James Pethokoukis

Politics and policy from inside Washington

Team Obama already running the numbers on a VAT

Apr 19, 2010 12:55 UTC

Talk about burying the lede. This from the NYTimes and my pal John Harwood:

One way to reach that 3 percent [deficit-to-GDP] goal, by the calculations of Mr. Obama’s economic team: a 5 percent value-added tax, which would generate enough revenue to simultaneously permit the reduction in corporate tax rates Republicans favor.

Me. Not only does it look like they are considering a VAT, the only offset would be lower corporate taxes. The whole thing would be a net tax increase, obviously. I mean, that is the whole point, despite all the talk about its efficient, pro-growth effects. A VAT of that size would raise $250-$300 billion a year in new tax revenue.

COMMENT

Not sure why Obama should give a hoot what Republicans want, since the people don’t either. And I don’t like VAT on principle. Still…

Given a choice between that, cutting Defense Pork or asset-stripping Goldman Sachs to achieve realistic budget aims, some fool somewhere’s always gonna be crazy enough to pick VAT.

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CBO’s Elmendorf on the VAT

Apr 8, 2010 16:41 UTC

The Weekly Standard reports some interesting bits from a breakfast chat by Congressional Budget Office Director Doug Elmendorf. The charming Mary Katharine Ham has some quotes:

1) “Many people in Congress are interested in it,” he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it’s been implemented. “We’ve had conversations with a number of members and their staffs.”

2) Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 budget deficit, which the CBO predicted will be 90 percent of GDP: ”That would put us in a very select group of developed countries,” he said. “There are relatively few developed countries that have debt-to-GDP ratios that high.

3) “Economists think about people deciding how hard to work or how many hours to work,” he said, explaining that the decision to take a higher paying job or work more hours is partly based on being able to buy more stuff with one’s money. “Any wedge between value you’re producing for your employer and what you can buy is a wedge that can distort. It is still a tax.”

4) “If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to,” he said. “The VAT tax itself could become very complicated.”

5) “It’s not impossible that the [deficit]problem could go away,” he said. “It’s also no less possible that it could get a lot worse.” The CBO’s 90-percent figure was intended to fall somewhere in the middle of all possible outcomes.

Verily, Volcker avers VAT is in the vicinity

Apr 7, 2010 14:57 UTC

Reuters has the scoop:

The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

Me:  It would be tough to find a think-tank economist or policymaker who doesn’t believe a VAT is on its way as part of a strategy to raise taxes.  (As I wrote earlier this week.) And not just on the rich. On the broad middle class.  But it is no magic bullet.  A VAT can be tricky to implement and could merely fuel more government spending. This will be a major political battle. I don’t see how it happens without a financial crisis as a spur. At the very least, a VAT would have to replace much of the current tax system and accompany major entitlement reform. Where to begin!?

COMMENT

This will make the nuclear wars look like middle class kindergarten.

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How America might get a VAT of its own

Apr 6, 2010 00:14 UTC

When will the other chaussure drop? Now that America has gone French (and German and British) with universal healthcare, expect Washington to eventually propose a European-style, value-added consumption tax to pay for it — as well as the rest of the historic rise in federal spending. But U.S. voters are in a severe anti-tax mood. It might take another financial crisis to give politicians the will and hubris to ignore them.

Here’s how it might all play out:

1) For Washington insiders, it’s a matter of “when” not “if.” Politicians and economists I chat with from the White House to Capitol Hill to the Federal Reserve think a VAT inevitable. Healthcare reform has only hardened that consensus. Spending cuts to pay for expanded coverage may not happen. Either way, the budget numbers scream for action. Annual federal spending as a share of GDP will likely outpace revenue by at least six percentage points for years to come. Trillion-dollar deficits the norm.

2) Just slashing spending is one option. But that would require a radical reshaping of social-insurance schemes as outlined by Rep. Paul Ryan in his recent white paper, “A Roadmap for America’s Future.” The war over healthcare would seem a minor skirmish by comparison.  A battle worth fighting, but a coalition of the willing might be small.

