Talking VAT
In most countries, there’s a national health care system. A national health care system would be desirable. But it would also require more government revenue. And in most countries, there’s a Value Added Tax, which is a consumption tax that’s implemented in a different way from the retail sales taxes we have in the United States, but that’s basically similar in its impact. So it’s natural that people turn to the idea that a VAT might be the way to pay for health care reform. Indeed, once upon a time paying for health care reform through a dedicated VAT was a CAP policy position. And indeed just about everyone who looks at the budgetary situation sees a VAT as a possibility at least some of the time. The problem, though, is that this is probably the tax that progressives least want to put in place, and also the one that’s easiest for conservatives to attack. To get a VAT, you’d probably need a totally different political dynamic in which the right is prepared to concede the need for a revenue source, and therefore you get a compromise around a right-friendly form of tax increase. At any rate, The Washington Post had a VAT article yesterday that put it thusly:
A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.
This last thing is a point I’ve made before and, indeed, make again in a new American Prospect article—the net impact of a regressive tax to finance new social spending is progressive. What’s more, it would actually be pretty easy to make the VAT dramatically more friendly to poor people by exempting groceries and basic clothing items, since those account for a much larger share of the poor’s consumption bundles. That would render a VAT less regressive than the existing FICA tax for Social Security and Medicare. If you set the VAT rate high, that would then let you reconfigure the income tax into something closer to its original mission as a highly progressive tax that falls on a wealthy minority rather than its current status as a kind of workhorse revenue source drawing from the middle class. A federal VAT would also simplify state and local tax procedures, assuming states did the sensible thing and dropped their retail sales taxes in favor of piggyback VATs.
At any rate, I don’t really see this coming any time soon, but it’ll probably come some time. But if I were to see the country undertake any giant controversial tax measures, what I’d like to see done first is a substantial overhaul of the individual and corporate income taxes, aimed at broadening the tax base and lowering the rates.
70 Responses to “Talking VAT”
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May 28th, 2009 at 3:18 pm
This last thing is a point I’ve made before and, indeed, make again in a new American Prospect article—the net impact of a regressive tax to finance new social spending is progressive.
Wel,l you have claimed this before, but I am not sure you actually “made” this point. As I recall, your big evidence for this claim is one graph with an extremely crappy fit, a crappy fit that would largely disappear anyway if you distinguished Europe from the U.S., Canada, and Australia.
May 28th, 2009 at 3:20 pm
Sorry, I posted prematurely:
I wanted to go on to note that I do think the idea of a progressive consumption tax is a good one. I don’t know if it is politically possible, but at least it has merit.
May 28th, 2009 at 3:23 pm
Why would conservatives oppose a VAT if they support the “FairTax” sales tax?
May 28th, 2009 at 3:27 pm
In 1991 Canada introduced a VAT (called the GST) at 7%. It was a massively unpopular measure, and the government got slaughtered in the next election. But it was necessary, and it help the follow government tame the deficit (they kept the tax despite promises to repeal it.).
17 years later, people don’t care that much about the GST. A 2% reduction last year was greeted with a big yawn (if not puzzlement) by the electorate.
May 28th, 2009 at 3:28 pm
The other side of the VAT is that when the US exports goods which contain payroll tax as a business expense, that is part of the “Value Added” on which VAT is assessed in the part of the world that has a VAT. By contrast, a VAT is easily rebated at the border to remove that tax from the “value added” of US production.
So using a VAT to cut payroll taxes (or as an alternative to new ones) reduces the current discrimination against products that use American labor as a resource.
But if a VAT is used to cut progressive taxes, or protect corporate income or capital gains from tax increases … that amplifies the case against the VAT, while reducing or eliminating much of the case for the VAT.
May 28th, 2009 at 3:28 pm
I said it on the last VAT thread, but it’s still true, so I’ll say it again. It is simply not the case that VAT is regressive. A VAT tax is a flat consumption tax and flat consumption taxes are economically equivalent to flat income taxes. Moreover, income taxes in the US have many actually regressive components such as payroll taxes and loopholes, so it’s not at all clear that a flat consumption tax like VAT wouldn’t be more progressive than what we have now. Your case is even better than you are making it: it is eminently sensible to pay for progressive policy with a VAT.
May 28th, 2009 at 3:31 pm
As I recall exempting certain goods from a VAT is not a very good way of getting a progressive tax code. Its not targeted well and it is inefficient and once politicians start exempting things from the tax bad things happen. The way to take care of the regressive nature of the VAT is to use it to pay for government services such as universal pre-K or universal health care which can both be good for poor people and allow middle class people to share in the bounty. You can also choose to give people a ‘Grocery tax credit,’ but you really shouldn’t exempt goods.
May 28th, 2009 at 3:34 pm
Federal tax revenues were down in April 34% YOY.
March -28%
Feb -17%
Jan -11&
Dec -14%
It is not a coincidence that VAT is all the rage since incomes and income tax receipts are collapsing. As incomes and asset distributions make their final drive to the top a repressively designed VAT is the latest wet dream of the oligarchs.
It can only happen after the collapse.
May 28th, 2009 at 3:36 pm
I should point out that the GST in Canada exempts groceries. This is more complicated then you think – is a bag of chips bought at a 7-11 exempt?
Exempting “basic” clothing would be a nightmare. What’s basic and what isn’t? Where would you draw the line? Socks at walmart are exempt, but socks at Hugo Boss arent? What about the socks at Old Navy? Cotton socks are taxed, but polyester socks aren’t? It seems like a crazy idea.
Oh, and the tax should be hidden and build into the sticker price. Don’t follow the GST lead and show a before tax, and after tax price. Thats a recipe for voter outrage.
