This is not a crazy idea--I heard an economist who specializes in Japan suggest basically the same thing ten years ago to cure the "lost decade" (though his was actually a straight consumption tax that stepped up every year). As Bartlett told Ezra Klein:
Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future. We're depriving ourselves of a great stimulant tool by ignoring this.
It would also have the happy side effect of solving some of our worst budget problems--and no, conservatives, we're not going to make Social Security and Medicare go away, so we're going to have to explore some means of paying for them.
The biggest problem I see with this is that the VAT is, as Bartlett says elsewhere, too good a tax--it would be very hard for a government facing a massive revenue shortfall to push through a tax holiday, and once the tax was in place, it would be hard for the many links in the compliance chain to temporarily abate it.
The idea behind a VAT is that every link in the supply chain pays tax on the value it adds to the product--to simplify greatly, the difference between the cost of its inputs, and the sale price of the product. This is what makes the tax so powerful: it's hard to dodge, because the next link on down the supply chain does your compliance work for you. Since they only want to pay tax on the value they add, rather than the total sale price of their product, each firm makes sure that the VAT was properly paid on the inputs in earlier stages.
But production takes time, and this complicates your tax holiday. On day one of the tax holiday, does Home Depot credit you with the full value of the VAT on the new grill you buy? And if so, where do they get the money? Remember, they've already paid the accumulated VAT to their supplier (if they haven't, you don't have a VAT; you have a sales tax). Similarly, after the holiday ends, you'll have a bunch of products that were partially produced during the holiday. These sorts of compliance problems mean that a VAT holiday is a one-time trick: you can announce a VAT and then delay the introduction, but once you've implemented a VAT, you can't really take temporary breaks--at least, not with the sort of transparent instant effect you want for a good stimulus.
The other problem is that I'm not sure how well this sort of stimulus works in the times when you most need it: when consumers are credit constrained. There are a lot of people right now who can't go out and stock up on 8 months worth of toilet paper (even assuming they have the space) because someone's lost their job, their credit lines are being slashed, and the family is being forced to live paycheck to paycheck. Cutting their VAT will make their current dollar stretch a little further, but it is not going to encourage them to time-shift consumption. As household finances improve, the stimulus works better, but also is less needed. So something like a straight increase to unemployment benefits, which directly targets the most constrained households, may have better stimulative power, while a payroll tax holiday is probably easier to implement and has beneficial side-effects on employment.
That doesn't mean we shouldn't have a VAT (though I'm skeptical, mostly because they often are used to endlessly ratchet up the size of government). I'm just not sold on the stimulative prospects for changes in the VAT.
Suppose we passed a VAT and said it was revenue neutral? Also, wouldn't a VAT increase taxes on people who pay little in income taxes(like me.) This sounds like a bad thing, but broadening the tax base could actually provide a restraint on government growth. Everyone maybe less likely to vote for more government if they have to pay more for it.
That's sort of like asking "why don't we regulate industry but have it favor consumers" When you are talking about government you have to look at the incentives. The incentives of regulation favor political insiders. The incentives of the VAT favor an expansion of government because it is a cheap, recession-proof source of income. The nice thing about funding your government on a fairly elastic source of revenue like income is that it puts constraints on the funds available for government.
Politicians incentives are also to do what's popular. Increasing government spending and letting someone else pay for it are also popular. Of course, we already do that by borrowing. Basically, I don't think a VAT could be worse than what we have now. Worst case is continue borrowing just like we do now.
Yay! What better time than a major recession to introduce a massive regressive tax utterly outside our administrative experience requiring a whole new appraoch to enforcement!
Which is why a ten month (or more) delay before implementation is proposed.
In my experience, it could easily take the government over 10 months just to write an RFP and select a vendor to consult on the design of VAT implementation and enforcement. Actual ability to manage this system would be two years away, at best.
That's the easy part.
In our rules based tax system, transfer price determination is insanely complex and endlessly gamed.
European countries with VAT have a whole different way of determining corporate taxes, with the tax agents going through the books & figuring your taxes for you.
Unless we switch to a system where the IRS gets a permanent office inside every company, and the government, not the taxpayer determines the tax, VAT is basically impossible.
, mostly because they often are used to endlessly ratchet up the size of government
Isn't one of the problems we've been facing for the past 9 years is that the size of government and government spending have been increasing without government income being increased? Absent a VAT, or a massive income tax increase, you need serious cuts in things like Defense (while a war is being fought) Medicare/Social Security (with an aging population) abandonment of health care reform (with health care costs rising for employers anyway), etc.
Lets face it, a VAT is probably more politically acceptable than any one of those things, nevermind all three.
To me, having more people pay taxes is the appealing part of the VAT. However, I'm not optimistic that any potential restraint on gov't growth wouldn't be negated by straight give aways through refundable credits on income taxes.
Also, I think we'd be able to charge a full VAT for imported goods and rebate the VAT when goods are exported without violating any trade agreements (anybody know for sure?), which would ease some of the burden imposed on our manufacturing base by funding our social safety nets through payroll taxes.
