James Pethokoukis

Politics and policy from inside Washington

VAT Attack! Will business go for it?

Jul 12, 2010 15:22 UTC

This WSJ story implies Big Business would accept a value-added tax for several reasons:

First, the VAT raises a lot of money, and Congress and the White House need a lot to avoid politically difficult spending cuts. According to one recent estimate, a VAT of 5% would raise $161 billion a year in 2012, even assuming that lawmakers build in protections for lower-income people (such as exempting necessities from the tax).

Second, many U.S. multinationals increasingly suspect they might have little choice but to accept a VAT, or some similar tax, if they hope to avoid further increases in U.S. corporate income taxes, or even win cuts in current rates.  … Some companies are hoping a VAT would encourage Congress to streamline and lower the corporate tax, something they regard as critical given international trends.

Third, even a few domestic businesses are beginning to eye the VAT as a possibility, despite the considerable administrative burden it creates. That’s largely because value-added taxes are imposed on imports at the border, and refunded to domestic businesses on their exports, making a VAT an effective subsidy for U.S. producers, according to the advocates. (Some experts disagree.)

Me: Why the rush to raise taxes? Here is the formula: a) cut spending; b) create a more pro-growth tax system; c) see what sort of budgetary gap remains.  As the Japanese election shows, voters are dubious of the need for dramatically higher taxes.

COMMENT

A super-sales tax is the last thing we need for our consumer-demand driven economy.

As for the end of the Bush tax cuts, that’s due to the Republicans trying to use Enron accounting for the budget. They assumed they’d be able to extend them permanently even though that would have been 10 years in the future. Just like Enron saying the receive leg of their swaps would always turn around in enough time to make their earnings goals.

And if we move to a VAT, keep in mind two points. First, Europe uses the VAT to supplement the individual and corporate income taxes. Second, we’d see a wave of VAT tax shelters, just like Europe. There are such things, I’ve seen them pitched by accounting firms.

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Christie’s moment of fiscal opportunity

Jul 12, 2010 15:04 UTC

The end of this NYTimes piece on N.J. Gov. Chris Christie sums up why Uncle Sam should not bail out the states:

It remains to be seen how well Mr. Christie will wear on New Jersey voters. Over the next year, people will begin to see the effects of his policies in their schools and towns, in his cut in funds for family planning or, for government workers, in their paychecks. The need to focus on fiscal issues has obscured some other areas where his positions are less popular, like his opposition to abortion.

It is also unclear how he would govern in boom times, when austerity is a harder sell. The governor said he would have preferred not to make some of his budget cuts, but suggested that in any climate he would have pushed for less government.

Me:  The economic crisis has created a moment of opportunity to make the sorts of budgetary changes need to put states on a sustainable path. This moment is being missed on the federal level. It is also illustrative that CC is focusing on cutting spending rather raising taxes, the exact opposite of the medicine that liberal/centrist DC policy wonks advocate.

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