James Pethokoukis

Politics and policy from inside Washington

How a VAT would affect growth

Oct 14, 2010 19:00 UTC

Just how would tacking a 10 percent value-added tax onto the current tax system affect the economy? Well, an Ernst & Young study commissioned by the National Retail Federation came up with this result:

1. An add-on VAT would reduce retail spending by $2.5 trillion over the next decade. Retail spending would decline by almost $260 billion or 5.0 percent in the first year after enactment of the VAT.

2. An add-on VAT would cause GDP to fall for several years. The economy would lose 850,000 jobs in the first year, and there would be 700,000 fewer jobs ten years later. By comparison, a comparable reduction in the deficit through reduced government spending would have less adverse effects on the economy, and could have positive effects for economic growth.

3. Although lower deficits and debt would have positive long-run effects for the economy, most Americans over 21 years of age when the VAT is enacted would be worse off due to enactment of an add-on VAT. A VAT would have significant redistributional effects across generations, reducing real incomes and employment for current workers.

Me: Even though this is sponsored by a retailing trade group, the results are hardly shocking since an add-on VAT is a massive tax increase.  Replacing the current tax system with a consumption tax is one thing, but this would  take the US tax burden to record levels. And those levels would likely rise with time given the international experience with the VAT:

vat

COMMENT

I don’t think the combined HST rates in Canada run as high as 20%, even in the “hold-out” provinces, there is no provincial retail sales tax rates higher than 10.5%. The highest combined rate is actually in two harmonized provinces of Nova Scotia + P.E.I where the rate is 15 + 15.5% respectively. Compared to other GST / VAT countries this seems on the low side (NZ – 15%, Ireland 21(+1+1), UK 20…And don’t forget Canada will soon have a corporate tax rate of 15%, one of the lowest in the OECD.

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The Obama recovery vs. the Reagan recovery

Oct 13, 2010 19:52 UTC

Expect to see this chart from the Heritage Foundation all around the blogosphere. I don’ t think it is completely fair given the different flavors of the two recessions. But I certainly don’t think the current recovery is a robust as could possibly be expected. I think even the POTUS would concede that.

recovery

COMMENT

I agree with James Pethokoukis and CND I guess it’s too naive to judge two completely different recessions with a simple graph line without undertanding the context.

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9.6 reasons why the jobs report is bad for Democrats

Oct 8, 2010 17:55 UTC

How bad was the September jobs report? Even the White House had trouble spinning it. As economic adviser Austan Goolsbee wrote on his WH blog: “Given the volatility in the monthly employment and unemployment data, it is important not to read too much into any one monthly report.” But this chart sort of says it all:

goolschart

Can Obama be deprogrammed?

Sep 27, 2010 14:29 UTC

Some interesting stuff in this piece by Michael Lind:

Instead of the updated Rooseveltonomics that America needs, Obama’s team offers warmed-over Rubinomics from the 1990s. Consider the priorities of the Obama administration: the environment, healthcare and education. Why these priorities, as opposed to others, like employment, high wages and manufacturing? The answer is that these three goals co-opt the activist left while fitting neatly into a neoliberal narrative that could as easily have been told in 1999 as in 2009. The story is this: New Dealers and Keynesians are wrong to think that industrial capitalism is permanently and inherently prone to self-destruction, if left to itself. Except in hundred-year disasters, the market economy is basically sound and self-correcting. Government can, however, help the market indirectly, by providing these three public goods, which, thanks to “market failures,” the private sector will not provide.

Me: To me the biggest issue that Obama needs to change his mind on is that economic inequality/redistribution is America’s biggest problem rather than slow growth.(It is certainly not working politically.) Of course, it may be that Obama is such a New Normal believer that he thinks slow growth is a given.

COMMENT

I don’t know what world you live in, but the capitalism I see is becoming less stable and more destructive. With each passing recession, the results get worse and the time interval gets less and less. Looks like a complex system de-constructing

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What’s wrong with the U.S. economy in one chart

Sep 27, 2010 14:14 UTC

Tax rates matter. You tend to get the stuff you tax lightly and don’t get what you tax heavily. Wonder why America had a housing boom and why we are wallowing in debt? Here is why:

taxchart

Obama vs. the hedgie

Sep 21, 2010 16:53 UTC

Here is a bit-o-goodness from my Reuters Breakingviews column on the Obama-CNBC town hall yesterday .

The Sept. 20 exchange between President Barack Obama and Anthony Scaramucci of SkyBridge Capital illustrates the severity of the rupture between the president and the financial community. … Scaramucci is a guy who was in on the ground floor of Hope and Change, Inc. He’s a former Harvard law school classmate of Obama’s who contributed early and often to Obama’s presidential campaign. …  But Scaramucci also gave the impression of a hedgie scorned, even though it’s debatable to what extent new financial regulations have “whacked” hedge funds. More funds must register with the Securities and Exchange Commission, they’re subject to greater state supervision and they may have to give more info to the SEC. Then again, limits on bank trading desks should allow hedge funds to compete more effectively.