So this would be different from Canada's GST, where everyone BUT the final consumer can be exempted from the tax with a proper GST tax exemption number? In Canada, goods destined for export just don't have GST applied to them, since the retail sale is done outside the country - though you would pay GST on the trucking service that moves them to the port.
Anyway, this is apparently legal under NAFTA and various other treaties.
I'm on record in these parts as being (shockingly) a big supporter of introducing a VAT to these shores.
The idea that the delayed intro approach would have a stimulative effect hadn't occurred to me, but it's not a bad idea.
However, I don't think the economy will be remotely strong enough to handle the burden of a major tax increase in a mere ten months -- 1937 relapse and all that. Sheesh.
Also, while no doubt a lot of folks would go out and spend money now, we'd have the same effect after the intro of the VAT we've seen with the real estate credit and cash for clunkers: a pretty horrendous drop off in demand afterward.
Again, I would like to see a VAT introduced (ideally accompanied by, say, a partially offsetting reduction in payroll or income taxes), but not before 2013 or so.
Sorry Megan, but no, we're not going to make the endless ratcheting up of the size of government go away, so we're going to have to explore some means of paying for it.
President Obama has already decided how we're going to pay for govenrment: We will raise taxes ... but only on people making more than $250,000 a year.
He has ruled out all other types of tax increases.
I find your surplus of faith disturbing.
The individual mandate is a tax. Get real.
He has already raise the tax on cigarettes which is hugely regressive so he has already broken his tax pledge.
He is going to tax cadillac health care benefits, of which 85% will be paid by the middle class.
Wake up. Your myopia is embarrassing.
Cigarette taxes are only regressive with respect to INCOME.
They are totally progressive with respect to politically incorrect behaviour.
You just need to look at thinks from the right angle.
Blighter hits precisely the point I was going to make.
Sorry Megan, but there -is- no means to pay for it. We can not afford it. All the new taxes in the world will only stifle our economy more and make them even more unaffordable.
Like so many individuals facing bankruptcy, we are faced with difficult decisions and we are living in a state of denial. We refuse to cut our spending to less than we make, and we accumulate debt and become more frantic as the debt grows with every passing day.
At some point, people are going to have to admit it or it will destroy us. The programs are unsustainable. We are living beyond our means. We can not afford these programs any more, we are going to have to cut our spending, and there is no way around it.
Alas, this is what economics has come to. Sure, we can stimulate people into buying a year's supply of toilet paper today, but then what happens? They don't buy toilet paper for a year. In effect, you are doing nothing but pulling forward future demand. What do you do for an encore? Tell them 6 months from now that the VAT on toilet paper will double in another six months so that they buy another year's worth? Why not just dispense with such half-measures and just tell people they have to spend their savings or they will be taxed at 100% a year from now. Afterall, stimulus is good, right?
Also, a VAT is a direct tax on all prior savings that has already been taxed when it was garnered as income- a double taxing event. And, in any case, I am simply disinclined to believe any promises about a VAT replacing a previous taxing scheme. History is replete with such promises, and not a single time has the promise been fulfilled.
Sure, we can stimulate people into buying a year's supply of toilet paper today, but then what happens? They don't buy toilet paper for a year.
Exactly. The whole idea is Cash for Clunkers writ large.
Ever start a fire in a charcoal grill? You pour some lighter fluid on it first to produce an initial source of heat and combustion, but afterward you don't have to keep adding lighter fluid because the fire becomes self-sustaining: it's own heat induces further combustion. Same theory here behind economic stimulus. I am not supporting this particular proposal, but I am pointing out that the general theory is not illogical and the analogous phenomenon exist in the world in many other areas of life.
Jon, this is a good bit different in that the idea is that by announcing the tax, but delaying its implementation, people would run out and hoard items to avoid the tax. Obviously once they've hoarded all the toilet paper they can afford at the no-tax price they will then not buy toilet paper when the tax hits (they won't need it). At least until they run out.
"Sure, we can stimulate people into buying a year's supply of toilet paper today, but then what happens? They don't buy toilet paper for a year."
Don't discount the Costco effect. When people buy large amounts of stuff, they tend to use more. It's human nature to over-consume when goods are on hand and already paid for.
Getting off subject here, but I've always thought that sales/vat taxes can be more progressive than income taxes. Taxable income is shockingly low for the high-net-worth, coupon-clipping, 'evil' rich (as opposed to the high-earned-income 'good' rich). I often suspect that the evil rich strongly identify with Catbert, laughing maniacally whenever working stiffs talk about taxing the rich.
The rest makes sense, though.
President Obama ran complaining that Warren Buffet pays a lower tax rate than his secretary.
But I've noticed something: Warren Buffet still pays a lower tax rate than his secretary.
When is Barack Obama going to confiscate Warren Buffet's pile of money and redistribute that money to us? He's been in office almost 10 months. Not only has he not closed Guantanamo ... Warren Buffet is still the richest and most untaxed man in America.
Awesome! And then in ten months when demand absolutely craters and you still have consumers up to their eyeballs in debt they cannot service and banks marking-to-myth and home prices still sky-high and U3 above 10% and U6 above 20%, what then? Raise taxes again to further time-shift consumption?