May 28th, 2009 at 3:37 pm
If the CAP position is that a government health insurance works and is competitive, then it should meet the requirement of voluntary purchase by individuals rather than funding by some other source. It is the basic fake that CAP uses.
Better idea, charge every resident of the nation a fee for using government health insurance, then you have a level playing field. The system would pass straight through Congress if it was funded by users directly, on a voluntary basis. But this approach is never taken, because, like the global warming fee, the ultimate issue with CAP is to get revenues first, then decide, without Due Process, how they are spent.
CAP promotes accounting fraud, simply put, and the actual definition of progressivism is accounting fraud.
May 28th, 2009 at 3:37 pm
A 2% reduction last year was greeted with a big yawn (if not puzzlement) by the electorate.
I think it was only a 1% reduction.
Ontario is getting ready to “harmonize” its provinical sales tax (PST) with the GST, which will have the effect of putting PST on services that used to be GST only. People aren’t thrilled.
May 28th, 2009 at 3:40 pm
Ah yes, bigY’s favorite topic, how can I get other people to pay my bills? Tsk.
May 28th, 2009 at 3:47 pm
@Realist,
A VAT, like a flat income tax, is regressive because poor people are likely to spend all their income, whereas wealthier people are likely to save or invest a significant portion of theirs. Therefore, poor people pay VAT or income tax on 100% of their income, while richer people pay those taxes on a smaller percentage of theirs.
May 28th, 2009 at 3:48 pm
The benefit to equity of exempting things like groceries and medicine tends to be overstated. If those items are exempted, the rate applied to other items must go up (holding revenue raised constant). So, while people would pay lower taxes on groceries and other items that are exempted, they would pay higher taxes on taxed goods. The exemption may be slightly progressive, but not nearly enough of offset the overall regressivity of such a tax. State and local governments would also likely oppose it, as the higher levies on goods would reduce consumption, thereby eroding revenue local governments generate from those sales.
May 28th, 2009 at 3:53 pm
Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer..
Except that unlike state sales tax at present, the carton of eggs is exempt in most places with VAT.
One big problem with VAT is enforcement. Another is the burden of collection, particularly on small biz or freelancers.. There are workarounds, though — the British system has an income threshold before registration, and a flat-rate scheme that simplifies returns. You charge the standard rate, pay a lower percentage to the VAT man, and keep the difference to offset business expenses.
May 28th, 2009 at 3:55 pm
What happend to the carbon tax (auction of emission credits) as a major revenue raiser as a CAP position?
May 28th, 2009 at 3:59 pm
Tax free employer sponsored health insurance is a regressive benefit, thus it needs to be removed.
Health care reform needs to be funded by a VAT, a highly regressive tax system.
I don’t get the logic. Are regressives in charge?
May 28th, 2009 at 4:00 pm
Another way to make the VAT more progressive is to provide a refundable tax credit to low-income households — which is what Len Burman proposes in his Congressional testimony (pg. 4): http://www.taxpolicycenter.org/publications/url.cfm?ID=901252
May 28th, 2009 at 4:02 pm
Wow, a progressive website drank the Cool-Aid:
a substantial overhaul of the individual and corporate income taxes, aimed at broadening the tax base and lowering the rates.
This is one of three races to the lowest global common denominator:
1. Worker pay/benefits
2. Taxes
3. Financial regulation
You’re helping the blue team inch ahead of the red’s in the race.
May 28th, 2009 at 4:09 pm
You’re obviously oblivious to statistics that show poor people consuming/spending somewhat more than their income, while the wealthy spend far less. Just as a small though experiment, do you think Bill Gates and Warren Buffet have spent as much as they made over the past twenty years?
May 28th, 2009 at 4:12 pm
All the people with no or far lower incomes, and there are going to be ten of millions more of them from now on, are going to love it.
Capital gains will not be taxed at all mind you.
May 28th, 2009 at 4:55 pm
The US spends roughly twice what other developed countries like France spend on health care. Are Americans that much dumber than the French that we would need a major new source of revenue on top of what we are already spending in order to achieve universal access to health care like the French have?
May 28th, 2009 at 5:38 pm
Why would conservatives oppose a VAT if they support the “FairTax” sales tax?
A VAT would be adopted in addition to an income tax. The crazy people advocating the “Fair Tax” wanted to get rid of the income tax.
I said it on the last VAT thread, but it’s still true, so I’ll say it again. It is simply not the case that VAT is regressive. A VAT tax is a flat consumption tax and flat consumption taxes are economically equivalent to flat income taxes.
Realist: How do you figure? I favor a VAT, by the way. I want us to get as close to the Denmark model as possible, so adopt a 25% Vat and I’ll be tickled pink. But I don’t see how you can say a VAT isn’t regressive, and I don’t see how you can say it’s the equivalent of a flat income tax. If Joe Millionaire earns $1 million/a year and spends half his income, he’ll pay $50K in taxes if the government has in place a 10% VAT. If it has in place a 10% flat income tax, he’ll pay double that. Also, in general poor people spend a higher portion of their incomes than rich people, and so a VAT subjects a greater percentage of the former’s income to taxation than the latter. And that, by definition, is regressive.
The benefit to equity of exempting things like groceries and medicine tends to be overstated.
I agree. Were we ever to adopt a VAT, I’d personally want the base to be as broad as possible, thereby keeping the rate as low as possible. You can always use the proceeds to cut income or payroll taxes for the poor, or better still use the cash for programs that support working families.
Exempting “basic” clothing would be a nightmare. What’s basic and what isn’t? Where would you draw the line? Socks at walmart are exempt, but socks at Hugo Boss arent? What about the socks at Old Navy? Cotton socks are taxed, but polyester socks aren’t? It seems like a crazy idea.
