Saturday, April 17, 2010

Fiscal Sustainability Without a V.A.T.

Jon Walker, commenting on left-wing factions that are pressing for a V.A.T. (Value Added Tax, a/k/a national sales tax) believes that such a tax "is not going to happen". My response to his thesis is that it would actually be quite easy to lay the foundation for a V.A.T., and once that foundation is laid it's relatively easy to expand or increase the tax.

The easy introduction of the tax is as a "national sales tax" for goods that are sold across state lines. While Internet merchants will lobby hard against such a tax, state governments very much want to tax those sales - they want the sales tax revenue and, let's be honest, most people don't voluntarily pay sales tax on their "tax free" internet purchases. A national sales tax could be reasonably low, would be payable to a single (federal) tax authority and thus easy for merchants to administer (they only have to keep track of the value of shipments they make to any given state, and forward that information to the feds along with their payment). It could even allow merchants to opt out if they already collect sales tax in every state, or for those states in which they collect sales tax.

The door is then open for expansion - having the federal government become the agent of collecting all sales taxes, with distribution to the states. Of bumping up the tax and having the feds keep a larger share. Or of bumping up the tax to "pay for" a bailout of the states.... Or to argue that we can "keep the tax low" by extending it to services as well. If you can open the door, just a crack, I think the bulk of the inertia is overcome, and we would inch toward a full-scale V.A.T./G.S.T. (Goods and Services Tax). As George Will observes,
A VAT is collected on value added at stages during the process of production, but most of its burden is borne by consumers. They file no VAT returns, so its stealthiness delights the political class, which can increase it in small, barely noticed increments, with every percentage point yielding another $100 billion.
The idea that Republicans would hate a V.A.T. is questionable - there is a faction of the political right that wants a V.A.T. For the anti-tax ideologues, or those who have signed an anti-tax pledge... well, let's see what George Will has to say:
When liberals advocate a value-added tax (VAT), conservatives should respond: Taxing consumption has merits, so we will consider it -- after the 16th Amendment is repealed.
It's possible to create a revenue-neutral V.A.T. - cut income taxes at the same time you introduce it - and like magic it's tax-neutral. The idea of turning it into the disingenuously named "FairTax", a replacement of income taxes, isn't viable - but I think you can read George Will's statement as reflective of a faction of budget hawk conservatives who would be happy to replace part of the income tax with a new tax that shifts more of the tax burden to lower wage earners. I do think that there will be difficulty getting a President to sign off on a V.A.T. (although perhaps not if it starts out as being "a favor" to the states, and creating a system that's "more fair" to "Main Street's" brick and mortar stores, and grows from there). But I think it is possible to create a bipartisan majority willing to pass such a tax.

The idea that everyone will hate a V.A.T. may be true, but I'm not aware of any country that has passed such a tax and has later repealed it. I'm not aware of a political party anywhere in the world that has collapsed as a direct consequence of implementing a V.A.T. To put it another way, people hate taxes, period - but we have them, and we pay them.

I think George Will gets this wrong, not numerically but as a matter of perception:
Because the income tax is not broadly based, it radiates moral hazard: Its incentives are for perverse behavior. The top 1 percent of earners provide 40 percent of that tax's receipts; the top 5 percent provide 61 percent; the bottom 50 percent provide 3 percent. So the tax makes a substantial majority complacent about government's growth.
I think most people see about a quarter to a third of their paycheck disappear each month for a range of reasons - state and local taxes, FICA, unemployment taxes, deductions for their contribution to health insurance, even deductions for their contributions to retirement plans - and they see that amount as the amount they paid in "taxes". I suspect that if you asked that "bottom 50 percent" of earners if they paid federal income taxes, most would answer, "Yes, and I pay a lot," simply because they don't differentiate one tax from another.
And wait until the political class's most imperious masters, the elderly, are heard from. When they worked they paid taxes on their incomes; retired, they will resent -- they are virtuosos of resentment -- being taxed when they spend their savings.
Here, Will is of course describing his own demographic - and what appears to be his own mindset. I wonder if he's connected the dots.

I believe it is possible to move toward a more sensible tax policy without implementing a V.A.T., and I think it would be a bad thing to create a V.A.T. CWD, who is perhaps more conservative than George Will, advocates something quite sensible - fixing the federal budget by increasing taxes and cutting spending, even though that necessarily means cutting entitlements and military spending. I suspect that slapping on a V.A.T. would be a band-aid, allowing us to postpone the pain rather than having the difficult conversations that we need to move the nation's budget toward balance and sustainability. We're not going to retreat to what George Will describes as "the Founders' vision of limited government" - why do I picture Will reading Oliver Twist and thinking, "Yeah - workhouses!" - quite literally, the world has changed. But we don't need an entirely new tax before we start the discussion of how to create a sustainable future.

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