Absolutely. Normally inflation can get us out of recession because debts and leverages used to be fixed. The increase in ARMs and other adjustable rate debts means that inflation and stimulus WILL NOT get us out of recession this time. We will have to go through the painful process of de-leveraging.
I’m not interested in a broader version of “cash for clunkers” wherein politicians attempt to time shift forward consumption in order to give the illusion that they’ve “fixed” the economy just in time for their reelection bids.
I’m also not interested in layering on another tax on top of the ones that we’re already paying and the same goes for the “revenue neutral carbon tax” crowd. Those of you who offer either a VAT or a carbon tax in exchange for a cut in either the income or payroll tax are decidedly in the minority of those who favor either a VAT or a carbon tax. The most likely outcome is that we keep the taxes we already have at or above their current levels plus the new ones you’ve created which will be decidedly easier to ratchet up.
This is the problem with the whole taxation side of the government revenue vs. spending equation. A VAT would simply be layered onto all of the other federal taxes, which will themselves be going up. And then there's the "carbon offsets" tax that will be passed onto consumers. And would a national VAT be in lieu of state / local sales taxes? No. State and local taxes will also go up.
Talk like this brings two words to mind: Banana Republic, and I don't mean the store.
Why? When people talk about a Banana Republic, among other things they're usually talking about a polity that can't pay for governmental operations, and so turns to the printing presses. But in reality most of the countries we associate with VATs are to be found in the rich world, and many of them borrow less -- and have accumulated less public debt -- than the VATless USA.
The Republicans of Nixon's era were right: a VAT does do a bang up job at raising revenue. Which is good if (like me) you have strong deficit hawk tendencies. And which is bad if (like most commenters here) you're trying to reduce the size of government. However, talk of "Banana Republic" is just off the mark. (And yes, one is aware you're no doubt referring to the stimulative effect being discussed here, but, still, if a VAT is a justifiable idea in and of itself -- and I'm aware you don't think it is -- the possibility that the timing of its introduction could counter the weakness in our economy constitutes Banana Republic-ism? Really?).
It's not the VAT itself. It's the scramble for revenue, and the reckless fooling around with the economy.
"...in reality most of the countries we associate with VATs are to be found in the rich world, and many of them borrow less -- and have accumulated less public debt -- than the VATless USA."
Not sure about their deficits, but there are also many rich VAT countries that have higher levels of public debt, as a percent of GDP, than does the VAT-less US (61%): Japan (173%), Italy 106%, Singapore 99%, Greece 97%, Belgium 89%, Israel 78%, France 68%, Hungary 68%, Germany 64%, Canada 63%, etc. A VAT does not itself imply better fiscal management of national finances.
...but there are also many rich VAT countries that have higher levels of public debt...
I'm not claiming otherwise. But there are numerous examples of VAT countries with less public debt -- and the US will soon pass at least five of the ones you've listed above. To put it another way, I think you'll find the position of the VAT-less US has deteriorated more sharply than than most of the ones you've listed here. Obviously the spending side of the equation is critical, as well. But as Megan herself has mentioned, there are problems with raising revenue via a progressive income tax -- chief among them the volatile incomes of the affluent -- and it doesn't surprise me that deficit spending on the part of the US government has seemingly become a permanent feature of life.
Haven't we learned from Cash for Clunkers? Shifting consumption temporarily doesn't do much for overall economic growth.
Anybody think business will hire based on what everyone will recognize is a government induced consumption bubble? Sure, some hourly folks may get a six month or so bump in overtime, but even they will know that they better put it in the bank because there could be layoffs when consumption tanks later.
I like seeing how much I pay in tax all in one place, on my pay sheet and my tax return. Paying a few cents here on toilet paper, a few cents there on gas, is extremely annoying because it is so hard to track. People should know how much they are paying, because they need to be able to evaluate whether what they get is worth it. I don't care what they decide -- they may decide they like government services and want to buy more. But there should be a visible price tag.
Hiding that information may be beneficial to politicians, but I don't think it's good for society. Borrowing from China to hide the price is bad too, of course, and the VAT may be slightly better than that. But I still think it's more important to look at how our current core taxes are structured. The tax code has gotten all cluttered and irritating since the radical simplification of the Reagan years, and it may be time to overhaul the whole silly thing again.
Too bad we don't see it all in one place. We have income tax, property tax, sales tax, state income tax, corporate income tax (it's invisible!), gasoline tax and probably a few more I'm missing.
Not surprisingly, my take is exactly the opposite. I like the idea of being able to give myself a "tax cut" merely by deferring consumption. You don't have much choice in the matter when it comes to income taxes, except to work or earn less. Sure, there's some growth dampening effect from the reduced consumption. But still, current conditions notwithstanding, America's problem in this area has tended to be too little savings, not too little consumption. Indeed, I actually had some sympathy for Huckabee and the Fair Tax idea he was pushing. (No, I think the specifics of the plan he was pushing wouldn't work and wouldn't be just; but I could get behind the idea of, say, a very high personal exemption -- let's call it $50,000 -- on income tax, and making up the remainder with a simple, clear, hard to evade VAT; I could also get behind an idea that Warren Buffet often touts: replacing the income tax with a progressive consumption tax).
