Volcker And Elmendorf Get In The VAT

Douthat already has many of these posts in his own post.

Charles Krauthammer at Townhall:

That’s where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude — if you exempt food, for example, the yield would be more like $900 billion).

It’s the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes — then ultimately you have to reduce government spending.

Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax

Conn Carroll at The Heritage Foundation:

A VAT can be (and has been) structured in many different ways. But the real world results are always the same: higher taxes, more government spending, lower growth, fewer jobs and more special interest power.

Higher Taxes: Don’t believe for a second that a VAT will help offset other taxes. International evidence clearly shows that a VAT is likely to increase the aggregate burden of govern­ment. Europeans used to only have a slightly higher tax burden than the United States. But beginning in the late 1960s, European countries began to implement VATs. Since then, the overall tax burden in Europe has climbed rapidly. And once a VAT is in place, the evidence shows that the tax rate rises over time.

Higher Government Spending: Not surprisingly, with more revenues, European governments turn around and spend much more than the United States does. According to a study by the U.S. Chamber of Commerce, government spending grew 45 percent faster in VAT nations than in non-VAT countries.

Slower Growth: According to the academic literature, there is a strong negative relationship between govern­ment spending and economic performance. In other words, more government spending means less economic growth and fewer jobs. Economic growth is driven by individuals and entrepreneurs operating in free markets, not by Washington spending and regulations.

More Power to Washington: There is one economy that would greatly benefit from a VAT: Washington, DC. No VAT could ever be levied evenly on all goods and services. Due to political considerations, a VAT in addition to current taxes would likely exempt politically sensitive items like food, clothing, health care and housing. Industries would lobby heavily for exemptions from the VAT for the economic benefits described above. This would give Congress an even larger role in picking winners and losers in the marketplace. Success would depend less on ingenuity and hard work and more on the ability to gain political favor.

Tyler Cowen:

I outlined it yesterday, to a small group at GMU.  My tale went as follows:

1. The United States is on an unsustainable fiscal path.

2. For whatever reason, long-term interest rates don’t reflect this problem.  There will either be a sudden collapse of demand for government securities, or the current market already is figuring we will get a VAT.  Either way it is more revenue for the government or a Greece-like scenario writ large.

3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum.  They might be willing to cut spending once a financial crisis arrives (though maybe not), but then there will be days or only hours for decisive action.

4. We could, for now, wait and postpone fiscal reform.  That means encountering a sudden collapse some number of years from now.  We will then clean up the budget in some way, but under a TARP sort of mood rather than what we might do today.

5. We’ll get a better deal, and make wiser decisions, if we do it today rather than in a panic.  Plus another financial crisis would prove deadly to both the budget and to the quality of economic thinking.

6. There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax.  Spend some of the rest on health care for the poor, if that is the deal on the Democratic side.

I am by no means convinced this argument is correct but I would like to hear the strongest arguments against it.  No one I talked to succeeded in defeating it, other than mentioning they don’t like the idea of more revenue for the government.  You will notice I structured the argument to be as neutral on the “left vs. right” question as possible.

Greg Mankiw in NYT:

YET despite its efficiency compared with other taxes, a VAT does not offer a free lunch. It would raise consumer prices, lower real wages, discourage work and depress economic growth. It would also break President Obama’s pledge not to raises taxes on the middle class.

But unless the president revises his spending plans substantially, he will have no choice but to find some major source of government revenue. Ms. Pelosi’s suggestion of a VAT may be the best of a bunch of bad alternatives. Unfortunately, in this new era of responsibility, the president is not ready to face up to the long-term fiscal challeng

James Pethokoukis:

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.

Allah Pundit:

The One’s perverse insight was that a giant federal expansion of health-care benefits had to be passed before any major entitlement reform could happen. Had he tackled the latter problem first, declaring that America had reached a moment of fiscal emergency and demanding that both parties address the crisis, he would have done his country a world of good but in the process created two problems for himself. First, the political fallout to his party from cutting entitlements likely would have been devastating, which would have wrecked any chance at passing health-care reform aside from a modest GOP bill. And second, even if the Democrats survived the electoral backlash, they’d have a hard time trying to sell the idea of a brand new entitlement after the country had sacrificed so much to get its fiscal house in order. No, the only way to get O-Care done was to add it to the entitlement basket first and then wait for dependency to work its magic so that, when the crisis finally hits full force, it’s already a fact of life. That was a fantastically reckless thing to do but he wanted his agenda passed at all costs. And I do mean “all costs.”

Ross Douthat:

But I wonder if many of these conservative commentaries, alarmist and conciliatory alike, aren’t overstating the political feasibility of passing a V.A.T.

Cowen, for instance, writes that he “would prefer spending cuts” to a consumption tax, “but voters seem too irrational to be willing to cut spending.” Krauthammer suggests that we’ll probably get a V.A.T. because Americans aren’t yet willing to accept health care rationing. Now I certainly agree that neither spending cuts nor rationing (which, where Medicare is concerned, may amount to the same thing) are likely to be particularly popular with the American public. But do you know what else isn’t popular? Sweeping middle-class tax increases.