3) Maybe a broad income tax increase? So far Washington has shown an appetite for nicking only the rich. And one study suggests the tax burden on wealthy households is approaching — or has perhaps even exceeded — the revenue-maximizing level. That’s right, America is on the wrong side of the Laffer Curve again. Even assuming the rich wouldn’t flee to tax shelters, top income tax rates would need rise to economy-crushing levels to balance the budget.

4) Anyway, it’s smarter to tax consumption broadly rather than work and investment narrowly. Especially in an economy that needs less of the former and more of the latter. And that is what a VAT does. Few doubt its ability to raise massive amount of revenue with fewer disincentives than the current system. But if the economics are clear, the politics are a puzzle in Tea Party America. VAT proponents assume political intransigence without a financial crisis to spur action, just as market chaos helped get the $700 billion bank rescue passed in 2008.

5) Yet there is a reasonable scenario where America would accept a VAT. In fact, it is the only scenario under which we should accept a VAT.

First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)

Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can’t be an add on.

Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.

Fourth, the intended tax burden should be kept level at first. A pro-growth VAT — one that does away with corporate and investment taxes — might produce more revenue merely by expanding the economic pie.

Still a tough sell. Better skip the part about the French.

COMMENT

Democrats: taxing and spending us into bankruptcy.

$14 trillion debt. $2 trillion deficits. High unemployment. A president living like Louis XVI.

Of course, it’s all George Bush’s fault!

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The other government mandate

Apr 1, 2010 17:49 UTC

Forget about being forced to buy health insurance. Aren’ t Americans pretty much forced  by our complex tax code to buy tax prep software or see an accountant? That is a mandate, too, notes Howard Gleckman of TaxVox:

The government does not specifically require us to hire paid tax preparers or buy commercial software, of course. But it has, in effect, left millions of taxpayers with no real choice. Congress has created a tax code that makes it nearly impossible for many Americans to file returns without paid help. And even those who could … are so intimidated by the whole process that they pay people to help them anyway.

Thus, in 2005, 89 percent of individual taxpayers either used commercial software or hired paid preparers to help them do their civic duty. Just 11 percent, according to my colleague Eric Toder, filed returns on their own.

Yet, we just shrug and pay our $59 for commercial software or pony up between a few hundred and a few thousand dollars to paid preparers. No constitutional challenges. No state attorneys general at the barricades. Many of us, in fact, are likely to spend more money hiring a human being to do our taxes than we’ll pay in penalties for refusing to buy insurance ($95 in 2014 increasing to $695 by 2016). Indeed, I’m willing to bet that more of us will pay somebody to prepare a tax return than will purchase medical coverage, despite the insurance mandate.

COMMENT

People pay $95+ for tax software? The program I use is $30, and I only use it because my dad buys it.

Unless you’re itemizing, the form isn’t that difficult. The biggest operation it asks is addition and subtraction.

7 reasons a VAT is a dicey proposition

Mar 29, 2010 15:38 UTC

My guy Pete Davis over at Capital Gains and Games unsheathes the katana and slices up the VAT. Not so easy to implement he says. A brief summary of his reasons (though read the whole thing, of course):

1. Like the U.K. when it adopted its VAT in 1973, the U.S. will struggle for at least two years and probably longer to implement a VAT.

2. Compared to our income tax, the VAT is regressive.

3. Tax reformers lambast the complexity of our income tax with good reason, but somehow assume that the same people who legislated that complexity will legislate a clean VAT.

4. I can’t think of a faster way to kill Rust Belt jobs than to impose a VAT.

5. Housing would be hurt by a VAT even if it is zero rated.

6. Exporters would benefit from a VAT, but that benefit would be partially offset to the extent that the dollar appreciated against the currencies of our trading partners.

7. State government sales tax revenues would be directly impacted by a federal VAT.

VAT Attack! Obama and middle-class tax hikes

Feb 11, 2010 18:12 UTC

As long-time readers know, I am convinced that the Obama administration is itching to slap the US economy with a value-added tax. Team Obama just needs to figure out how to do it politically. Listen to the POTUS in this BBW interview:

The whole point of it is to make sure that all ideas are on the table. So what I want to do is to be completely agnostic, in terms of solutions. What I can’t do is to set the thing up where a whole bunch of things are off the table. Some would say we can’t look at entitlements. There are going to be some that say we can’t look at taxes, and pretty soon, you just can’t solve the problem.

