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04/25/2010

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Jack

Posner begins with one mistake. That is the retailer collects/pays the tax on the entire value of the sale, not just on his typically thin margins after cost of goods, labor, rent et al. In essence the VAT would do the same thing though spread over the various value added contributions of perhaps many companies.

I agree with him here:

" Our public debt is soaring at a rate of more than $1 trillion a year, and for political reasons it is extremely unlikely that the debt will be brought under control by higher tax rates, spending cuts (or forbearance to adopt new spending programs), or a rate of economic growth faster than the rate of growth of the public debt."

He's right, at this point it's more important to accept the reality of ongoing military obligations, debt service and other government costs including trying to spur this dead economy, tackling long delayed infrastructure maintenance, and lower our annual deficits than continuing to pretend our bills don't exist. Of the two choices raising taxes is the lesser evil. Letting the unaffordable, even in 2000, Bush tax cuts for the wealthy die a peaceful and long deserved death would be a good down payment.

"Devaluation is a standard response to excessive public debt, but would not make sense for the United States"

Agreed, and another reason devaluation might be counter-productive is that while traditionally the higher prices (in dollars) of imports would be expected to lower imports. But, in our case we are so dependent on imported oil that rising prices would simply be accepted leading to the cost-push inflation of the last (70's) "oil crisis". It's likely the same with cheap imports from China and others; ie that in the ranges of a 10% devaluation there are not cheaper substitutes.

VAT not creating distortions? How would I respond to another $4,000 being tacked onto that $40K hybrid I've been eying? Perhaps by patching up the old guzzler for a few more years? Or? buying used or cheaper car w/o the gas saving tech? How about homes? Borrow another $25k added atop the $250,000 of a modest abode? Perhaps stay put? And would the remodeling industry be driven even further underground as the cost of employing each other jumps another 10%??

"Most important, by discouraging consumption in favor of savings, a VAT would reduce the interest rate on our public debt and the Treasury’s dependence on foreign lenders."

Higher taxes of any sort, especially on strapped middle income earners and below, would certainly choke consumption but hardly in favor of saving. Since such a high percentage of our jobs are directly connected to consumption, is it wise to telegraph an even stronger message to NOT "go shopping" in what will prove to be at least a decade of unusually high unemployment?

Given that the "right" opposes the VAT as another "government taking", the left for sticking working folk with a regressive tax, while the rest of Americans find it confusing and complex, and that a resolution against the VAT passed some 80/20 in Congress, my guess is this is just another media tempest in a teapot due to the President having not kicked it off the table in no uncertain terms.

Peter Franklin

If Greece is compelled to reduce its government spending under current circumstances, perhaps the United States can and eventually will do likewise.

Giving the government new sources of revenue will in all likelihood increase government spending. As long as our economy is growing at a sufficient rate, we can live with a reasonable fiscal deficit. An additional tax such as the VAT will probably make our situation worse.

LATB

So, let me get this straight, part of the argument here seems to be that if the United States doesn't institute a VAT they could find themselves in a situation like Greece?

I'm not sure how anyone could seriously compare the two nations, their economies, or their situations. The difference are striking, the similarities are relatively few, and a quick search tells us that Greece has a VAT (of about 19% I believe), rendering the argument that a VAT here could help us avoid a situation like the one that happened there essentially moot if not outright bizarre.

Gordon Longhouse

I find it astounding that an economist would advocate a less efficient means of government finance as a means of limiting government spending. If this tactic actually worked Becker's argument might be defensible, but given US fiscal history over the past 10 years, it is clear that spending decisions in the US are not in any way linked to the availability of tax revenue.

While VAT rates may have climbed in Scandinavian countries, the experience of Canada, the UK, New Zealand and Australia where VAT rate increases are rare or non-existent would be more predictive of probable US experience. There are lots of ways to lock in a rate short of constitutional amendment. In Australia where VAT is employed to replace many state (sub-national) level transaction taxes, all 6 states plus the federal government must consent to any rise in the VAT rate. It hasn't happened and won't happen.

Posner is right in suggesting that GST is best used as a substitute for other less efficient taxes. In Canada it was substituted for a manufacturer's sales tax, in Australia for a wholesale level sales tax plus a host of state level, transaction based, pain in the neck taxes (stamp duties on mortgages and bank deposits for example). For one thing the promise of ending a tax would make the imposition of a new tax more politically acceptable. (Note I say MORE, the imposition of a VAT is a politically fraught process no matter what the circumstances).