How is it that information "hidden" if you see the item marked up on your receipt -- at the cash register -- every time you make a purchase? If anything, I suspect the very frequent reminder of the tax you're paying makes for less obfuscation than when it comes to the various deductions removed from one's paycheck (after all, a lot of workers have no idea they pay 13% and not 6.5% FICA; similarly a lot of them have no clue the employee-paid portion of their health insurance in large measure comes out of their own wages).
I frankly think the simplicity, clarity, and openness of a VAT is one of its best features.
Do VAT countries calculate the tax you pay at the cash register, where you can see it? That's how the sales taxes imposed by US states are done, but overseas it all seems to be built into the price printed on the price tag. There's no tax markup the consumer can see.
I haven't been to every country with a VAT, but I've never seen one that did it the way the US states do sales tax. Does anyone know of a country that does?
When I lived in France way back in 1993, McDonald's broke out the VAT on their menu board. No one else did.
I think it depends. IIRC from my travels there usually is some kind of signage, either indicating that prices include VAT, or not. Also, tourists are often provided the ability to claim a VAT rebate upon exiting the country, so that would imply one is able to locate these figures. No matter the method, providing a citizen is aware of the existence of the VAT, there should be little trouble determining how much of each purchase is going to the tax man. Of course, it helps if everything is taxed (ie., if the base is as broad as possible) and that politically powerful lobbies are resisted. Obviously the narrower the base the higher the rate has to be.
I do recall seeing the VAT added to purchases I've made in Canada, and, at any rate, I strongly suspect most sellers of goods and services in the US would prefer to spell out what the VAT amount is, by tacking it on at the end, because it allows them to quote lower prices. I mean, this is almost always how it works with sales taxes in the US, based on my experience.
I have a receipt here from a supermarket in Australia, and at the bottom it gives the total amount, and how much of that is GST (goods and services tax aka VAT)
It's 10% on everything, except fresh food.
One of the regulations for the GST here in Australia is that the receipt or invoice must show the tax component - primarily to assist with the self-compliance Megan mentions, if you're buying goods or services as an input to a business you need to know how much tax you've paid to offset against that you have to charge on your sales. Obviously to consumers this is pretty irrelevant but the rule applies nonetheless, although IIRC for under $50 transactions a complying tax invoice isn't required - supermarkets and anyone with an automated POS system . You can list prices including or excluding tax as long as it's specified either way.
The end result in my experience has pretty much been that businesses quote ex-tax to each other, because that represents the real cost to them, and end customer transactions are quoted in inc-tax terms - sure, it's legal to advertise ex-tax prices as long as you disclose it, but end customers really only want to know "what is this going to cost me", quoting low prices then adding the tax is bad PR. They still have to tell you how much the tax is on the receipt though so it's still transparent.
Aargh, forgot to finish a sentence - after "anyone with an automated POS system" it should say that the tax amount will usually be shown on the receipt regardless of the amount.
Interesting that gbarto says McDonalds showed the VAT separately on their menu board in France - it's very rare here to see ex-tax pricing displayed at point of sale.
There are lots of taxes that are hidden. Gas taxes are a good example. A better example is the "employer" contribution to FCIA taxes. People are ok with payroll taxes b/c they think they pay ~7.5% and that they fund Social Security and Medicare. Most people don't realize they pay something closer to 15% and that the SS and Medicare taxes essentially go into the general fund.
It would probably make it easier for politicians to make reasonable policy proposals if people had better information. Actually, it would probably make it harder. But hiding information also makes it easier for poiticians to ignore problems and/or make terrible policy proposals, so I'm not sure we're better off hiding information.
WHO doesn't know that their payroll taxes are only half the total? I don't think I've ever met anyone, including wage workers in the food service industry, who didn't know. Nearly everyone knows someone who pays the self-employment tax and has to deal with both halves. Many people have done it themselves at one time or another.
Perhaps very recent immigrants and kids in their first jobs don't know how this works. Or people who actively avoid finding out. But the information isn't hidden.
I'll grant you the gas taxes, though, as well as taxes on other specific items like alcohol. I'd like to see that information made clearer as well. But creating even more hidden taxes doesn't strike me as a good idea.
MC,
You should ask Timothy Geithner that question.
It's good to see what we pay.
We also are forced at gunpoint to fill out overly complex forms and jump through all sorts of other hoops so that we can get as much as possible of our own money back.
And then we're expected to be grateful.
Indeed. Yet another reason to favor taxing consumption over taxing income.
I actually think it's a positive that at least once a year we're forced to really take stock of what we pay for government, and all the better if you're conscious of the fact that your "refund" is money government required you to overpay so they wouldn't have problems collecting it later.
The biggest problem with our current system is that too many people are off the tax rolls. The more people who know the joy of filling out tax forms and paying taxes the better.
The nice thing about a VAT is that maybe people would be less enthusiastic about government if they weren't getting government services for "free." However, if VAT isn't broken out, it would hurt, rather than help, this issue.
I read somewhere that less that 50% of taxpayers actually fill out their own forms. I don't know if that includes people using tax prep software.
When I was in Sweden, everything was marked both ways, in case you happened to be leaving the country. You can get a VAT refund at the airport.
