James Pethokoukis

Politics and policy from inside Washington

Why the GOP shouldn’t embrace calls for a VAT

Oct 7, 2009 18:00 UTC

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.

COMMENT

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

VAT attack! More on Obama, Pelosi and the value-added tax

Oct 7, 2009 11:14 UTC

When you start looking for signs of the VAT virus, you start seeing them everywhere. Here are some excerpts from Howard Gleckman over at TaxVox, the blog of the Tax Policy Center:

I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.. … Urban’s Bob Reischauer and Rudy Penner (both former CBO directors), American Enterprise Institute Congress-watcher Norm Ornstein, TPC co-founder Len Burman, and international economist Mike Mussa agreed that the depths of the medium and long-term problem can’t be overestimated. …

Mussa, who spent a decade at the International Monetary Fund and is currently a senior fellow at the Peterson Institute for International Economics, figures it could be years before overseas investors turn bearish on the U.S. In part, he says, that’s because net foreign lending has actually fallen in the past two years—their huge increases in investments in Treasury paper have been more than offset by shrinking portfolios of private debt.

But that won’t last. Once the economy begins to get back on track, private capital and government will again compete for the same foreign money—bad news for everyone seeking funds.

Is there any way out? Ornstein sees little chance that a hyper-partisan Congress will confront the budget crisis in the absence of a financial market crisis, or even in the face of one. Interestingly, Burman, Mussa, and Penner think that when the fix finally comes, it will include a Value-Added Tax. Penner calls it “almost inevitable.”

Then there is this analysis by Heritage of the costs:

Just a 1 percent VAT on all goods and services in the economy would raise $63 billion for Congress to spend each year. Some suggest the VAT rate should be set as high as 20 percent. At that rate, a VAT that covers all goods and services in the economy – including food, clothing, housing, and health care – would collect an additional $1,260 billion a year and cost every U.S. household $10,680 annually.

Even if Congress passes a VAT that has a rate of just a few percentage points, it would likely lead to higher rates in the future. Evidence from other countries that already have VATs show once it is on the books the rate tends to rise over time.

COMMENT

Question. How does the VAT affect the states Sales Taxes? Is it part of the states sales tax or a different tax all toghether?

Posted by Jamie | Report as abusive

A different kind of “second stimulus”

Oct 6, 2009 21:04 UTC

Larry Kudlow speaks or, rather, writes:

As for the second stimulus package, here’s my plan: Go for growth. Reduce tax rates to provide growth incentives, something Team Obama has avoided like the plague. Cut the top corporate tax rate from 35 to 25 percent, and accompany that with a small-business tax cut from 35 to 25 percent. And leave the Bush tax cuts alone. Don’t let them expire in 2011. That’s cap-gains, dividends, and the top personal rate.

Yes, this is a supply-side solution. Reducing tax rates will spur growth incentives. Forget about Keynesian spending multipliers, which Harvard’s Robert Barrow writes are less than one. Instead, borrow from George W. Bush, Bill Clinton, Ronald Reagan, and John F. Kennedy. (And Calvin Coolidge and Andrew Mellon, too.) Forget about Keynesian spending. Forget about class warfare. Forget about income redistribution. Go for growth.

Me:  Of course, what Team Obama is actually considering is more social spending and then a VAT to close the budget gap. Nor, apparently, does it seem to much care about the dollar, despite the ghostly presence of Paul Volcker. Weak dollar, high taxes, big budget deficits — an interesting mix.

VAT Attack! Greenspan: Raise taxes with a value-added tax

Oct 2, 2009 15:13 UTC

At the Atlantic magazine symposium I am attending, former Federal Reserve chairman again said he thinks taxes are going up and that a value-added tax would be the “least worst” way of doing it.  This dovetails nicely with what I wrote yesterday:

Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. Connect the dots:

1) The joint statement from the just-concluded G20 Summit in Pittsburgh called for balanced global growth — which means Americans must spend less and save more and reduce its budget deficit.

2) That same weekend, John Podesta, co-chairman of Obama’s presidential transition team and an outside White House adviser, tells a Bloomberg reporter that a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A VAT is a kind of consumption tax.

3) Yesterday, the Center for American Progress, the liberal think tank with close White House ties, holds a conference on the rising national debt. While speaker after speaker — Paul Krugman, Roger Altman, CAP President Podesta (again), Laura Tyson — admits entitlement spending must be reduced, they also agree that taxes must be raised. Altman suggests $400 billion in new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it. That’s $400 billion a year, by the way, not over ten years.

4) Also, yesterday was the first meeting of President Obama’s tax reform panel led by former Federal Reserve Chairman Paul Volcker. In a two-part interview with Charlie Rose airing yesterday and today, Volcker says that if Washington can’t get spending under control, either a VAT or a carbon tax would be effective revenue raisers. “Those are two big ones,” he says.

5) As they used to say in the Soviet Union, “It’s no coincidence.” This is also the conclusion of one Washington insider with ties to the White House economic team: “Does this all add up to a trial balloon? Of course, it’s a trial balloon. And I expect the administration will propose major tax reform, including a VAT.”