One issue that US VAT advocates should consider but so far as I can tell have not, is how the federal VAT should work with excise taxes and state and local level sales taxes. Is there a problem with the cascade effects of tax on tax? Should compensation be paid and if so how?

A lot of rubbish has been published and no doubt will be published in the US about the VAT. Given the situation in which you find yourself, informed comment about the VAT in particular and tax policy in general is long over due.

Jim

How would a VAT effect the balance of trade inasmuch as there seems to a disconnect between US exports and imports relative to countries with a VAT at present?

Jack

Jim: I think the typical VAT setup gives a small advantage in competing on exports. Again, "I think" they don't collect the VAT on that last value added before export.

Decoupling H/C from the producers would likely make a much bigger difference. Consider a GM trying to export their substantial H/C costs on a per unit basis while other advanced nations are A. spending about half what we spend, and B. funding most of the costs from taxes on wages and profits. Just think, were H/C funded more by taxes those on WS who "earned?" 30% of all the profits in the US would be helping to pay the H/C of mfgs and exporters competing on razor thin margins and the typically low pay scales of those having to compete with lower wages around the world.

Jim Mulcahy

WRT: "Most important, by discouraging consumption in favor of savings, a VAT would reduce the interest rate on our public debt and the Treasury’s dependence on foreign lenders." in Posner's column.

If Americans consume less then foreigners will have fewer funds to invest in US treasuries. It is not at all clear that the interest rate on the public debt would decrease. Reducing the Treasury's dependence on foreigners may be a good thing but it will also reduce their dependence on us which may not be a good thing.

Jack

Jim M: The numbers for the US are both interesting and surprising to many. For all the chatter over imports, we import about $1.5 trillion, on the one hand more than any other nation, but still just over 10% of our $14 trillion GDP. So any reduction in overall spending would be felt 90% in the US and just 10% among all of our trading partners.

But this whole "consumption tax" discouraging consumption while enhancing savings seems a stretch in the first place even if the VAT were merely a substitute for an equal amount of income tax. If such were the case most middle income folk would find a bit more in their paycheck but then be confronted with higher prices on everything they buy. Would they be inclined to lower their std of living for having seen a bit more in hand against higher prices on the goods they buy??

Well, the VAT being discussed is meant as an additional tax, so it would surely constrain spending, after all a tax bite is a tax bite. As for incenting savings? Ha! Maybe, among those not having to pay their share of a progressive income tax!

david jowett

As long as there are no exemptions for necessities, VAT is an effective substitute for cutting benefits, because benefits disproportionally go on necessities. Probably we cannot get out of our fiscal mess without cutting benefits, so maybe this would work. We must accept that squeezing the upper tiers of the income distribution will nor work. Like tobacco taxes the target has to be the poorer half. Not that I like it. I would prefer reducing the cost of government. It is disgraceful that D.C. is the only thriving city. But with schoolboys in power, what can one expect?

Jack

David: Nearly everyone pays lip service to "cutting government". Perhaps it's a good exercise to look over these pie charts of expenditures to see where you could cut enough to make much difference:

http://www.warresisters.org/pages/piechart.htm

http://www.concordcoalition.org/learn/budget/federal-budget-pie-charts

Roger C

Gary, Richard,

Its interesting that neither of you appear to have considered the effects of demographics on the attractiveness of VAT. Is this because you consider these effects to be minimal?

With regard to other posts, Gordon Longhouse has hit the nail on the head - the experience of the US is much more likely to mirror the UK and Canada than Scandinavian countries. Also, its worthwhile to note that "low" US government expenses relative to other countries generally don't factor in the appallingly high cost of the US health care system or support for higher education, which tends to be much more extensive in those aforementioned Scandinavian countries

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If Americans consume less then foreigners will have fewer funds to invest in US treasuries. It is not at all clear that the interest rate on the public debt would decrease. Reducing the Treasury's dependence on foreigners may be a good thing but it will also reduce their dependence on us which may not be a good thing.

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added is a reasonable if crude proxy for the government services that a business firm (and hence its customersd) receives. The VAT also avoids the double taxation of savings under a corporate plus individual income tax system, further encourages savings by making consumption more costly, and reduces the disincentive effects of heavy income taxation. The VAT is criticized as

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