Also, you’d only be exempting the final, retail stage of the product’s production, right? I mean, if you’re a cotton grower, you collect VAT on your sales of raw cotton to a mill, don’t you? (and then you subtract the VAT that you have in turn paid — on fertilizer, tools, seeds, etc., — before remitting to the government that VAT you collect from your customers). And then the mill collects VAT on the cloth that it has produced (and subtracts the VAT that it has paid from the amount it sends to the government). And so on, and so forth, all the way up the line until the socks are in a bin at WalMart waiting for customers. Isn’t this how a VAT works? And if so, even if the government exempts clothing purchases from VAT, isn’t in essence an amount of value added tax built into the price?
May 28th, 2009 at 6:00 pm
Re: The problem, though, is that this is probably the tax that progressives least want to put in place, and also the one that’s easiest for conservatives to attack.
I can see why progressives would be disinclined to go for a VAT, but I thought conservatives were at least mildly friendly to the idea of a consumption tax due to its regressivity.
re: This is more complicated then you think
It needn’t be. Michigan’s sales tax exempts groceries too, and the definition is very simple: if you can eat it or drink it and it doesn’t contain alcohol and wasn’t prepared on site (e.g., resturant, deli and cafeteria foods) then it’s tax free.
May 28th, 2009 at 7:07 pm
MattYoung:
Due Process refers to legal proceedings and processes. Even if you grant the usual libertarian rubbish about taxation being seizure of property, it’s still the case that due process has nothing to do with spending. Appropriations are an explicit Constitutional power of Congress – so how could they violate due process? How could you even have due process for spending – hold every appropriation bill to a referendum? Get everyone in the country to sign off on the checks? This is a representative republic; the process of election is the mechanism where taxing and spending are legitimated, not the courts.
May 28th, 2009 at 7:43 pm
And so on, and so forth, all the way up the line until the socks are in a bin at WalMart waiting for customers. Isn’t this how a VAT works? And if so, even if the government exempts clothing purchases from VAT, isn’t in essence an amount of value added tax built into the price?
But my point was that Matt said basic clothing. Seems like he was saying that certain brand or class of socks or shirts would be “basic” and not taxed, and pair of socks or shirt would non-basic and would be taxed.
So how would you class something as basic and not.
May 28th, 2009 at 7:50 pm
“Highly visible, it would increase the cost of just about everything, from a carton of eggs”
Can’t speak for other countries but in the UK eggs are zero rated for vat. And generally food (except from restaurants),childrens clothing,work clothing, public transport ,books,newspapers,medicines,domestic travel and a pile of other stuff.
May 28th, 2009 at 8:08 pm
A VAT, like a flat income tax, is regressive because poor people are likely to spend all their income, whereas wealthier people are likely to save or invest a significant portion of theirs.
People say this every time I bring it up the flatness of consumption taxes, but it is false. The reason it is false is that all income is eventually either spent on consumption or spent on nothing. Investment is just future consumption–there is no end point for income other than consumption (except burning it). So as long as future consumption is taxed at the same rate as current consumption, taxes on consumption are taxes on currently invested income just as much as they are taxes on currently spent income.
May 28th, 2009 at 8:21 pm
You’re obviously oblivious to statistics that show poor people consuming/spending somewhat more than their income, while the wealthy spend far less. Just as a small though experiment, do you think Bill Gates and Warren Buffet have spent as much as they made over the past twenty years?
Let’s go with another thought experiment. Say income tax is 10% flat and you make $1000. You pay $100 in taxes and have $900 left. You can either buy $900 worth of consumption now, or invest it; let’s say 10 years doubles your money to $1800, then you can buy $1800 worth of consumption in ten years.
Now let’s replace that with a 10% consumption tax. You make $1000, and can spend $1000 on consumption, which is equal to $900 after tax. Or you can invest $1000, double it in 10 years, and spend the $2000 in consumption ten years in the future–with that also taxed at 10%, for $1800 worth of consumption ten years ago.
Notice that these scenarios are the same. A flat consumption tax and a flat income tax are equivalent, and the fact that poor people invest less has nothing to do with it.
But what if rich people never spend their money, holding it to perpetuity? This is equivalent to just burning cash–they aren’t taking advantage of their worth. Removing money from circulation creates deflation, which makes everyone else richer at the expense of the rich. So the money that isn’t spent gets “taxed” anyways–and at a 100% rate!
May 28th, 2009 at 8:22 pm
Realist:
Rich people save a lot more than poor people, as well.
This isn’t something new – it’s called marginal propensity to consume.
May 28th, 2009 at 8:26 pm
Steven,
Did you read my posts? If rich people really do save more than poor in the long term, then the money that is never spent on consumption creates deflation, which is the same as a 100% tax on the rich.
May 28th, 2009 at 8:31 pm
People say this every time I bring it up the flatness of consumption taxes, but it is false.
It’s not false. Taxes aren’t paid by ghosts. Taxes are paid by people. Individual people. A tycoon who spends only a tiny fraction of his income over the course of his lifetime will have enjoyed a far lighter tax burden (under a consumption tax regime) than his butler. One can make an argument such an arrangement is acceptable — even desirable — because by denying himself consumption the tycoon has provided capital to make everyone else richer. But one can’t call it “flat” because the tycoon has paid out far less of his income to the tax man than the butler has.
May 28th, 2009 at 8:38 pm
It’s not false. Taxes aren’t paid by ghosts. Taxes are paid by people. Individual people. A tycoon who spends only a tiny fraction of his income over the course of his lifetime will have enjoyed a far lighter tax burden (under a consumption tax regime) than his butler. One can make an argument such an arrangement is acceptable — even desirable — because by denying himself consumption the tycoon has provided capital to make everyone else richer. But one can’t call it “flat” because the tycoon has paid out far less of his income to the tax man than the butler has.