Maybe Americans would swallow a broad-based tax hike faster than they’d swallow extensive spending cuts. But I doubt it. In fact, I think that taken on its own terms, a V.A.T. could actually be a harder sell than Paul Ryan’s proposal to means-test and voucherize Medicare, which everyone agrees is politically unimaginable at the moment.

Incremental tax increases on the wealthy are one thing: They’re relatively popular, we’ve seen some of them from Democrats already in the health care bill, and if the Democrats hold on to power we’ll probably see more. But a broad-based consumption tax is something else entirely. At the very least, any politician tempted to support a V.A.T. would quickly find himself pondering the example of Canada’s Progressive Conservative Party, which midwifed Canada’s Goods and Services Tax into existence in 1990, and lived to regret it. (Though “lived” is a strong word: The G.S.T. is still with us today; the Progressive Conservatives, however, are not.) And that was in Canada! In the United States — well, let’s just say there’s a reason that no American presidential candidate has campaigned on a middle-class tax increase since the days of Walter Mondale.

Again, this doesn’t mean that a V.A.T. won’t need to be part of whatever deal our elected representatives (God willing) eventually hammer out, dire political consequences notwithstanding. But there’s something strange about a right-of-center conversation in which a middle class tax increase is being framed as the politically realistic alternative to spending cuts. You don’t usually see conservatives and libertarians underestimating the tax sensitivity of the American public, but in this case I’m pretty sure they are.We’ll probably need both middle-class tax hikes and entitlement cuts before all of this is over. But I wouldn’t bet on the middle-class tax hikes happening first.


Volcker: Taxes likely to rise eventually to tame deficit

(Reuters) – 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.

Bruce Bartlett:

Volcker’s views are no surprise to me for two reasons. First, he is a smart guy who knows how to read a budget projection and draw the obvious conclusion that it is impossible, practically, to bring the budget deficit down to a manageable level without raising taxes significantly.

Second, I had some correspondence with Volcker a few years ago after I wrote about the need for a VAT in my Impostor book. I can’t share his response, but I don’t see why I can’t share my letter to him since I still believe everything I wrote and have said more or less the same thing publicly on many occasions.
April 1, 2006
Dear Mr. Volcker,
Thanks for the note about my book. I hope by the time you get this letter you will have finished it, especially the chapters dealing with the inevitable tax increase and the need for a VAT. These are the chapters that have caused me the most trouble with my conservative friends.
Despite my best efforts to explain that I am merely predicting a large tax increase not advocating one, that is how I am regularly portrayed. For this reason, my discussion of the VAT has also been widely misinterpreted. I would only advocate a VAT if my assumptions about the path of future spending—and therefore taxes—are correct. If they are, then a VAT is the only way we can hope to raise the additional revenue that will be necessary without destroying the economy—on the order of $1 trillion per year in today’s economy. I tried to explain myself a little better in the attached posts I made on my New York Times blog a few days ago. (The blog is only a temporary thing.)
There is at least one senior member of Congress who agrees with me and with whom I am working. But the political climate is such that he and others like him are going to need a lot of cover before they can even start to talk openly about legislation. I believe that one of these days the political climate will change when financial markets force action on the deficit. I don’t know when or how this will happen, but I feel certain that eventually there is going to be some sort of market break that will suddenly focus everyone’s attention on the deficit once again.
One of my fears is that when that day comes, the political class will deal with it as a one-time event. But with spending growing as rapidly as it is, I think it is likely that Congress will be forced into serial budget deals, as it was in the 1980s. If it deals with each of these as a discrete event, at the end of the day we are going to end up with a collection of individual policy actions that no one in their right mind would advocate if they knew the ultimate outcome.
For example, on the tax side, I see our revenue system as already being unable to function. If we try and get significantly more money out of it, the results could be disastrous. That’s why it makes sense to me to bite the bullet on the VAT now and raise it a little at a time to pay for the spending that is in the pipeline. If the ground is well prepared by people like us, maybe when the next financial crisis hits, Congress will use it as an opportunity to institute a VAT, which would certainly be politically impossible under any other circumstances.
As you know, in crisis there is opportunity. And if one is well prepared in advance before the crisis hits, amazing things can be accomplished. If I am wrong and there is no crisis and we continue to just coast along, that’s fine. I don’t want to pay higher taxes any more than anyone else. But everything I know about politics and economics tells me we are in a temporary lull and that eventually we will return to trend and things like the deficit will once again matter to people. I think those with the foresight to see this have a responsibility to prepare for that eventuality.

Mary Katherine Ham at The Weekly Standard:

White House advisor Paul Volcker made news this week by calling a value-added tax (VAT) “not as toxic an idea” as it’s been in the past for tackling the nation’s deficit problem. Today, Congressional Budget Office Director Douglas Elmendorf confirmed he’s been getting “a lot of questions” about the VAT tax from Congress.

“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.”

Elmendorf declined to specify which members and said he has yet to field an official request to study a VAT tax. The CBO is in the process of figuring out how best to study a VAT tax’s impact, sorting through various structures employed by other countries. Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 debt, which the CBO predicted will be 90 percent of GDP.

Daniel Foster at NRO

UPDATE: Curtis Dubay at Heritage

Jules Crittenden

UPDATE #2: Clive Crook



Filed under Economics

2 responses to “Volcker And Elmendorf Get In The VAT

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