Seriously, if you want to tax consumption, just tax consumption. But don't tax consumption and production (labor is just an input to production, and the price of labor should not be taxed). You could even progressively tax consumption, by making certain goods have a different tax rate than other goods. Retailers would be in charge of collecting all tax revenues, and april 15th would be just another day for us regular folk.
Seems to me that the stimulative effect of VAT is complete rubbish, for reasons many have pointer already. However, shifting from income taxes to consumption taxes (VAT or sales) seems like a great idea to me for multiple reasons.
1. I think it does a better job of reminding people of the cost of gov't. Instead of seeing a number once a year, they are reminded of it with every purchase.
2. It encourages savings, since income is not taxed until it is spent.
3. It encourages companies to vertically integrate, giving them greater resiliency.
4. Without a corporate income tax, US becomes a very attractive business environment. Companies move to the states, providing more jobs. They still pay taxes on what they spent.
5. No more tax brackets. Sorry, those seem very unfair to me. Many will disagree.
Having spent some amount of time in all our wonderful brackets, I think they're about right. The rich can afford to pay more.
The regressiveness of the VAT is among its worst attributes. I'm not sure advocates realize how much consumption is done by people currently paying no taxes. A VAT will disproportionately reduce their consumption, which in turn will hurt the economy. It's a recipe for a death spiral.
Those that pay no taxes are often the ones using the most government resources. Well, the poor and the investment bankers anyway. There probably isn't much harm in recouping some of those costs from the people that use the services.
But do the rich get more for their taxes? If not, why charge them more? Simply because they can afford it? I'm sorry the whole thing seems very unfair to me. Sort of like those subsidizes apartments, where your rent differs with your payment. Two people rent identical apartments, yet one gets to pay twice as much as the other. Going from a purely fairness argument, a citizenship fee (in a dollar amount) makes more sense than a % tax. However, that is a non starter for many reasons.
Also, I'm mostly in agreement with jasper for once. its a strange day.
If not, why charge them more? Simply because they can afford it?
Because if you subsidize the consumption of the relatively poor, they spend a lot more. That means more GDP, more jobs, more profits for the relatively well-off.
However, many of those advantages become nullified if we add VAT to income tax, instead of replacing it. Politically, i think this is the most likely outcome.
So you are arguing that we should pass a permanent change in our tax code because delaying it's introduction would provide a temporary and one time stimulus as people scramble to avoid the permanent and long term malaise?
That argument is an atrocity against reason.
Believe it or not I seem to have found some good stimulus news that may generate some jobs, protect national security, and get us up to speed on our power grid improvements.
The VAT of taxes we do not need, but jobs we do need.
I've always hated the VAT. A tax on adding value? Why do we want to discourage people from adding value?
Not related: a great TARP-bashing article from WSJ. The extent to which it's become a gigantic slush fund is irritating.
A VAT is alot less distorting than income taxes, company taxes and all the funny special exemptions that both those are prone to. It is a tax on consumption; and that is better than taxes on earning and investing.
The only less bad taxes than VAT that I know of are taxes on land value, and levies on things that are really damaging us - like carbon based fuels.
Consumption is the purpose of an economy.
Carbon-based fuels are probably not damaging anything. The ERBE analysis says all the GCMs have the radiative equation upside down, and the measured optical depth since 1958 supports this as well.
Ah, so there is the fundamental disagreement. I always thought that production was the purpose of an economy, and consumption is what allowed production to happen.
I agree with Talldave. We produce so we can consume. Production is no good if no one wants to consume the product.
The Russians produced a lot of stuff.
It was not worth consuming. It was not even worth producing.
In the 1950s and 60s they claimed to have more TVs and Cars per capita than the US, and US socialists believed it.
It may have been technically true, but probably not. They built TVs for sale in areas with no TV stations, which was a good thing because the average viewing life span of the TV was measurable in weeks and months, not years. Many never functioned at all.
They did produce the Travant, the crappiest car ever assembled.
Production is easy. Making something worth the effort is a challenge.
Oops, the East Germans produced the lovely Trabant.
The Russians made the equally craptastic Lada.
Which was a friggin' copy of a Fiat.
A crappy copy of a crappy car is one super-craptastic car.
I think Obama and the liberals in congress should pass a 10% VAT right now, with that 10 month delay.
Then, in September, 2010 Americans can see the price of everything go through the roof - 2 months before the congressional election. Then, we can see what Americans think of the idea.
And the republicans will campaign on the hatred of the VAT (and hatred it will be). They will promise to repeal it.
And win the election. Within a month or two they will say they can't, because of the importance of the revenues.
I've heard this story before.
Derek
Hey, Megan this has to be the worst idea I have seen from you. :-(
It would just cause another crash in 10 months as demand dropped off because people were now living off their stockpiles. During the 10 months previous to the enactment of the tax, prices would go up as demand increased. The price signal would mean that producers would increase supply. Then when the demand crashed we would be left with huge amounts of malinvestement in production.
Its not just a bad idea, its a /horrible/ idea.
