Redstate

It is true in principle that a VAT need not increase the overall level of taxation. If those imposing it back out some other tax, it could theoretically be made revenue-neutral. It will hit different sectors differently than the old tax did (whatever it was), and that will cause a round of resource reallocations, but the overall drain on the economy could be made to remain constant.

That still doesn't mean it's a good idea, or even an acceptable idea. It's a horrible idea; for two reasons.

The first reason is that it taxes exactly the wrong thing. Anything you tax, you're going to get less of, and value-added is not one of those things you want less of. Such a tax invites the creation of value outside the sphere of the VAT, and its importation into the VAT area as a cost. If people are worried about outsourcing now, just wait until there's a big hefty tax on adding value in the United States.

The second reason is that such a tax invites legislators to hide it. A VAT can be made to disappear into the prices of things. To the extent a VAT replaces only other taxes levied on corporations, there's no difference, i.e. the corporate income tax is hidden in the prices of things now. But the lure of being able to hide taxes from We The People is strong, which is why Democrats especially always like to propose higher taxes on corporations. Taxes on gasoline are a perfect example of why legislators love these things, because they can then have it both ways. They get to raise lots of revenue, and they also get to blast the oil companies for 'gouging' people. Give legislators a VAT, and everybody will be 'gouging' us, while the legislators smile and say, "Nobody here but us Critters."

According to Mr Bartlett raising or creating a tax is not what it seems, and must, be.It's not to often you get to read a statement that on the bare face of it is a complete contradiction in terms  Mr Bartlett offers the Vat as an answer to deficits, perfect timing as deficit projections are going down.  This is offered as an addition to the existing tax structure but seemingly an addition is not an addition.  From a thug's point of view the Vat is beautiful, you come in at, say, 2% or 3% and going forward you suggest a modest increase of 1% or 2% a year.  Aspiring serfs will always approve as "the nation needs the money".

I'm not a fan of a VAT, but you can make a conservative case for it, assuming (the problem is that we all know what assume does to u and me) it was used to reduce/replace the income tax. You'd stop taxing people on making money, something that shouldn't be discouraged. You'd encorage savings. If you got rid of the income tax, you'd put most of K Steet out of business.

I'm not up to a Google search, but plenty of card-carrying conservatives have argued for some sort of sales tax as an income tax replacement. That in and of itself shouldn't get one kicked off the conservative reservation, unless you're kicking him off to some paleoconservative fringe.

The conservative case is largely due to our twin goals of pro-growth tax policies and fiscal responsibility.  The VAT has generally functioned as a solid revenue-raiser without as many of the negative effects on the economy as an income tax.  It's basically taking the whole national sales tax idea and implementing it at every stage of production so that the consumer isn't hit with sticker shock at the checkout counter.  It also makes the tax harder to avoid via a black market, since the tax does kick in at each individual level of production.  

Conservatives who oppose it are generally those who still think someone is going to wave a magic wand and actually shrink government down to a point where we won't need any more revenue than we're getting now.  But anyone who's watched our REPUBLICAN Congress spend over the last decade knows that's not going to happen.  Replacing a good portion of the tax code with a VAT would increase revenues without hurting the economy.

...since you argue in the third person, but I think you're presenting arguments in favor of a consumption tax. If so, then why use a VAT? Why not keep it simple and use a national sales tax that is paid by the final consumer? This is nice because it doesn't hide the tax, which will make it much harder to raise. And additionally, you can get some progressivity through the mechanisms proposed in the various "fair-tax" proposals.

the less distortion it can wreak on economic activity, which is one of the main reasons why taxation is bad. However I would object to the notion a VAT is necessarily invisible. Canada uses a VAT-like tax (the GSA) and it is stated on the every sales receipt what the consummer is paying, and the tax is a regaular issue at election time up there.

Is there a subject-object disagreement or am I more braindead than usual this morning? As I read it, you're saying that invisible forms of taxation are less bad because they don't distort economic decisions as much. But that's bizarre. Taxation distorts the relationship between cost and value whether you see it there or not. This can't be what you mean.

A national sales tax is far simpler than a VAT. Do you prefer a VAT (with a visible breakout on each sales-slip)? If so, why?