In short, how I read this is that Obama is willing to consider a broad-based tax hike on the middle class. Smells like a VAT. But I don’t see how the WH gets there absent a financial crisis that puts Washington into a panic, just as happened with TARP. Maybe if Congress rejects the proposals of the new deficit commission, a bad market reaction would be a catalyst to action.

Of course, Obama could suggest the Hall-Rabushka flat consumption tax, a favorite with conservatives. It is like a VAT with part of the tax paid directly by individuals. This makes the tax more transparent, which politicians don’t like. To them, transparency is a bug not a feature. But the concern on the right is that an invisible VAT would make it too easy to raise taxes and finance a vast expansion of government. But even with an H-B tax, conservatives have no interest in a tax that would raise the tax burden as a way of increasing revenue as a portion of GDP from around 18 percent.

COMMENT

VAT is the worst idea that has come out of the conservative think tanks like Cato Inst. and others. It is regressive, will impoverish the middle class of America even more and will be a nightmare to administer.

However, the US must increase its tax revenues. How? Pass an intangibles tax (tax on net worth) on all individuals, corporations, trusts, PICs, etc. with a net worth over $10 million. Just 1% intangibles tax on the super wealthy would more than balance the budget and not disturb one bit the life styles of over 99% of Americans.

Already states like NH and Fla have an intangibles tax instead of an income tax. The Federal Government should do the same thing.

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The new Washington Consensus: taxes, taxes and more taxes

Dec 29, 2009 15:13 UTC

This depressing WSJ article outlines some possible solutions to America’s long-term fiscal problems:

1) Don’t keep fixing the AMT

2) Let all the 2001 and 2003 tax cuts expire

3) Add a VAT overlay on top of current system

4) Tax Wall Street trading

5) Put an expiration date on business tax cuts and credits

6) Create a commission, like the Greenspan Commission on Social Security, that would cut spending and … wait for it … raise taxes.

This article perfectly encapsulates Washington thinking that fundamental change in how Washington spends America’s tax money is really impossible. So raise taxes through the roof. One more reason to believe a low-growth New Normal is here.

COMMENT

About: WSJ & VAT

It would be wrong, let alone politically impossible, to add a U.S. VAT on top of existing taxes. When Japan instituted its VAT, to assure adoption, it was done along with an overall tax reduction.

But, as a revenue-neutral substitute for the corporate income tax, the VAT in itself would have positive implications for the U.S. economy because it is border-adjustable, i.e., imports would be subject to the tax and exports would subtract the tax. Thus, U.S. corporations and workers would be in a more competitive position at home and abroad. Furthermore, eliminating the corporate income tax would do away with the double-taxation of dividends; the U.S. would become a magnet for foreign investment, and U.S. multinationals would no longer have an incentive to park funds abroad in lower-taxed countries.

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The political blowback from healthcare reform

Dec 18, 2009 19:20 UTC

Kim Strassel of the WSJ states her case:

1) Consider North Dakota. A recent Zogby poll showed 28% (you read that right) of state voters support “reform.” A full 40% said they’d be less likely to vote for Democratic Sen. Byron Dorgan next year if he supports a bill. In a theoretical matchup with Republican Gov. John Hoeven (who has yet to announce), Mr. Hoeven wins 55% to 36%. Mr. Dorgan has been in the Senate 17 years; he won his last election with 68% of the vote.

2) In Arkansas, 32% support this health-care legislation. Sen. Blanche Lincoln, also running next year, trails challengers by more than 50 points among the 56% of voters who strongly disapprove of the health plan.

3) Senate Majority Leader Harry Reid, the public face of health reform, can barely break 38% approval in Nevada.

4) In Colorado, where 55% of voters oppose a health bill, appointed Democratic Sen. Michael Bennet told CNN he’d vote for a bill even if it “cost him his job.”