The stimulative, and restrictive, potential of VAT has always attracted me. At long last, one of the European countries with VAT has used it. Britain has used a temporary 2.5 percetage point cut in a 17% VAT rate as part of its consuption stimulus in this crisis. All that is clear about the results so far is that it has done no harm, and may have done some good. That is, it seems no worse than the other remedies various countries have tried.
I would support a VAT with two caveats: 1) Revenue neutrality as I mentioned above. 2) Some kind of mechanism to limit on increases in the rate. BTW, what about the Constitutionality of the VAT? Or would we just fit it into the all encompassing commerce clause, or would it go through as an excise tax?
(1) I don't think revenue neutrality is on the table. I don't think trillion dollar annual deficits are sustainable and people apparently don't want smaller gov't.
/
(2) As long as we're in fantasy land, I would rather have a constitutional cap on income tax percentages, or better yet a limit on the effective spread between income tax rates (to prevent refundable rebates being used to buy too many votes). People could then have as much gov't as they wanted, but they would at least know that they are going to have to pay for some of it.
I believe the cap on income tax rates was proposed with 16th amendment. Didn't go through because many believed the tax would never go that high. The proposed cap was 10% if I recall. I'm proposing if we add a new tax we shouldn't make the same mistake twice.
The issue with a VAT is this:
conservatives like it as a replacement for income taxes
progressives like it in addition to income taxes
Also the flip side. Conservatives oppose it because its a tax. Progressives oppose it because its regressive.
Stop looking at the world in terms of "progressive/regressive". There's so much more out there.*
*Paid for by Americans for Rich People
What the heck does that mean? I was making a statement about how political camps look at taxation, not a normative statement about what taxation should be.
Actually, "progressives" like "progressive" taxes because there's so much more to be gained squeezing the rich than the poor. If the upper income bracket taxes are sky high, arranging credits, exemptions, and loopholes can be very profitable.
"progressives like it in addition to income taxes"
And Social Security taxes, Medicare taxes, state and local sales taxes, carbon taxes (soon), etc.
And don't forget "fees". I expect Obama to embrace California's idea to claim he didn't raise taxes on the middle class.
Re: people stocking up now to avoid a future VAT
There are plenty of classes of people who are not positioned well to stock up. The poor are obvious. What about urban dwellers (esp. young urban dwellers with little savings) with tiny apartments and a high cost of living? I don't have anywhere to put a year's supply of toilet paper (or anything really). I don't have hordes of money laying around to buy all this stuff either.
The stocking up strategy only works for people with lots of storage space (mostly suburban & rural dwellers) with lots of money in the bank. These are the people who could most easily handle the VAT, and will most easily avoid it (early on at least). Meanwhile, the people who can least afford it will have the most trouble avoiding it. I'm not a class warrior (and I will be in the "can easily handle the VAT" class soon enough) but are regressive taxes really good policy?
My question is: how the devil does this get through? Assuming the 2010 elections are already perilous for democrats, how do they institute it beforehand? After the elections, how does Obama get VAT through a weakened D-majority in the House and Senate? VAT will be at least as contentious as the other debates we're having, so much like the "how does the public option get through?" question, we're left wondering how the VAT gets through. Reconciliation? On a huge tax increase? How does this not put Obama's 2012 re-election in jeopardy (see: GHW Bush)?
It doesn't. VAT talk is just more masturbation than anything else.
Sh. We should do anything we can to distract the Democrats. If we can get them running 6 directions at once, maybe we can delay things until the next election. Then maybe we'll vote ourselves a divided government again.
You better tell the GOP, they seem to have forgotten they are the opposition.
My question is: how the devil does this get through?
A blue ribbon, bi-partisan fiscal policy commission, similar to that headed by Greenspan in the early 80s (dealing with Social Security) comes up with suggestions -- the most serious one being a grand bargain (introduction of a VAT, and perhaps rises in carbon taxes, in return for nudging up the retirement age and perhaps some more aggressive means-testing). And no, today's GOP won't be part of any such effort, but perhaps the beat-down GOP of early 2013 will be more amenable.
After the elections, how does Obama get VAT through a weakened D-majority in the House and Senate?
He doesn't. Absolutely nobody thinks the enactment of a VAT is even a remote possibility during Obama's first term.
This sounds like wishful thinking. The GOP was likely at its lowest point in 2006/2008, at least until they get some power and start screwing things up again. Even the demographic arguments begin to look weaker as we see the strength of the GOP in states like VA where demographics were supposed to be changing the landscape there for a lifetime.
Assuming the GOP can't recapture a majority in either house until 2012, 2013 looks dicey for instituting a VAT, absent eliminating payroll and/or income taxes. I don't know how Democrats would go along with THAT, although, it seems they should.
Even the demographic arguments begin to look weaker as we see the strength of the GOP in states like VA
I don't the demographic argument looks in the least bit weaker since it's based on, you know, demographics -- not the ups and downs of the business cycle. I don't think anybody's been arguing that demographic change makes the Democrats immune to the political challenges driven by events.