I’m not arguing that taxes are paid by ghosts. My argument is very simple math. It’s not that “by denying himself consumption the tycoon has provided capital to make everyone else richer” (that may be true, but it’s a different argument). Rather, it’s that by denying himself consumption the tycoon has left more consumption for everyone else–including the government. It’s as if the tycoon had made less money in the first place–or, as I said, as if the difference between what he made and what he spent was taxed at a 100% rate. To an accountant that may be a lower tax burden, but economically, it is a much higher tax burden.
May 28th, 2009 at 8:41 pm
But my point was that Matt said basic clothing. Seems like he was saying that certain brand or class of socks or shirts would be “basic” and not taxed, and pair of socks or shirt would non-basic and would be taxed…So how would you class something as basic and not.
Alex: maybe it would be difficult, but I suspect you could exempt “basic” clothes by basing it on the dollar value of a given article of clothing (say, under $15). But my point is that — unless I’m completely confused as to how a VAT works (entirely possible as I’d be the first to admit!) any “exempted” good will nonetheless still have a certain amount of VAT tax built into the purchase price, to the extent that the components going into any product will have already been hit by VAT (unless, of course, you exempt wide swathes of goods, components, and services from VAT, but then things must get awfully complicated).
May 28th, 2009 at 8:54 pm
Realist:
That’s not how deflation works. Inflation reduces the value of currency; deflation increases it. If you sit on your savings, forcing deflation, your net worth goes up, not down.
May 28th, 2009 at 9:00 pm
Inflation reduces the value of currency; deflation increases it. If you sit on your savings, forcing deflation, your net worth goes up, not down.
The effect on value is evenly divided across all the currency. The benefits are distributed while the costs are individual. So yes, not ever spending X amount of money makes all your other money a tiny bit more valuable, but not anywhere near enough to compensate for never spending X, and it makes everyone else’s money that much valuable as well.
May 28th, 2009 at 9:05 pm
Except that money is a finite (albeit growing) commodity, rich people have more of the money, and deflation can get quite substantial. Moreover, you’re ignoring the impact on credit – credit starts getting much more expensive, which really hits more modest income people hard.
There’s a reason why the financiers of the Gilded Age were militantly pro-gold standard; it made them hugely rich at the expense of people who didn’t have much money (farmers and workers).
May 28th, 2009 at 9:35 pm
Steven,
The entire point is that the money is never spent. Burning money is never going to make you richer through increasing deflation–it is a mathematical impossibility.
May 28th, 2009 at 9:37 pm
We could dust off the old sumptuary laws. They worked so well.
May 28th, 2009 at 9:37 pm
“anonymous Says:
May 28th, 2009 at 3:23 pm
Why would conservatives oppose a VAT if they support the “FairTax” sales tax?”
God, liberals are stupid. Those conservatives that support the “Fair Tax” propose that it replace the INCOME TAX, you moron. Jeez!
May 28th, 2009 at 9:40 pm
Full-auction cap-and-trade with a *scientifically based* cap would prevent any need for a VAT for decades, if not the forseeable future. It would turn deficit to surplus.
Sadly, this seems even *harder* to pass than a VAT, although it’s *better* and will be *necessary* to avert major disaster.
May 28th, 2009 at 9:42 pm
“even if the government exempts clothing purchases from VAT, isn’t in essence an amount of value added tax built into the price?”
Actually, what happens is that the “final retail seller” of VAT-exempt goods gets a massive VAT refund (a refund for the sum total of the VAT paid down the line). So no.
May 28th, 2009 at 9:45 pm
pseudonymous in nc wrote: Except that unlike state sales tax at present, the carton of eggs is exempt in most places with VAT.
Sales taxes vary by state, with some taxing groceries at the full rate, some at a reduced rate, and some not at all.
May 28th, 2009 at 10:21 pm
I just can’t understand how anyone can think that raising prices (taxes) increases revenue. It just doesn’t work. Doesn’t work in business, doesn’t work with government. If you want more revenue you MUST increase GDP. There is 50+ years of data that clearly shows that GDP growth is the only thing that increases tax revenue, regardless of rates. In fact, lower rates produce higher tax revenues. This is simple math, yet no one seems to be able to comprehend it.
As for a consumption tax, its a GREAT idea, BUT only if all taxes created by the 16th Amendment are repealed. You want to increase revenue. Get rid of all income and capital gain taxes, and just go to a consumption tax instead. GDP will explode because investment is rewarded not penalized. Tax revenues will grow exponentially, as investment requires consumption. Amazing how politics distorts so much of this.
May 28th, 2009 at 10:59 pm
Better than a VAT is a progressive consumption tax. It works like the income tax, with withholding, etc., except that the tax is levied on what you buy instead of what you earn. It’s progressive because the rate goes up as your spending goes up. The leading proponent is academic Robert Frank, a raging liberal.
Finally we’d be taxing what we want less of (consumption) instead of what we want more of (work.) Of course, we need to wait until the current deleveraging phase is over, because we need people who can afford it to keep opening their purses.
Government would like it much more, because spending is much less affected by the ups and downs of the economy than is income, making tax revenues much more steady.
May 28th, 2009 at 11:23 pm
I am far from being an expert on this subject. But if we do get a VAT of 10 -25 percent wouldn’t that lead to a sharp drop in spending.
I know that some commenters will think of a rational reason why it will not.But people ,especially as consumers, generally aren’t rational.
As i said ,I do not know if a VAT is a good or bad idea.But i do think that the effect of a price increase during a rescession ,should at least be thought about.