Yes, I am often ambiguous on purpose.  Comes from years of living inside the Beltway I suppose :)

Anyway, I'm a layperson on economics, but from what I've read so far, it seems that Aleks is correct that the VAT does less damage to economies than a plain old sales tax.  I don't know why this is, but you do see a lot of countries that have VATs and not a lot with NSTs, as the prominent US proposals go.  So the VATs must be doing something right.  But I'm not sure what.  And I am open to suggestions regarding the various FairTax proposals.

Whatever we do, our tax policy should accomplish the twin goals of raising the requisite revenue for the government to operate while doing as little damage to the economy as possible.  I no longer think that we can "starve the beast" by deliberately cutting taxes to the point of deficits in the anticipation that Congress will reduce spending as a consequence.  Clearly, this hasn't worked, and just leads to tons of debt.

Although aleks311 points out that Canada makes VAT percentages visible, the same is not generally the case in Europe. VAT is a "hidden" tax in the sense that it's levied at points of production ("value-added") rather than at consumption. Therefore it affects all producers symmetrically and doesn't put anyone at a competitive disadvantage. Since they all pass the tax on to the next step in the value-chain, they serve as simple passthroughs to the state, and don't suffer directly from the tax. By the time the consumer sees a finished product, the tax has been "baked in."

So you can see that the imposition of a VAT has very little impact on the behavior of producers, which I suppose is why people say that it doesn't distort economic decisions. But the real problem is that the tax would certainly affect the behavior of consumers if they were more aware of it. And this is the genius of the VAT. Psychologically, it works just like income-tax withholding.

Now you might be in favor of anything that helps the government collect more money. I have a big problem with this approach, because the government exists to provide services to us, and we have to buy them just like we buy anything else. As you know, people are exquisitely sensitive to even small variations in price and they change behavior accordingly. (Aleks311 denies this, by the way, but it's still true.) Whenever anyone hands you an unexpectedly large bill for anything, you'll kick and scream, and then you'll ask yourself whether you got your money's worth, and whether you'll buy that product again. This is exactly how the magic of pricing signals that everyone talks about comes to be. Things like VATs mask the cost-visibility and so they mute the pricing signals.

Who benefits? The government does, big time. When VATs were introduced in Europe, they were typically about one or two percent. They turned out to be so easy to raise that they rapidly zoomed up past 15%. No one complained. But the economic damage was done.

Remember, taxes are not something anyone chooses to pay. Therefore they aren't subject to any sort of market discipline, so by definition they are wasteful. Every dollar taken out of an economy by a government is an investment or a consumption foregone by a private individual. There is undeniable value in doing so (I'm not advocating the abolition of taxation) but no one should suffer from the illusion that government can do anything efficiently. And that's the basis for the conservative position that governments should do only do only the things that they alone can do. Such as run police forces and armies.

that replaces the income tax (i.e., 16th amendment is repealed) then, Yes, I think it's preferable to a national sales tax since it is indeed the least disruptive of major taxes and the most difficult to evade.

There was a national sales tax in effect during World War II and for a few years immediately following. If I recall correctly, it was on the order of five percent or so. That number is also, incidentally, roughly the same as the profitability (expressed as ROE) of most large corporations at the time.

Re: Psychologically, it works just like income-tax withholding.

I fail to see how this is true. Income tax withholding creates a vast industry of schemes, some legal and some not, to evade the income tax. A not-insignificant amount of money is poured into the game between tax payers and the IRS. I fail to see how a VAT could generate anything like that.

Re: As you know, people are exquisitely sensitive to even small variations in price and they change behavior accordingly.

Depends very much on the goods and services. See: Elasticity of demand. And it also depends very much on the existence of alternatives. A VAT that applies equally to every good on the market would not produce much behavioral change since there would be no point to that change: one could not save any money no matter what one buys.

I know a lot of people who think nothing of their income-tax withholding, because they don't think it's their money. That's why so many people blow their income tax refunds as if it was free money, instead of their own money. But if you were to give people everything they earn, let them deposit their money in the bank and see it on their statements, and then ask them to write a quarterly check to the IRS (as self-employed people do), then they'd be a whole lot more sensitive about it. Because at that point, they're (psychologically) sending their own money to the government. Aleks311, I know you will deny this, and I think I've finally figured out why: because it's not a rational behavior, and you're a rational guy. But you have to get used to the idea that people do all kinds of irrational things. Here's another example: I know plenty of people who will drive an extra mile to find a gas station that's two cents cheaper. (How much gas did you waste driving the extra mile? What's the value of your time?)