5) In deep-blue Delaware, 46% oppose the health plan. Democrats pounded Delaware GOP Rep. Mike Castle, running for Senate, for voting against the House bill. That vote has in fact kept Mr. Castle leading his expected opponent, Beau Biden, the vice president’s son.

6)  In the past weeks, four well known House Democrats announced they will not run for re-election. All are longtime incumbents; one, Tennessee’s respected John Tanner, co-founded the Blue Dog coalition. These folks have seen the political handwriting on the wall.

So why the stubborn insistence on passing health reform? Think big. The liberal wing of the party—the Barney Franks, the David Obeys—are focused beyond November 2010, to the long-term political prize. They want a health-care program that inevitably leads to a value-added tax and a permanent welfare state. Big government then becomes fact, and another Ronald Reagan becomes impossible. See Continental Europe.

Me: Yup. Ds, who also no doubt think healthcare reform is good and moral policy, see a long-term political advantage.  Indeed, they often talk about the structure of reform as more important than details. Those can come later. But change the structure of 1/6th (and climbing) of the nation’s economy and you change its politics, too.

COMMENT

The truth is that Congress wants to escape any suggestion of having to pay for healthcare benefits, and would prefer that corporations pay the bill and “hide” the cost from consumers.

A more honest health policy was presented in detail by Ezekiel Emanuel, which would have paid for universal healthcare with a dedicated value-added tax. It would have been progressive in that the cost would have burdened citizens in proportion to their consumption which is directly related to their disposable income. And, since everyone would pay for healthcare this way, those who now receive free attention in hospital emergency rooms would also contribute.

The VAT would have put the focus on the direct cost of healthcare in the percentage level, so citizens would be aware that demands for increased services would have an impact on their ability to pay for other things. Healthcare expenditures are now around 17% of GDP and will represent fully one-fifth of GDP by 2018.

Replacing the direct corporate burden of healthcare premiums with a VAT would have removed a major cost disincentive to employment, and would also have made imports share the burden equally with domestically produced goods and services. And, because the VAT is a border-adjustable tax, so used for healthcare insurance, it would have been subtracted from exports making our products more competitive abroad as well as at home.

Too bad this plan did not receive more attention from the press as well as the Congress.

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VAT Attack! Will deficit commission lead to a VAT?

Dec 11, 2009 15:02 UTC

That is one theory offered up as the eventual outcome of the C0nrad-Gregg deficit commission. And today in the NYT, there is a story extolling the virtues of a VAT.  Indeed, it is a great revenue raiser, and liberals love it because they think Americans are undertaxed and don’t want to cut spending to reduce the long-term structural budget deficit.

Now given that it will take 60 votes by Congress to approve the commission’s reforms, I am not so worried about a huge tax increase passing with phony spending cuts.  A currency or bond market crisis, though, could lead to calls for a VAT to show markets the US is serious about the deficit. And the WH would love to slap one on the US economy,  A better solution is actual cuts in the rise in entitlement spending accompanies by a more growthy, efficient tax system. I like the Hall-Rabushka flat consumption tax, as long as it replaced the existing taxes on labor and capital and corporate income.  It has VAT-like features, but is not hidden the way a VAT is. Here is Greg Mankiw:

If you look at the economic effects, a VAT is similar to the Hall-Rabushka Flat Tax, which many economists love. Essentially, the main difference between a VAT and the flat tax as developed by Hall and Rabushka is that firms get to deduct wages as a cost under a flat tax, but then those wages are taxed at the household level. Other than this minor change of shifting the responsibility for the tax on wage income from the firm to the household, the Hall-Rabushka flat tax and VAT have identical economic effects. (There is also an exclusion for the first X thousands of dollars of wage income under Hall-Rabushka, making it progressive in average tax rates, but the same result can be accomplished with a VAT as well by rebating some of the revenue via a demogrant.)

My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

COMMENT

I do not believe that the Hall-Rabushka flat tax is border-adjustable, which is a prime competitive advantage to the VAT, which is accepted as border-adjustable by OECD under GATT rules.

Posted by SteveA | Report as abusive
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