I also fail to see how it can be anything but regressive.Yes , we can exempt certain items such as groceries.but lets face it. In the unfair world that we live in ,who will benefit from exemptions,the rich or the poor?
By the time the lobbyists get done with any VAT bill , I doubt whether it will be progressive. It’s not the idea of a VAT that I worry about.It’s the end result that I fear.
As i said , I am no tax expert, and I hope I am wrong about the lobbyists.But it is something to think about.
May 28th, 2009 at 11:52 pm
mark l:
Wow. That’s a whole bunch of crazy. First of all, the supply-side/Lafer argument that lower taxes increase revenues is quite simply gibberish. No economist, not even your most conservative Chicago School Friedmanite, believes that.
Second, investment is only one part of the economy. Consumption is another big part. If you shove a whole bunch of money into investment, shift taxation from the rich to the non-rich, and create a disincentive to consume, we’re going to see an economic order that makes the current financial crash look like a speedbump.
May 28th, 2009 at 11:54 pm
Stephen and Realist -
I’m really enjoying your debate; I hope you haven’t given it up completely.
Stephen, why would holding money (in a bank, presumably?) increase the cost of credit? Wouldn’t it increase the world’s supply of liquid capital?
If either of you would be willing to look over this post I wrote a couple weeks ago for a group blog about shifting a VAT, I’d be very grateful. I’m not certain if I’m missing something, and I’d very much like to know.
In any case, I hope you continue the talk here.
May 29th, 2009 at 12:04 am
While conservatives have been treating taxes amounting to 3 or 4 percent of GDP as the most critical existential issue of the age, America has gone from slow to now rapid relative decline vis a vis the rest of the world. Long term the dollar will continue to decline and someday will be worth perhaps 10% of what it once was.
Geitherner is over in China now reassuring them how safe their US bond holding are now, and they are laughing at him. They know their value will be inflated away. Those bonds are a ledger entry of the central bank and have no meaning. The dollars we sene them already did their work. The important thing is they built a gigantic infrastructure and educated and trained hundreds of millions of people while we closed our factories and invented fancy financial, whose main function was actually to avoid taxes, and allowed a tiny minority to gain astounding wealth. Anything else they get back out of those dollars is gravy. They were part of the path to our own destruction, at the alter of cheap credit.
Taxes are not unimportant but in the grand scheme of things the fetish about them will seem bizarre and unimportant. When the history of Americas decline is written the percent of taxes to GDP being 18% or 23% will not even be considered an issue in 100 years. It will have no meaning, except to perhaps some Bill Kristol IV’s and the linke, other dead enders from an age long gone.
May 29th, 2009 at 12:05 am
Matt,
I have an idea for “broadening the base of income taxes in order to lower the rates”. It is to limit the deductibility of charitable giving to the proportion of work the recipient 501-C3 organization provides outside the pool of givers.
So, for a church, nothing about its own operations — the building fund, the choir robes, the minister’s salary, the taxes on the structure and grounds — would be deductible. Instead, the services that the church provided to outside groups would be. For most churches this would be 10 to 15 percent of the total operations at most. For some of the “mega-churches” with Million-Dollar-Ministers, it would be 3%.
For arts groups the portion of donations that go to subsidize public performances for which admission is charged would not be deductible. If the symphony or ballet goes to a school and provides a pro bono performance that would be deductible. When a museum provides free tours for church or low-income groups or sends a curator for a lecture at a school, that should be deductible. Restoration of paintings arguably would be a “public good” as well. But the operating budget subsidy that allows “free admission” for “members” should not be deductible.
I recognize that defining “outside groups” would be somewhat difficult for churches. Some of their members might sneak a lunch or two at the Friday soup kitchen, but I’d include that. Others might not; perhaps the benchmark could be “occurs at a location other than the church facility”. This would be a decision for democratic debate.
Far too much of “charitable giving” is Peter giving money to a 501-C3 which then provides a service for Peter. It’s a scam.
Of course the large arts groups and mega-churches would scream because many of their rich supporters would cut their contributions. But I say, if they love God, they should give with no thought of return. If they want to see Tosca or a Monet exhibit, let them pay full freight.
May 29th, 2009 at 12:53 am
I don’t get the logic. Are regressives in charge?
Yes, Zero and the liberal regressives are in charge, that’s why everything is so screwed up.
May 29th, 2009 at 1:18 am
Michael Anderson:
First of all, it’s Steven with a V. No biggie, tho.
Next, money saved isn’t necessarily saved in a bank, and money saved in a bank isn’t necessarily lent – such as is the case now. The important factor is that it’s drawing money out of circulation, which makes the “price” of money higher.
The political-economic story of the last half of the 19th century in the U.S is a fight over inflation and deflation, centering over issues such as the gold standard versus greenbacks, the terms of the repayment of Civil War debt, the benefits of balanced budgets vs. a standing debt, and the alternating waves of gold standard deflation (which was the norm, as gold was gradually removed from the currency via hording, loss of coinage, and the effects of time) and inflation (an occasional event when new gold strikes expanded the circulation of gold, thereafter to be replaced by deflation).
At a time when the American economy was rapidly developing there were chronic shortages of currency, especially out West, and especially among farmers and to a lesser extent industrial workers. The Civil War – especially the movement towards a national banking system, the massive Federal orders into heavy industry, and the huge amount of debt run up – accelerated an already existing problem of extreme concentration of capital in the eastern financial sector. This concentration allowed two things to happen – one was that financiers were able to extract quasi-monopoly rents on the credit requests that farmers and workers experienced on a regular basis (for farmers at the beginning of , and second, financiers encouraged deflation as a means of improving their net worth and their liquidity (as an increase in the value of cash would improve their balance sheets free of charge).