As far as the impact of a visible sales tax against an invisible VAT: people indeed can change their behavior if they think the sales tax is too high: they can vote for politicians who promise to lower it.

Perhaps VAT is better suited for Europe in any case. Europeans (and Canadians) are sold on the idea that they should give the government as much money as they can possibly spare. Americans (I hope) are still in the habit of asking "what am I getting for my hard-earned dough?"

It's also the easiest to raise, which disqualifies it as far as I'm concerned.

If you're concerned about compliance rates, then how do you feel about a 15% flat income tax, as in Russia and (once upon a time) Hong Kong? Compliance rates are exceptionally high because a marginal rate that low isn't worth evading.

A national sales tax is very difficult to evade.

THIS is the reason it is a popular choice in other countries.

It is even more like the gas tax than the income tax. How many people can tell you what they spend on gas tax? Not many. It is built into the price at the pump and never broken out. You don't file a return at the end of the year for it.

reveals that driving a mile out of the way to save two cents per gallon is probably not a losing proposition.

Suppose the planned purchase is, for instance, 15 gallons, and the car gets 20 miles per gallon. These are reasonable assumptions to work with, especially considering that MPG usually varies inversely with the size of the tank.

The cost of driving an additional mile is 1/20th of the price of a gallon -- plus the small incremental cost of adding a mile to the odometer (let's be conservative and call this $0.05/mile).

With the parameters we chose, the driver who goes the extra mile comes out ahead as long as the price of gas remains below $5.00/gallon.

That leaves us to consider the value of the five minutes (or so) spent pursuing the bargain. And unless someone is making the driver an offer for the use of those five spare minutes, I submit that the valuation is strictly subjective -- and that means that if it pleases the driver to go down the road for cheaper gas, it's worth it.

Anyway, the point is that pursuing this small bargain may not be a big moneymaker and your mileage may vary, but you can hardly call it irrational. :)

may be difficult to evade (although I can think of a few things I might want to try if I were so inclined), but is it hard to avoid?

What effect will a consumption tax have on consumer spending? What predictions have been made?

...equally clever response. Unfortunately, it's irrational for me to spend the time to think of one. ;-)

Of having money if you don't spend it? Maybe some people will choose to horde their earnings and not spend anything, but these are the same people who are doing this now.

In any case, I don't think too much saving and not enough spending is a problem we would have to worry about for a while. Americans having a little savings would be a good thing.

But such a large-scale modification of tax policy would certainly spur some changes in behavior, and I'd like to know that someone smarter than I am has some notion of what changes there'd be and what the effects would be on the economy.

you seem, to think. Griping about the GSA and other taxes is widespread in Canada.

people tolerate comsumption  taxes better than they do most other taxes. Perhaps because consumption taxes (whether sales, excize, or VATs) take only a small bite at a time. The most hated taxes (from my observation) are property taxes, followed by the income tax since both take big bites which the tax payer is forced to notice. From my experience in Michiagn, where the property tax was cut while the sales tax was raised (by John Engler no less), I would say that politicians can easily get away with raising a consumption tax, whatever its structure. Hmm, perhaps the anti-tax folks ought not be in such a hurry to do in the income tax.

If you were really thoroughgoing about it and eliminated both the corporate income tax and the capgains tax, then the net effect would be to favor capital formation and related investment activities. The cost of goods and services would immediately drop, and continue to drop over time (relative to incomes) as the increased capital expenditures paid off in increased productivity. The bond market would explode upwards, and the stock market would follow.

If you got progressivity right (perhaps through a per-family "prebate"), then the impact of consumer spending for essential goods and services would be negligible. You might see some impact on the marginal consumption of luxury goods and services, which would adversely affect people whose job is to produce these services. But there would be so much additional investment that these displaced people would easily find other work.

The "real" burden of the national debt (meaning, its displacement of more productive investments) would be suddenly reduced, and Congress would go on a wild tear to waste as much new money on ill-conceived spending as they possibly could. So the burden of government indebtedness would stay roughly the same as it is today.

