax, and massive entitlement reform which would eliminate the need for taxes to rise as a percentage of GDP. But Bruce thinks both are politically impossible, and thus the GOP needs to push for a VAT while also dropping marginal rates.

2 comments

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“…we don’t need the revenue today. But I think we will need it in the future because I don’t see any natural limit to spending or any appetite in either party for significant spending cuts.”

Of course there isn’t, as long as neither party need incur the pain of raising taxes. They both are enjoying a free lunch.

But when that need arises, *then* you see spending cuts enter as part of the deal. Example: The 1983 bailout of Social Security. It was brinksmanship until the very last moment — then a 50% spending cut, 50% tax increase solution.

“If Democrats have to raise taxes on their own, they will do it in the worst possible way…”

No doubt!

“… Democrats will do what they have to do as they did in 1993.”

As if raising taxes is *easy* for Democrats? That 1993 increase was 0.83% of GDP, less than 1/7th of the tax increase needed by 2030 to stay even with entitlements — with taxes increasing ever more after that, forever.

That 1/7th-as-large increase passed by just one vote in the Democratic controlled House, only on Al Gore’s tiebreaker in the Democratic Senate — and the Democrats got wiped out in the next year’s election.

If Mr. Bartlett thinks the Democrats are just going to happily by themselves pass a tax increase 7 times as large for starters, then keeping increasing taxes ever more forever … that’s just not politically plausible.

The Democrats are renewing the bulk of the Bush tax cuts and hiding in every way from raising taxes even *today.*

Exactly as per the 1983 Social Security reform model, when the need for big tax increases actually arrives, *that’s* when spending cuts get bargaining power behind them. But that inevitable future situation must be prepared for today, by those who want to restrain the amount of future government growth.

What happens if we raise taxes before then? There is zero pressure for spending cuts or to cut the budget deficit, so the Democrats will just spend the money. We’ll stay in the same debt hole as before, and the long term debt situation will be *worse* because the “easy” tax increases will already be spent.

Look at what happened to the Social Security surplus. “Each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.” Smetters, 2003

Look at what the Democrats are doing right now:

(1) Potential deficit reducing revenue of near $100 billion a year from cap-and-trade permits given away free to big businesses, in what Orszag said beforehand would be “the biggest act of corporate welfare in history”.

(2) All those savings they claim they’ll get from Medicare later aren’t going to be used to close deficits, but to increase spending now (whether or not they get it later.)

What are they doing with the revenue they are scratching together to close deficits? Nothing.

Hey, if you were a Democratic politician and got new revenue today, why *wouldn’t* you spend it? On bigger health benefits for starters — they’d buy votes for sure!

Is it good fiscal management to do nothing until the fiscal crisis is at the door, then engage in spending cuts for tax increases brinksmanship?

Of course not, it is horrible. But given the incentives driving all the players, it is inevitable, there is no way around it — just as there wasn’t for Social Security in 1983.

It’s another example of Churchill’s: “Democracy is the worst form of government, except for the alternatives.” But we have to face up to it and prepare accordingly. Or it will happen anyhow with us being unprepared.

Giving the politicians an unlimited amount of cash is insane!

No VAT tax forever!

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