There was a massive economic policy dispute between these two groups. Farmers and workers generally preferred an inflationary economic policy, because they tended to be debtors rather than creditors, and because a scarcity of credit exacerbated their economic insecurity – hence, they liked it when during the Civil War the government printed a lot of greenbacks, the first time the Federal government had ever issued non-specie currency. There was a big fight over whether greenbacks would be continued after the war – and the financiers won, and the greenbacks were discontinued in favor of gold, which had a big deflationary impact. Similarly, workers and farmers preferred the Civil War debt to be paid off gradually, as this would keep taxes lower and prevent money from being sucked out of the economy – again, they lost; Civil War debt was to be paid at face value (which resulted in a huge payout for speculators) and in gold, which again massively deflated the currency.
This turn of events was a major impetus behind the Greenback Party and the Populist Party towards the end of the 19th century, because farmers workers felt that they were being screwed over by bankers and other big holders of capital (like corporations), and that they were being made to pay the price twice over (first in having to pay the taxes for all of this, and second in getting the worst of resulting boom and bust cycles).
That’s why I’m arguing that all other things being equal, deflation is good for the rich and bad for the non-rich. Even if they don’t spend it, it massively increases their net worth and makes things harder for everyone else.
May 29th, 2009 at 1:31 am
And I commented on your blog.
May 29th, 2009 at 2:07 am
Michael Andersen, I agree with most of your concrete proposals in the blog, but I don’t think your way of thinking about it is correct. The fundamental issue is that production and consumption are tightly coupled. Everything that is produced is eventually consumed (or wasted); this is true by definition. People work in order to consume, and work itself is what creates production to be consumed. So if you tax work, you are taxing production; if you tax income, you are taxing consumption; and these two statements are in fact saying the same thing. You simply cannot decouple consumption and production such that work is encouraged by the tax system and consumption is discouraged.
Well, there is one way to do it–increase the waste term. More waste means people have to work more for every unit of consumption, and in some scenarios this can increase work while decreasing consumption. But I don’t think that’s a good idea.
May 29th, 2009 at 2:13 am
Even if they don’t spend it, it massively increases their net worth and makes things harder for everyone else.
Increasing net worth which is not spent does nothing for you. Not spending is precisely what creates the deflation in the first place. Also, the deflation that comes from the rich not spending results in increased value of earned income, but does not decrease the amount of income earned–so it makes everyone (except the person not spending) really richer, not just nominally so.
May 29th, 2009 at 2:51 am
Thanks a ton, Steven and Realist.
Steven (sorry about the spelling, by the way), I’ll respond to your excellent Geek Buffet comments on that thread, and I’ll let you keep duking it out with Realist over deflation on this one.
Realist, I take your point that every dollar of labor produced must eventually be consumed. But even if these functions are economically equivalent, our tax system doesn’t treat them equivalently.
Labor, for example, is taxed progressively and calculated on an annual basis. The progressivity modestly dampens our incentive to bring in marginally greater income. The annual basis gives a strong incentive to earn the same amount each calendar year, rather than to let your income spike in some years and fall in others.
Consumption, however, is taxed regressively (largely because it doesn’t capture services) and calculated on a constant basis. The regressivity gives us an incentive to spend on high-end services (rather than saving money so we can retain a basic level of income in retirement, for example) but increases the marginal rewards of higher income. The constant basis means that it doesn’t matter whether we consume something now or later; without policy changes, we’ll presumably pay the same tax either way.
None of this is inconsistent with Realist’s central point: a dollar earned will eventually be a dollar spent.
Let’s review the score.
On equity: income taxes win (progressivity)
On incentivizing productivity gains: sales taxes win (regressivity)
On administrative costs: sales taxes win (harder to game a tax that’s calculated on a constant basis)
If you just want to count, sales taxes win 2-1. But equity is pretty important, so I think it’s anybody’s game.
We might also solve the “annual basis” problem with income taxes by calculating all income taxes on a constant basis, as we do with payroll taxes.
I’m sure you’ll correct me if I’m wrong. Please do.
May 29th, 2009 at 4:09 am
I agree with everything you said. And it’s true that it’s easier to make an income tax progressive than a payroll tax. But despite the way sales taxes are treated now in the US, there’s no particular reason a truly flat consumption tax couldn’t be implemented, and we could deal with the flatness (not regressiveness) of such a tax by implementing progressive policy with the revenues, as suggested by Matthew. That hits all three of your points.
May 29th, 2009 at 4:13 am
A “post-sale” VAT (like a current sales tax) would probably be a better incentive to save than a “pre-sale” VAT, and would most likely have the least “dead weight” loss out of any consumption tax.
In any case, it’s a good idea. It would allow you to cut back on the income tax while stretching the brackets (so that you get higher marginal income tax brackets stretching up to those who make $5 million a year and more) without hitting that magical “47%” point where you start to see a rise in tax evasion.
May 29th, 2009 at 7:25 am
StevenAttewell Says:
May 28th, 2009 at 11:52 pm
mark l:
I just can’t understand how anyone can think that raising prices (taxes) increases revenue. It just doesn’t work. Doesn’t work in business, doesn’t work with government. If you want more revenue you MUST increase GDP. There is 50+ years of data that clearly shows that GDP growth is the only thing that increases tax revenue, regardless of rates. In fact, lower rates produce higher tax revenues. This is simple math, yet no one seems to be able to comprehend it.
As for a consumption tax, its a GREAT idea, BUT only if all taxes created by the 16th Amendment are repealed. You want to increase revenue. Get rid of all income and capital gain taxes, and just go to a consumption tax instead. GDP will explode because investment is rewarded not penalized. Tax revenues will grow exponentially, as investment requires consumption. Amazing how politics distorts so much of this.