Very large amounts of new private wealth would be created under this plan. If current investment patterns persist, much of this wealth would be owned by middle-class investors, whose portfolio valuations would rise exponentially over time, because of the lifting of the tax burden. Overall investment yields would come down since less risk would need to be taken in order to achieve the same returns that, in today's world, are needed to counteract the effect of taxation.

The newly-created middle-class wealth will have political effects that are extremely unfavorable to the Left, which is the principal disadvantage of the entire idea: they will go to unimaginable lengths to keep the plan from being enacted.

That's the general thrust. How did I do? You asked about "predictions," by which I assume you mean the kind of specific numerical predictions the press loves to publicize. Whenever you see one of those, run the other way. That's like trying to predict interest rates: the only thing you know for sure is that you'll be wrong.

Bartlett can not/has not put good evidence up at all and should be banned from Economic and political commentary.  He has bashed a VAt for years and later warms up to it.  He has bashed the Fair Tax but failed to answer when confronted with true data and facts and now runs from Fair Tax supporters unable to answer with honesty.

The VAT is a poor choice because it is not transparent nor easily seen by the Taxpayer, as others have pointed out.

A VAT becomes an easy mark for Congress and K Street to tinker with or bastardize to their benefit and to the detriment of American Families.

Any Tax on business or the supply chain is ultimately just passed to the consumer. Therefore make the tax visible and easily trackable by the public by adding it at the final point of sales of the product or service and just have a national sales tax like the Fair Tax !

The added economic advantage over the VAT is the Fair Tax is not added to products manufactured in America for export.  This allows Made in America to be up to 20% less expensive to produce and sell overseas.  Offshore investment and corporate dollars can be repatriated to US banks and investment because under the Fair Tax those Business investments will not be taxed.  

The Economic boom of the Fair tax to American business far surpasses the VAT.

A Consumption tax should be a solid conservative choice that most conservatives can agree is the best choice for the American economy and the Fair Tax is the best form  for a consumption tax which far surpasses a VAT.

Thanks.

I'm not nearly as economically literate as most posters here, but I have learned the law of unintended consequences, so I thought it prudent to ask where such a change might lead us.

Next question: Have you taken a side in VAT v. National Sales Tax?

Have I taken a side? Have I taken a side in VAT vs. national sales tax?

Oh yeah, I've taken a side. See upthread.

The most hated taxes (from my observation) are property taxes, followed by the income tax since both take big bites which the tax payer is forced to notice.

I pay almost 10 times as much in federal and state income tax as I do in property tax. Yea people scream about property taxes much more often and loudly than they do about income taxes.

Why is this? Because with property taxes you write a check for the entire amount due a couple times a year. With income taxes you get a nice check back from the government at the end of the year from your overwithholding.

When you talk about the property tax, you're going to a completely different place. The property tax is not a tax on consumption or on income, but rather on wealth. And this is the very worst kind of tax to take because you already paid taxes on the money you used to buy your house and pay your mortgage (minus the mortgage-income deduction). People have a sense that if they paid for something, they should own it. If the government has a yearly claim on your property, then how can it truly be said that you own it? It's more like the government is your partner in everything you do, and they confiscate a little piece of your property twice a year. To heck with that. I don't need them to share my past successes for the rest of my life.

By the way, this is also why people hate the inheritance tax ("death tax") so much. It's because all the taxes you paid all your life aren't enough. You still have to pay another big whack on what you own when you die. And by the way, the liberal argument in favor of the death tax is extremely interesting: liberals positively hate the idea that anyone should be born with any advantages not available to anyone else. To them the ideal inheritance tax rate is 100%. It's a radical egalitarian position that denies people's natural desire to provide for their kids.

that VAT encourages horizonal monopoly, and for the same reason is a small business killer.

encourages horizontal monoploy, and displaces small business.

the president on the Left Wing?

might work if we repealed the sixteenth amendment, other wise we will have an armed revolt if they try to stick us with that on top of the income tax.

The VAT has been extremely successful in the fertile soil of Europe. You mention horizontal monopolies and that reminded me of an important feature of European businesses: they are run for the benefit of their managers. Whereas in America, businesses are run for the benefit of shareholders. This makes all the difference in the world, as Europe's business leaders are today's version of the landed aristocrats of the past. As such, they are interested primarily in maintaining stability and preserving their power. So a VAT regime behaves exactly like the feudal tributes and vassalages of past centuries.