The reality is the country is getting steadily more urban, more Latino, more Asian, and more dependent on the government for retirement income and medical care (and it's also about to become marginally more dependent on government services via Obamacare). I don't see anything changing this dynamic in the next several decades. I do think eventually the GOP can once again begin to make inroads among people who aren't culturally conservative white heterosexuals, but not until/unless it jettisons its more Dobbsian airs. But given the fact that the Republican rump is actually lurching rightwards at the present time, I think that's a long term project. Essentially, the GOP needs to do what David Cameron's Tories have done in Britain, and they're not yet ready for the gut check and honest self-reflection necessary for such a move.
You also should consider the results of this poll Jasper: http://www.gallup.com/poll/123854/Conservatives-Maintain-Edge-Top-Ideological-Group.aspx# The problem with the demographic argument you make is that its greatest strengths can be its greatest weakness. Looking at members of ethnic group X and saying they historically vote for party Y, so therefore party Y will increase its share of the electorate ignores the fact the ethnic group X might change it's affiliation. I agree with you on Obamacare, that's why Obama is fighting so hard to pass something, because he hopes that it will encourage beneficiaries to vote for anyone who supports continuing or increasing it. BTW, the GOP's rightward shift is largely in the area of fiscal conservatism which seems to have a broad appeal.
My third sentence should read: so therefore party Y will increase its share of the electorate as ethnic group x increases it's share of the population.
Simple Question
What happens in 1 year? Say you announce the VAT tax now- to start in 12 months. Everyone buys their Charmin- as much as they can afford/store. Charmin hires multiple shifts and cranks out the TP to satiate demand. Then the tax is added.
Everyone has 1 years supply of Charmin.
Why would Charmin produce another square of TP? No one will buy- they will use up their stock (the whole purpose of purchasing is to use your stockpile) rather than buy at 10% more.
Charmin has no choice but to close its doors for a year until individual stocks dwindle... that means big increases in UE, lower velocity of money and.... RECESSION!!!! YAY!!!!
There is zero (no, none, zilch, zip, nada) way aroudn this.
I dunno, perhaps you could put out rumors that every third roll of toilet paper was contaminated by poison ivy and needs to be discarded unused.
Will someone please tell me how another policy-induced bubble helps to create long-term value in the economy?
Please?
I agree that you would see a large blip for a few months, followed by a deeper crater afterwards...
Not only do you have pent up supplies, but the tax pushes your overall penchant to consume downwards.
What corporate planner in their right mind would invest in new plant, equipment, staff and marketing dollars on the basis of a temporary bubble THAT EVERYONE KNOWS WILL BE A BUBBLE.
An artificial bubble only works in juicing the economy when most people do not know it is a bubble until it is already bubble.
This idea goes the way of the permanent income theory. Employers will not employ on the basis of a blip, just like people save stimulus checks instead of spending them.
If it does not alter long-term incentives, it is counter productive because it makes it harder to plan or know what the real state of the economy is.
...just more government induced turbulence that ultimately has a downward push on consumption.
If they eliminated the income tax at the same time I would cheer louder than anyone. That is simply not going to happen.
I am surprised that credible economic minds would suggest yet another bubble a la Paul Krugman.
What a joke. Will they ever learn?
This is coming from the same people who want to micromanage the economy with sales promotions to get us to buy cars. No doubt these are the same geniuses, present in nearly every business, that suggests "we should cut prices" to increase sales.
Focusing on creating real economic value is never really important. Just try some kind of promotional scheme.
Promotional activities and financial stimulus, may be helpful from time to time, but they are not long term strategies. Add that to the fact that we've been stimulus-ing the economy for almost the entirety of the last 20 years or more it does not make sense that more useless spending will help.
Real businesses understand that creating value helps to build a foundation for success. Our government, and not just including the President, do not seem to understand this. Real value, to them, seems to be an accident of marketing and sales promotions...
Am I the only one pissed off enough, at the ready-to-grab-my-gun-and-throw-the-tea-in-the-harbor point, by the thought of the government telling me it will tax me even more in the future, but in doing so they're doing me a favor by giving me a break for a couple of months?
What kind of bizzaro mafia, syndicate world is that?
What next, a plan to start a nuclear war in 12 months, with the hope that everyone will eat drink and be merry?
If the Democrats bring in a VAT, they will be out of power for a generation.
That is why it won't happen.
Derek
A VAT as stimulus is foolishness, nonsense.
Sure -- you'd advance sales into the 10 months, then watch them collapse in an offsetting amount when the 10 months are up, "Cash for Clunkers" writ large. That ain't stimulus. In fact spending will fall by more than the amount that was advanced when the tax on consumption hits because that's what a tax on consumption does, permanently reduce it. What's stimulating about that??
"Stimulus", very differently, those who believe in it will tell you, creates new, additional economic activity that wouldn't have happened without it. Not merely spend $100 more on Tuesday followed by $100 less on Thursday.
And it doesn't force you to acclerate your spending to beat a deadline when you will become permanently poorer after tax.
"We are going to confiscate any wealth you have next Thursday, so you had better consume it by then, because you won't be able to after".
Economic stimulus?
As far as taxation goes, a VAT is probably the most controllable of all for a consumer. Not subsistence level income, all which goes to consumption. You pay on what you buy, and supposedly it will encourage savings. Don't think that happened in Canada.
What is hateful, and I use that term advisably, is that every business becomes a tax collector for government. The way the GST works in canada, is that we (as a business) pay GST on all purchases, charge GST on all services and goods sold to Canadians, and remit the difference.