Wow. That’s a whole bunch of crazy. First of all, the supply-side/Lafer argument that lower taxes increase revenues is quite simply gibberish. No economist, not even your most conservative Chicago School Friedmanite, believes that.
Second, investment is only one part of the economy. Consumption is another big part. If you shove a whole bunch of money into investment, shift taxation from the rich to the non-rich, and create a disincentive to consume, we’re going to see an economic order that makes the current financial crash look like a speedbump.
Steven:
First of all “crazy” and “gibberish,” or other labels on people and ideas seem to be a common theme these days, as ways of minimizing people and positions. Not necessarily constructive. And, whatever current economic thinking is, it has largely gotten us to where we are today. So, I’m not sure it rests on such solid ground.
Instead, wouldn’t it make sense to produce real data to debunk an idea. The fact is there is strong data that lowering tax rates produces more revenue, both in this country and beyond (Ireland). Certainly there is overwhelming evidence around the world that higher rates does not produce more revenue.
I’m not a supply-sider (again a label that evokes an emotion in people such that they may not think for themselves), but data is data. Hauser’s Law may not be embraced by everyone, but it contains valid data in terms of tax revenues as a percentage of GDP regardless of rates. That is real data, even if folks choose to find ways to shoot holes in its basic assumptions.
I live in a state where the taxes are so high, folks are leaving…, leaving. Hence, so is the revenue. You can’t continue to tax and expect revenue to increase. It doesn’t work – it is fantasy. Where is the DATA that shows that it does. If you run a business and you are spending more then you are taking in, will just raising prices fix that? Of course not. I think more economists need to actually run businesses to understand fundamentals. Economists are like sportscasters that have never played the game. They just don’t understand nuance or fundamentals. Their heads are to far in the clouds.
We need a broad based consumption tax. It should be high enough to generate a level of revenue that can support our needs, rather then our politicians (Republican and Democract) needs to get reelected by favoring those groups that support their relative constituencies. Our founding fathers specifically limited the types of taxes our government could collect (”excise”). It took an amendment to the constitution during a time of great wealth concentrating in a very, very few individuals, and a populist revolution so to speak, to enact the 16th amendment. Its time is gone. It needs to go away. For all of us who invest our hard earned currency in businesses, employ people, help families buy homes and cars with our efforts, we simply will not do so if the penalty for success continues to overwhelm the risk. This is simple economics. Everything else is…, to borrow your term “gibberish.”
May 29th, 2009 at 9:52 am
This first mistake here is thinking that the Federal Government needs to “raise revenue”. A currency issuer does not need to do anything to obtain it’s currency of issue – it simply creates it by spending it. What it does need to do is manage it’s currency so that people will accept it in return for the real goods and services the issuer wants.
That’s what taxes are for – to create a notional demand for the currency of issue. It’s the same reason why the subway collects tokens or electronic swipes at the turnstile.
How does this help us to understand tax policy? Simple – the government is in competition for it’s share of output with the private sector. Since the government can always win any bidding war, if private demand + public demand is greater than the total supply, all it will do is bid up prices. So we need a set of policies that can reduce private sector demand in the fairest way, while creating the fewest distortions in the real allocation of capital.
Income taxes generally suck at this. First, they are hugely wasteful – armies of accountants, lawyers, etc. who do nothing but look for and lobby for loopholes, without creating any real output. Investments made purely for tax avoidance are another boondoggle. And worst, it penalizes savings. If I make $100,000 and spend only $50,000, I have already been voluntarily “taxed” at 50% – but government will then go and reduce my bank balance in order to “raise money” – an action that gains them nothing and only serves to piss me off.
Consupmtion taxes are better, but they still involve a lot of overhead and distortions. The main problem with the fiartax proposal is that the real agenda is to shrink governement, so they propose unrealistically low rates. I myself think that Henry George had it right and we should go to a pure property tax on unimproved value. But that won’t happen, so I guess maybe a VAT is the way to go…
May 29th, 2009 at 11:41 am
We do need to clean out the thicket of loopholes and exemptions, but given the same political economy, consumption taxes will start to collect the same thicket … that is more about how long the tax has been in place to collect actions in favor of special interest groups than about the nature of the tax.
That’s silly … why should government tax consumption while not taxing wealth accumulation? The primary reason for the unwarranted worship of promotion of “savings” as a goal is that since it is primarily the wealthy that have money to save, policies that “promote savings” are invariably increasing the share of national income retained by the wealthy, but hiding it under an upside down model of the economy in which “getting income and not spending it” has some kind of magical beneficial force.
May 29th, 2009 at 12:56 pm
Mark I:
There’s much better evidence that the opposite is true – see here, here, here, and here. But if you want U.S based evidence, the best examples are the massive deficits created by the Reagan and Bush II tax cuts – tax cuts reduced revenue, not increased revenue – and the opposite effects of the Clinton tax increases, which increased revenue, not decreased revenue.
And the people saying this aren’t the same economic thinkers who’ve been in charge – these guys are the ones who were screaming at the Bush people, telling them that tax cuts don’t increase revenues, and do increase deficits.
May 29th, 2009 at 1:49 pm
consumption taxes will start to collect the same thicket …
Maybe, but it’s harder. The main opportunity for gaming income taxes is defining what “income” is, particularly for businesses. (A fact that is intentionally ignored by flat-tax proponents) With a VAT, it’s a pretty simple percentage of the invoice, and every business has an incentive to police it’s suppliers (since it deducts tax paid from it’s own bill).
That’s silly … why should government tax consumption while not taxing wealth accumulation?