In America, by contrast, our business leaders would like nothing more than the kind of power-balanced stable relationships and ties to government that exist among Europe's large business organizations. But it doesn't work here because our corporation law and related jurisprudence strongly favor stockholders over management. American businesses have as their overriding priority to make their quarterly numbers. When they fail, their managers are taken out and shot.

But they don't push their politicians to lower the GSA. And they also complain when their health-care rations run out around this time of year. So they're stuck.

...not being subjected to taxation. I hadn't thought about that. That might be just what we need to revivify American manufacturing, which is far more productive and efficient than anyone else's and should be a world-beater.

Pat Cleary, are you listening? Whaddya think?

They are both valid reasons why the property tax is despised by many. Imagine if people had to write a check for their income tax liability at the end of the year. And had to pay both halves of their FICA the same way. There would be a revolt.

I really don't have a property with property taxes, because it is the more reasonable tax in a couple of ways...

1. You are paying for services in your community and sometimes directly related to your property... compared with other taxes (income and sales) where they have no relation at all to the activity that generated them. You working for a few hours or buying a loaf of bread does not cost the government money, though the government collects taxes on the transaction. Owning a house does cost the government money in fire and police protection, road access, sewage treatment, street lights, etc.
   
2. The money is all spent close to home. The taxes go to the city (or township), the county, and the local school district. There is some control and accountability at this level. You can have some say in how it is used and be heard. Not really the case at the federal and state level.

As far as the estate tax goes, I think it should be the last priority when it comes to cutting taxes. Yes, the income has already been taxed once, but how is that any different than taxing corporate earnings?

They are nearly the most taxed class of income, because they get taxed at the corporate level and then again when distributed to shareholders (if they ever are). This extremely unfavorable tax treatment distorts all kinds of business decisions and accounts for the low dividend yield on stocks as a class.

The VAT works?  With most EU countries having double our unemployment rate at more than 10%, and anemic growth rates?  

I'm no economist, but from a practical standpoint the argument is moot.  No one in Congress who supports a VAT is going to make it out of their primary because its implementation would require the elimination of the home mortgage interest deduction as an offset.

That translates into fewer homeownership, and reduced property values as the demand falls.  Currently, with the highest homeownership rates in history, and so much of the country's homeowners taking out second mortgages to buy bigger and better toys, can you imagine hue and cry when the bottom drops out of the real estate market?

Look to gas prices over the last six months if you're wondering how much patience the average American has with pilfering his pocketbook - even if its only temporary.

get a check back on Apr 15th. I haven't seen one since 1994. Some of us are writing checks to Uncle Sam on Apr 15th.

Re: It's because all the taxes you paid all your life aren't enough. You still have to pay another big whack on what you own when you die.

Which is a weird way of looking at at it because "you" are dead when the tax is paid and as such will not be paying a penny to anyone. You heirs will, yes, but they haven;t paid any taxes on that money either, so in effect it's like lottery winnings for them: free money they did nothing to earn (except maybe put up with you in hopes of inheriting the moola). Sorry, but I'm way off the reservation of the estate tax. I can't take it with me, so I don't give a hoot in hades what happens to my property once I shuffle off this mortal coil.

I have a relative who is strongly in favor of the inheritance tax (she thinks it should be 100%). Now she also happens to own several million dollars worth of real estate. Admittedly she didn't work very hard to create that value, it just happened to be the right piece of territory and has appreciated sharply over several decades. But I asked her why she wanted to will this property to the government instead of to her two children (who are young adults and struggling somewhat). She literally said "Screw my kids! Let them make their own way in the world." She won the argument because I had to spend the next minute or so picking my jaw up off the floor.

How would you answer the same question?

Now what if the property in question was a small business that you had worked all your life to build up? Would you also just want it to collapse and die with you?

Now aleks311, I know very well that you are rather doctrinaire about not thinking and acting as many other people do, but I want you to try to imagine this: if you knew your small business was going to fold and not be passed on to your children, wouldn't you work a least a little less hard on it? Consider your answer carefully, because this goes right to the heart of why the inheritance tax matters here and now, not just after you die.

