Politics and policy from inside Washington
Over at NRO, Duncan Currie gives it his best shot:
Despite being more efficient than an ordinary sales tax, a VAT carries significant administrative costs, and piling it on top of the present U.S. tax structure would be a mistake. But using the VAT to eliminate a sizable amount of distortionary U.S. income taxes would yield a far more growth-friendly system than the one we have today. Over the long run, America must reorient its economy away from consumption and toward investment while boosting its dangerously low savings rate. A VAT is certainly not the only way to promote those objectives, but it should at least be part of the conversation.
In the piece, Currie more or less outlines a proposal similar to what Gov. Mitch Daniels suggest a month or so ago: Lower existing taxes rates and add a VAT. I don’t believe he means for this to be a tax increase. Higher government revenue would come from higher economic growth. Of course, many liberals see a VAT as an efficient way to dramatically raise taxes. Roger Altman, perhaps the replacement for Larry Summers in the White House, has recommended a $500 billion VAT.
In theory, I don’t have a problem with the Currie-Daniels approach, though I would prefer to have the income tax repealed. I also don’t think it would automatically lead to higher and VAT taxes and higher and higher spending — especially not after reading this piece. As Currie notes:
Moreover, while the VAT can lead to higher spending, it does not inevitably have that effect. Consider what happened in Canada, where the Progressive Conservative government of Brian Mulroney implemented a federal VAT in 1991. Since then, as economists William Gale and Benjamin Harris of the Urban-Brookings Tax Policy Center point out, “the size of the Canadian federal government has shrunk significantly.” The VAT rate started at 7 percent, but it has fallen to 5 percent under the Conservative government of Prime Minister Stephen Harper, which has also slashed corporate taxes.
In New Zealand, it was a neoliberal Labour government that embraced the controversial consumption tax. During the mid-1980s, Prime Minister David Lange and his finance chief, Roger Douglas, spearheaded a radical program of fiscal consolidation that included massive income-tax reductions, deep spending cuts, ambitious deregulation, and a 10 percent VAT.
This is the kind of thing that really burns me. Here is Simon Johnson, former chief economist at the IMF, over the at the NYTimes econ blog:
The weakness in the Palin-Gingrich position is that while they want to balance the budget, they want to do so primarily by cutting spending. This is very difficult to do, as most of the spending issues over the next 30 years are about Social Security (a little) and Medicare (a lot). …
Cutting or limiting nonmilitary discretionary spending may play well with voters, but it is simply not big enough to make much difference. If Ms. Palin and Mr. Gingrich are willing to put military spending on the table, that would help, but this is fast becoming a taboo subject for all Republicans.
Of course, Johnson is being absolutely ridiculous here. Palin has flat out endorsed Paul Ryan’s fiscal Roadmap for America, a blueprint for radically restructuring entitlements. He is also wrong that cutting defense spending is taboo among Republicans. Plenty of conservatives, at least, think there are lots of smart cuts that could be made. But Washington insiders like Johnson — and most of the people I hear give presentations at symposiums around town — think just like he does. They assume spending can’t be cut, thus taxes must be raised dramatically. So when Palin and Ryan and other true budget hawks actually say “Yes, lets revamp entitlements,” it just doesn’t penetrate their noggins. They can’t take “yes’ for an answer.
Then there’s this: Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures as spending cuts and higher taxes. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain. … [Faster growth] is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt. And that means keeping taxes low.