Stop using tax cuts as industrial policy

Oct 1, 2009 12:57 UTC

Larry Kudlow is dead solid perfect here:

But here’s what I don’t like about this story: Big, central-planning, government-directed tax preferences for housing, like the $8,000 dollar tax credit for new buyers. Or even the popular mortgage interest deduction. And let’s not forget perhaps the biggest one of all: Home sales are basically capital-gains-tax free. That passed back in 1997. Many people (including myself) believe it helped create the bubble.

Why not eliminate the capital-gains tax for everyone and all sectors, including investors and stocks and bonds? Why direct it only to housing? Let’s abolish the capital-gains tax altogether. Let’s quit double-taxing investment, which is what capital gains does. But let’s do it for everyone and everything — not just housing. While we’re giving all these preferences to housing, what about manufacturing? What about transportation? Or health care? Or any other sector in the economy for that matter?

We also could be cutting business tax rates across-the-board for companies big and small.

Me: The story of the Great Recession is the error of government policy — the Fed, housing policy, Fannie and Freddie, ratings agency favoritism. Kudlow’s idea would be a big step in the right direction.

COMMENT

Why should capital gains tax on stock investments be eliminated? Buying on the secondary stock market is actually quite meaningless, as far as increasing productivity or any kind of activity that should be thought of as an investment. When I think investment, I think ‘direct money at a company so it can expand or improve itself, and in turn make more money’; buying stocks on the secondary market does not accomplish this in any way. Sure, if you want to eliminate tax on IPO purchase gains, that’s probably reasonable.

I agree inasmuch that tax breaks shouldn’t be directed at owning a home, but I think these kinds of measures were enacted with a figurative gun pointed at the government’s head. Lobby politics need to stop in Washington so appropriate responses to problems can be formed.

Posted by the Shah | Report as abusive

The untried economic solution: tax cuts

Oct 1, 2009 12:24 UTC

If Germany can do it, why not America? More evidence of the wonder-working power of tax cuts, this time from Robert Barro and Charles Redlick:

The effects of tax rates on GDP growth can be analyzed from a time series we’ve constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.

For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

Me: Along the work of Christina Romer, now head of the CEA, powerful evidence that tax rates matter — a lot.

Obama’s not-so-secret plan to raise taxes

Oct 1, 2009 03:18 UTC

Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. Connect the dots:

1) The joint statement from the just-concluded G20 Summit in Pittsburgh called for balanced global growth — which means Americans must spend less and save more and reduce its budget deficit.

2) That same weekend, John Podesta, co-chairman of Obama’s presidential transition team and an outside White House adviser, tells a Bloomberg reporter that a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A VAT is a kind of consumption tax.

3) Yesterday, the Center for American Progress, the liberal think tank with close White House ties, holds a conference on the rising national debt. While speaker after speaker — Paul Krugman, Roger Altman, CAP President Podesta (again), Laura Tyson — admits entitlement spending must be reduced, they also agree that taxes must be raised. Altman suggests $400 billion in new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it. That’s $400 billion a year, by the way, not over ten years.

4) Also, yesterday was the first meeting of President Obama’s tax reform panel led by former Federal Reserve Chairman Paul Volcker. In a two-part interview with Charlie Rose airing yesterday and today, Volcker says that if Washington can’t get spending under control, either a VAT or a carbon tax would be effective revenue raisers. “Those are two big ones,” he says.

5) As they used to say in the Soviet Union, “It’s no coincidence.” This is also the conclusion of one Washington insider with ties to the White House economic team: “Does this all add up to a trial balloon? Of course, it’s a trial balloon. And I expect the administration will propose major tax reform, including a VAT.”

Obama’s campaign promise to not raise taxes on households making less than $250,000 a year was always considered a joke here inside the Beltway. It’s the economic “consensus” — and this was true even before the financial meltdown and recession — that rising entitlement costs would eventually mean a higher tax burden for the American people.

Maybe it was a joke inside the campaign, too. Since being elected, Obama has raised cigarette taxes and has advocated raising healthcare taxes, energy and small business taxes, in addition to corporate taxes. What’s more, economic advisers like Larry Summers seem eager to get rid of all the Bush tax cuts, not just those on so-called wealthy Americans.

And it’s also no secret that economists love the idea of a VAT. It promotes savings over consumption, and its hidden nature may mean it has less behavioral impact on taxpayers. Conservative economist Bruce Bartlet puts it this way, “As a broad-based tax on consumption, it creates less economic distortion per dollar of revenue than any other tax–certainly much less than the income tax.” Indeed, a VAT is part of cash-strapped California’s newly proposed tax reform.

Liberals love the idea of a VAT because it’s, well, so European — also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.

See, even after the recession, there might be a 6 percentage point difference between what Uncle Sam spends as a percentage of GDP and what it takes in. Liberals like Krugman have no problem with making up that difference purely through higher taxes, even though that translates into raising the national tax burden by at least a third. And that, even though such a massive hike might well have a crushing effect on growth.