What may really be bugging Scaramucci and his colleagues is that when Obama speaks about the Wall Street “fat cats” who almost toppled the economy, the condemnation is sweeping. Hedge funds didn’t need a bailout like the big banks, used far less leverage and are almost always small enough to fail. … Wall Street is never going to get Main Street’s sympathy. Better to talk softly and carry a big wallet. And that seems to be just what Scaramucci is doing. Filings show he’s only contributed to Republicans so far this year, including $5,000 to Free and Strong America. That’s the political action committee of potential 2012 Republican presidential candidate — and potential Obama challenger — Mitt Romney.

The midterms and the markets, take two

Sep 21, 2010 16:31 UTC

A bit more from Ed Yardeni on one of my favorite topics:

Yesterday, I reviewed the outstanding performance of the market three months after midterm elections. I also noted that the third years of the presidential cycle tend to be very bullish. The fourth year of presidential terms, along with first and second years, tend to be much less consistently bullish than third years.

Yesterday, I asked Joe, “How well does the S&P 500 perform from the midterm elections to the end of the third year of the President’s term?” The results are spectacular. Since 1962, there have been 12 such 14-month periods, and their average increase was 20.9%! Not one of them was down. Indeed, there are only two gains that are not in the double digits: 0.4% during 1986-1987 and 6.2% during 2006-2007. …  I suppose it could be different this time. Gridlock might block appropriate policy responses to revive economic growth, if necessary. Gridlock might mean that the Bush tax cuts won’t be extended for another year to avoid depressing a depressing recovery. Gridlock could stymie any agreement on measures necessary to narrow the federal deficit. Then again, a sweeping ouster of incumbents on November 2 might be a good start toward bringing back some fiscal discipline in Washington by newly elected legislators, who really want to do what’s good for the country rather than for themselves.

Me:  Gridlock is better than another wave of tax hikes and regulation — but not as good as spending cuts and pro-growth policies like cutting taxes on companies and capital.

The oh-so-slow recovery

Sep 21, 2010 16:25 UTC

A great chart from David Rosenberg of Gluskin Sheff showing just weak this recovery has been:

chart3

Obama on CNBC

Sep 20, 2010 19:26 UTC

The president participated in a town hall meeting earlier today on CNBC. A few thoughts on the event:

1. He noticeably dodged a question about whether, in the name of fiscal prudence, all the Bush tax cuts should eventually be left to expire. That is the position of his former budget chief, Peter Orszag, as well as that of many deficit hawks. It does seem strange for him to say America cannot afford the upper-income tax cuts, but also support the lower-income tax cuts which cost far more, according to the Congressional Budget Office.

2. He seems to think the Tea Party crowd is a “Party of No” manifestation with no real agenda other than to complain about his policies. But that is not how I read them at all. For instance, many activists are big fans of the Fair Tax and  Paul Ryan’s budget-cutting Roadmap for America’s Future.

3. The POTUS said tax rates were as low as they were under Ronald Reagan. When Reagan left office, the top marginal rate on ordinary income was 28 percent. Today it is 35 percent, and Obama wants it to go to 40 percent. More evidence the White House thinks America undertaxed.

4. More evidence the economic New Normal may create a political New Normal. The first question was telling. It was from an Obama supporter who was very frustrated by the pace of the recovery:

I’m one of your middle class Americans. And quite frankly I’m exhausted. I’m exhausted of defending you, defending your administration, defending the mantle of change I voted for, and deeply disappointed with where we are right now.

Obama stuck to his guns, arguing the measures he had undertaken since taking office in January 2009 were slowly pulling the country back to health:

My goal here is not to try to convince you that everything’s where it needs to be — it’s not. That’s why I ran for president. But what I am saying is … that we’re moving in the right direction.

5. Overall, the crowd seemed anti-bank, anti-China, pro-Obama.

6. Certainly the big quote of the day was when he said his economic team had done an “outstanding job.”

COMMENT

James, I enjoy your commentary on CNBC. That “Town Hall Meeting” was a sham. 1) The audience was packed with progressive democrats as evidence by the overwhelming applause after the President’s comment about how”assuming Sen. Boehner would be Speaker of the house was premature”. 2) Scaramucci obviously made some deal with the administration to be publically but gently chided by the POTUS in return for a shameless, “rubbing me on the back with a soul brother handshake photo-op” after the meeting. Can you say Shiela Jackson Scarramucci? I mean, seriously. And 3) why can’t the administration start these things on time? I mean, really….how far ahead was this scheduled? If it is supposed to start at 12:00, why make the American people wait. Obama has had….oh I quit counting….up-teen press conferences and I don’t believe even one has started on time.

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