While I’m not one of the people who gnash their teeth about our savings rate (investment creates it’s own savings, so there’s never really a problem in that regard), the fact remains that accumulating money is not inherently an antisocial act that should be penalized. (Indeed, it’s voluntary taxation,) If you have a million dollars in your bank account, you have no ill effect on me. If you take that million and spend it on a yacht, you are using real resources that could be used for other, more useful purposes (either public or private). The real problem is not inequality of wealth; it’s inequality of consumption. That’s why, even without broad-based comsumption taxes, I would support punitive luxury taxes on cars, boats, mansions, etc., that would be judged as successful by how little they take in (i.e., the idea is prevent the consumption, not to “raise revenue”)
May 29th, 2009 at 3:32 pm
Hold up there, Jimbo. “The real problem is not inequality of wealth; it’s inequality of consumption”? No.
Wealth isn’t just forgone consumption – it also represents economic security. it’s an additional form of potential income you can turn to when things get rough – you can rent out a room in your house, you can get a loan using your wealth as collateral, you can get dividends and other forms of investment income, you can sell off assets to generate cash on hand.
A lack of wealth means that your economic status is extremely vulnerable to sudden income shocks. The sudden loss of a job or a debilitating illness or the loss of a vehicle or a home or your insurance, or any other form of income or cost shock, can very quickly push you down from near-poverty or even middle-class status into poverty and below poverty.
That’s why wealth inequality matters; not only are the poor worse off on absolute terms, but they also are much more exposed and vulnerable to “the vicissitudes of modern life.” That’s why a progressive society seeks to spread the wealth (not just the income) around, so that the non-rich can have economic security.
May 29th, 2009 at 4:29 pm
Steve –
All the problems you list are problems of unequal consumption. They might be brought on by a lack of personal wealth, but merely erasing some zeros from other people’s bank accounts (which is all, in real terms, taxes do) does nothing to help these poor unfortunates. And you can build “assets” like unemployment insurance, universal health care, etc. that defend the security of the less well off without having to erase those zeros (as long as they are not converted into demand for those real assets). As I said – what really matters is how the real goods and services that are produced are distributed, not nominal wealth. What would you rather have: a job that paid you $100,000/yr or one that paid you nothing but granted you an expense account that paid for a fancy house, a car for you and your wife, a personal chef, tutors for your children, etc.? It’s not about the money – it’s about what you can do with it.
May 29th, 2009 at 5:53 pm
StevenAttewell Says:
There’s much better evidence that the opposite is true – see here, here, here, and here. But if you want U.S based evidence, the best examples are the massive deficits created by the Reagan and Bush II tax cuts – tax cuts reduced revenue, not increased revenue – and the opposite effects of the Clinton tax increases, which increased revenue, not decreased revenue.
And the people saying this aren’t the same economic thinkers who’ve been in charge – these guys are the ones who were screaming at the Bush people, telling them that tax cuts don’t increase revenues, and do increase deficits.
Steve:
You’re just crooning the partisan line. I’m not a dem or Rep. I’m an Independent , aka “free thinker” and not drinking anyone’s kool-aid. Krugman? Come on. He’s so partisan its kind of amusing. There’s just no objectivity there. As for deficits. Again, wrong metric. Deficits are the difference between revenues collected and spending. And, again attributing deficits to Presidents is silly. We need to look at the entire picture. Congress rules the budget. And, although I’m no fan of the Repubs, Congress under Clinton was largely controlled by the Repubs, if memory serves me right. But I’m fine if you want to give the credit to Clinton. Does that mean we should blame the Dem Congress and Bush for the spending frenzy the last few years. I think so. No cake and eat it too.
So, please lets not make this a partisan discussion. Our tax system is a complete mess. We tax everything. I buy property, pay taxes on it, and then pay taxes to own it. What a joke. I don’t own it, I’m renting it from the Govt. We need to look at this not through a partisan eye, or rich vs. poor, this is about what is the best way to generate revenue for the Govt, and increase GDP. Raising taxes CAN’T increase government revenue unless GDP remains static, at a minimum. That’s where data is relevant. Has GDP ever grown consistently when raising taxes, other then an isolated year or two. No data supports that.
So, no more liberal or conservative soap boxes. Something needs to change, and more and higher taxes has NEVER, ANYWHERE, produced the desired result. It just doesn’t work. The only think more taxes has consistently generated over history is revolution. And that’s a fact.
May 29th, 2009 at 8:08 pm
[...] In Economics, History and Politics, Taxes on May 29, 2009 at 5:09 pm Note: this is a response to this comment on Matt Yglesias’ blog. Since Yglesias’ site isn’t letting this response go [...]
May 29th, 2009 at 8:10 pm
Mark I:
This damn site isn’t letting me post my response, I’ve put it up on my blog here.
May 30th, 2009 at 10:51 am
Has GDP ever grown consistently when raising taxes, other then an isolated year or two. No data supports that.
The 90s, and for that matter the 1950s and 1960s when tax rates were astronomical compared to now. And I fail to see why taxes (within broad limits) should have any effect on GDP at all. Taxes are just what we pay to consume government services. There’s no reason that paying more (again within broad limits) to consume more govermnment services should cause us to produce less overall. It may of cousre cause us to consume less of other goods and services, but not produce less of them. No one would make that argument about the consumption of any other goods or services. I see no reason to treat govermment services as if they are governed by very different laws.
May 30th, 2009 at 1:43 pm
JonF:
What Mark I is basically extolling here in a rather extreme form is the disincentive thesis of Lafer. However, empirically, the reverse seems to be the case – people who earn a lot of money often like earning a lot of money, so when their taxes go up, they work more to keep their earnings up.
And I absolutely agree about your argument about government services as consumption. Now, of course, at the high end, you do run into the problem of not enough capital to go around, but the high end is rather high – as the Scandinavian case shows.