Obama wants a VAT? First, it should be part of broader tax reform, including getting rid of capital gains and corporate taxes. Second, it should accompany an Economic Bill of Rights much like Ronald Reagan used to suggest. Its elements: a) a balanced budget amendment, b) a line-item veto, c) a spending limit such as inflation plus population growth, d) and a two-thirds vote in the House and Senate for any tax increases. (Reagan also wanted a prohibition on wage and price controls. That would likely kill ObamaCare.)

And come to think of it, let’s cut spending and streamline government before cash-strapped, wealth-reduced taxpayers are forced to pony up a penny more, OK?

COMMENT

THAT’S WHY OBAMA KEEPS ON SPENDING. HE WANTS TO CREATE A FISCAL CRISIS TO SAY A VAT TAX IS IMPERATIVE TO SAVE OUR ECONOMY… THIS PRESIDENT IS NOT WHAT WE VOTED FOR!!

Posted by Ron | Report as abusive

Will financial markets force a $400 billion tax hike or a VAT?

Sep 30, 2009 16:51 UTC

So I am at this CAP thing on the deficit where talk of higher taxes was hot and heavy. Both Robert Rubin and Roger Altman both seemed to imply that the financial markets will force action sooner rather than later on the deficit — and that means higher taxes.

Outside WH adviser and CAP president John Podesta was talking up the VAT over the weekend, and Altman said today that the WH will have to start doing $500 billion to $700 billion a year in annual deficit reduction during this term. Maybe $400 billion of that should come through higher taxes such as a national VAT.

Definitely the Wall Street guys seemed more worried than the academics like Alan Blinder or Laura Tyson about the near-term importance of deficit reduction. Blinder, also former Vice Chair of the Fed, says he could envision the dollar crashing because of American fiscal problems. And Tyson though the balance-sheet recession and expiration of the Bush tax cuts would mean slow growth ahead for the US economy.

COMMENT

It could have aided dilute not just racism as is taking place now but also homophobia. The guy has a lot more talent than any other idol I’ve observed. He places inside a 100% effort into all his performances unlike Kris.

Is Obama planning a VAT surprise for America?

Sep 28, 2009 13:34 UTC

So John Podesta, co-chairman of Obama’s presidential transition team, says a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A few thoughts:

1) Podesta is also president of the George Soros-funded Center for American Progress, a liberal think tank closely allied with the White House.

2)  It’s consensus among centrist economists, like those in the White House, that America will need to raise taxes to cover budget shortfalls and a VAT is the most efficient way of doing this.

3) At the G20, Obama promised more coordinated economic policies, including having the US lower its borrowing and consume less. This could be done via a VAT, which would also let the US have more tax synchronization with other OECD countries.

4) It seems like the WH is staring to redefine its pledge not to raise taxes on those making less than 250k as applying only to income taxes.

Bottom line: These Podesta remarks sure sound like a trial balloon by the White House.

COMMENT

Kelsey,

I would be such an American, that is in favor of a VAT tax. The economy of the United States is hemmorraging money and will continue to do so, as baby boomers increase SS, Medicare, etc. obligations. Throw in additional spending measures, and revenues are greatly needed.

I am aware of many other individuals that are in support of a VAT. Perhaps out of necessity, rather than affection, but support nonetheless.

Posted by sddan | Report as abusive

How to kill a democracy

Sep 25, 2009 17:27 UTC

The Tax Foundation does the math:

New reports from the Tax Foundation show that President Obama’s policy proposals will increase the financial dependence of middle-income Americans on the federal government.

“Attempts to put ‘price tags’ on health care and cap-and-trade proposals vary among government agencies and think tanks,” said Tax Foundation President Scott Hodge, “but one vital question has been left unanswered: Counting all federal taxes and spending, how would these policies affect American families’ financial ties to the government? The foundation’s new ‘fiscal incidence model’ answers that question.”

“Currently the bottom 60 percent of the income spectrum receives more in federal spending than they pay in federal taxes,” said Hodge. “By 2012, if President Obama’s proposals on taxes, health care and climate change become law, the bottom 70 percent of American families will, as a group, be receiving more in federal spending than they pay in federal tax.”

Even if none of Obama’s policies becomes law, the extent of current income redistribution is remarkable: The top-earning 40 percent of families will transfer $826 billion to the bottom 60 percent in 2012. If Obama’s policies become law, the federal government will redistribute nearly $1 trillion from the top-earning 30 percent of families to the bottom 70 percent (those earning up to $109,000).

Me: I don’t think this is either a) sustainable, b) good for future economic policy or c) good for American democracy

COMMENT

probably because it
a)will eventually eat up the 61st %’s wealth so they rely on the government, then the 62nd, then the 63rd…
b)removes incentive to be in the top 40%, and encourages people to stay poor
c)people who need the government to survive would have a hard time voting against the dominant party for fear of losing their entitlements

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