If your customer base is business, it is a matter of bookkeeping. Your customers pay willingly, since they deduct it from what they remit. No problem collecting.
But if your customer is the end user, you are simply adding the cost onto your price, and they ultimately pay it.
Consumer goods in stores is one thing. No difficulty collecting. But if you sell a service to consumers, they will refuse to pay the GST. In that case, if you contact the revenue agency, they will say pay the percentage on money collected. We are going to a 12% rate next year. If you can't collect that, and have to pay nonetheless, the government takes the profit and more.
Many many businesses that provide service to consumers don't collect or pay GST. They don't pay income tax either, nor fulfil any other regulatory requirements. The cost of compliance is too high.
There was an interesting instance a few years ago. If you export your products or services, you don't charge GST, yet you pay on your purchases. When time comes to report, you would get all (or almost) you have paid refunded.
So people were reporting large purchases, ie. vehicles, as sold to the US. And claiming large credits. And getting them. Without doing any purchasing or sales. Simply filling out the form.
There was a bit of a fuss, and some called for closer scrutiny of the refunding operation. Nothing changed however. The collection agency knew that if they pushed too hard, didn't process refunds in a timely manner, the whole structure of someone else collecting taxes by decree could fall apart, and the cost of administering and collection for government would rise.
If all businesses in Canada affixed a list of names and addresses, and wrote a note saying something like "here are the customers, itemized how much they owe. Collect your own %$##@* taxes. They are expecting you", I suspect revenues would drop considerably.
Derek
How much savings do you have Megan? I am guessing not very much.
Personally, I save money, which I was told was good for our country. But now, apparently, its so good that they can tax all of my post-tax savings an additional 10% when I spend them under a VAT regime.
Meanwhile the non-prudent among us, with no savings, are not penalized. Great, just great.
The only way to implement a VAT or Fair Tax and sell it to people with savings is to simultaneously convert to a new currency that pays 1.10 to any holder of the previous currency. That way the savers are not hurt by the switchover. Or you can give me tax rebates for the amount of savings I had as of the day of switch.
Your first idea will not work- the currency switch. Think about it.
The second idea would get you most of the way there.
Your comment ignores two points:
1. Many, many countries have successfully introduced a VAT. Therefore your plan is proven not to be necessary.
2. Americans are, on average in DEBT (remember, that whole deficit, financial crisis thing?) So an effective tax on savings isn't going to hit them that hard.
As far as taxes and incentives go, why not think about increasing the Federal tax on Gasoline, partly to raise money, but also to encourage us to use less of the stuff and to stop shipping our dollars overseas to regimes that are actively our enemies? A one dollar gas tax would raise about $140 billion a year. The GDP is about $14 trillion. Assume that the VAT is a sales tax on all of that (a vast simplification) and a 1% VAT raises about $140 billion.
Now the incentive part. Would you rather be forced to pay an additional 1% on everything, or on something you can take steps to avoid using? If we then cut back on our gasoline usage (more than half of our total oil use), we reduce the amount of money leaving the country, and going to our enemies.
You could even rebate part of the the income to the customers to reduce the pain, while still retaining the full incentive benefits.
A short-term stimulus makes sense for a short-term problem. Stuff that has already been produced is piling up in stores and warehouses, and businesses shut down production because nothing is moving. Get it to move temporarily and the Charmin factory won't have to reduce hours or lay off workers. Meanwhile, the economy's natural recovery processes have time to work. All the more so given that the Charmin workers haven't had their incomes reduced.
But if it turns out that we somehow ended up with six times more Charmin factory workers than we need year-in and year-out, and if the recession is the shock that makes that clear, then creating an artificial bubble in Charmin just postpones the economic changes that have to happen.
We've got some of both going on in this economy. Some of this recession is just temporary -- people are wearing their stuff out while they hoard cash or pay down debt, but eventually they WILL need new underwear and couches and so on. A lot of the consumption that has happened in the past few decades was kind of stupid, though, and I think at least some of it is gone for good. No stimulus will bring it back.
Lets play the 'by that logic game'. BY that logic, we should announce a 50% tax on savings in 1 year. Imagine the stimulus!
I have 10 dollars of savings.
You have 0 savings.
I swap out to get 11 new dollars.
You get 0 new dollars.
10% VAT
I buy something that costs 10 dollars. +10% VAT = 11 dollars.
I am thus not paying the tax for my saved money, whereas if I earned new money, I would have to pay it.
Admittedly, the tax rebate seems much easier, that's why I included it.
Dr. Pat, you are correct that other countries have instituted a VAT despite this problem. Not sure how they did it, but two wrongs don't make a right. If they address the savings issue, I would be fine with a revenue neutral VAT - and if it were to replace payroll and corp. tax, I would be an advocate.
This would have made a lot more sense before we started pulling out of the recession. At this point spending now and spending a year from now won't make a huge long term difference and much pre-VAT consumption will be canceled by post-VAT under consumption.
If I use 25 rolls of toilet paper per year. I can buy 50 to avoid paying next year's VAT, but that's 25 rolls that I won't buy next year.