Sign me up for some of this "free money"!

That is a very strange view.  The gov has already taken more than their fair cut.

A Consumption tax in the form of the FairTax will be an amazing economic boom to the American Economy. This groups thoughts?

With the removal of Corporate income tax and business payroll tax you reduce costs in the supply chain and are estimated to see a 20% drop in price of goods and services made in the USA.

American Manufacturing does not need to lower wages to compete with Chinia or Mexico but by eliminating business taxes entirely - American business and American workers WIN!

The US becomes the Tax Free Zone of choice not the Bahamas. This provides the investment capital for Economic growth.  Our American Workers are more productive and they provide the working capital.

The result is full employment and wage competition for quality American workers.  Wages will probably rise based on Supply and Demand.

Exports are 20% cheaper.  That changes the Trade deficit dynamic with Chinia and others very quickly.

Outsourcing of call centers  and other services to India and to Ireland will be reversed with this Tax treatment on business, and business investment.

The income of Tourists, Illegal aliens, and untaxed criminal income are not taxed by income or payroll taxes but they all consume goods and get taxed by a Fair Tax.

Manufacturers of Cheap Imports from Chinia do not contribute to our income tax to support the Federal budget but under the Fair Tax when they are sold at WalMart they will cost a little more but the sales tax of those Chinese goods will now support the Federal Budget.  A VAT does not do that as well and does not provide the advantage for "made in America" being sold in the Global marketplace at a far lower price allowing us to gain global market share.

Your Thoughts??

I'll ignore your rant and stick to your first point. Let me guess, you're an American, aren't you? I argued that the VAT "works" in Europe, and it indeed achieves its goals extremely well. These goals are: maximum government revenue with minimum citizen unrest, and reinforcement of the stable constellation of government and business elites. It you look closely at Europe's history, that's what it's been all about there for over 1000 years.

You're taking an American's view, which is that individual prosperity is the key marker for what is good in public policy. That attitude is a big part why the Europeans think we're so uncouth and semi-barbaric.

Boot, you're an uncivilized American, just like I am. And I love ya for it.

What on earth are we waiting for?! Full speed ahead!

That's all I have to say :-)

I believe that some sensible reforms should be in place so that they would not fall under the inheritance tax unless sold outright by the heirs. Or better yet: if you want to make someone your heir they should be brought into the business as an apprentice partner while you are still alive so they can learn how to run it. I'd even go that far with real estate: pay the estate tax only when you sell the real estate. However I do happen to agree with your friend: people should make their own way in life and not have everything given to them on a silver (or even leaden) platter, assuming we are talking about able-bodied adults of course. That's a pretty traditional notion, isn't it? The last thing the US needs is a heriditary aristocracy, a class of drones living off their great-great grandfather's wealth. It didn't benefit Europe, nor the Kennedys.

with money the government has already taxed, yet the IRS still takes its cut of the winnings. What's the difference? Actually there is one, but it favors the lottop winner: he has at least contributed something to his good furtune. The trust fund heir has done nothing at all to deserve his wealth.

If giving poor people free money as welfare corrupts them, why isn't that same principle true for unearned inheritances too? Or are teh rich really different after all?

I guess it is a matter of perspective.  I am under the opinion that a person's heirs have better claim to the money than the government does.  

Lottery winnings are taxed as ordinary income. Estate taxes take up to 50%.

Transfers of businesses and real estate to heirs are both subject to plenty of capgains tax liability. So why add the extra whack of an inheritance tax? Your proposals do nothing more than move the inheritance tax liability so it hits you at the same time the capgains tax does. Now many people quite rationally respond to capgains-tax jeopardy for appreciated assets by not selling them at all, unless forced to by financial distress. This is bad news because illiquidity makes any asset less valuable. Your proposal powerfully accentuates this effect.

The only reason for the inheritance tax is an egalitarian desire to make sure that no child starts out in life with more than any other.

Re: The only reason for the inheritance tax is an egalitarian desire to make sure that no child starts out in life with more than any other.

I believe I said something about able-bodied adults, not about newborn children.

The only reason for the inheritance tax is an egalitarian desire to make sure that no individual starts out in life with more than any other, simply by accident of birth.

Better?