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Brooks, David, “Let’s Talk About X,” The New York Times, 11/30/12

December 2, 2012 By

“…Even the 1986 reform, which closed loopholes and lowered rates, didn’t do much to increase growth. Even after the reform was passed, people were paying the same amount in taxes, so they faced the same basic incentives.

If you closed loopholes and raised rates, as we’d have to do this time around, then you would make the incentives worse. Raising top tax rates may not be as cataclysmic for the economy as some have argued, but this is still one of the most growth-killing ways to raise revenue.

In other words, if we’re going to simultaneously address our two most pressing needs — raising revenue and boosting growth — we’re going to have to break free from the 1986 paradigm.

That means asking the basic question: What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.

You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. This idea is off the table right now, but reality will inevitably drive us toward it. We have to have a consumption tax if we want to both grow the economy and reduce debt.

But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others. Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.

The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.

The other complaint is that a consumption tax is politically impossible to get passed. There are, indeed, political difficulties. But there would be huge political difficulties if we try to do another 1986-style act next year. Every special interest will fight every loophole closing. And after all that, the country would get very little benefit in return. The political barriers to an X Tax are no greater, and we would actually address our problems…”

http://www.nytimes.com/2012/11/30/opinion/Brooks-lets-talk-about-x.html

 

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Hollings, Sen. Fritz, “Critical Needs Ignored,” HuffingtonPost.com, 11/07/12

November 7, 2012 By

“The presidential campaign ignored the real needs of the country. Four problems — four solutions.…

Second, we must pay for government — not plan to pay. In 2001 we gave President Bush a balanced budget but he and President Obama have refused to pay, adding $10 trillion to the debt in twelve years. Now everyone is running around with plans for later Congresses to pay. Congress can pay for government now by replacing the 35 percent corporate income tax with a 7 percent value added tax (VAT). One-hundred-fifty countries compete in globalization with a VAT that’s rebated on exports. The corporate tax is not rebated. A U.S. manufacturer exporting to China pays the 35 percent Corporate Tax and is levied a 17 percent VAT when exports reach Shanghai. But a China manufacturer exports to the U.S. tax free. This 52 percent difference is killing manufacture in the United States. The Corporate VAT is not regressive, needs no exemptions and eliminates all loopholes — instant tax reform. Last year’s corporate tax produced $181.1 billion in revenues. A 7 percent VAT for 2011 would have produced $872 billion. This tax cut, with spending cuts, will balance the budget in two years. Eliminating the Corporate Tax releases $1 trillion in offshore profits for Corporate America to create jobs in the United States…

Third, we make wars in Iraq, Afghanistan, Pakistan, Somalia and Yemen; threaten wars in Syria and Iran, but refuse to fight in the trade war in which the world is engaged. Globalization is nothing more than a trade war with production looking for a country cheaper to produce. Tax cuts and federal aid for policemen, firemen and teachers don’t build a strong economy. It takes private investment. The president and congress must make it profitable to invest in the United States and protect the investment. The VAT tax cut is a good start.

The United States was founded in a trade war — the Boston Tea Party. Instead of calling for “free trade,” the Founding Fathers rejected David Ricardo’s comparative advantage in agriculture and opted for manufacture by enacting the Tariff Act of 1787 — two years before the Constitution. This protectionism worked so well that Edmund Morris in Theodore Rex wrote that, after a hundred years, the Colony was “$25 billion richer” than the Mother Country. But Wall Street, the big banks, and the U.S. Chamber of Commerce want to keep the China profits flowing. So they shout “Free trade! Protectionism!” and contribute to the president and congress doing nothing.

In 2006, the Princeton economist Alan Blinder estimated that in ten years the U.S. would offshore 30-40 million jobs, or an average of 3-4 million jobs a year. David Wessel reports in the Wall Street Journal “between 2007 and 2010 (U.S. Firms) added 200,000 U.S. jobs and 600,000 outside the U.S…” BusinessWeek headlined (10/14/12) “Despite profits near record highs many executives are planning to trim their payrolls.” We lose 4 million jobs a year due to our deficit in the balance of trade. Great Recession? The recession has been over for three years. We are having a weak recovery because we are offshoring more jobs than we are creating.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/critical-needs-ignored_b_2088479.html

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Bartlett, Bruce, “Support The VAT,” Forbes.com 10/23/09

October 27, 2012 By

“”(W)henever I suggest the idea of a VAT for the U.S., I am attacked by supply-siders and assorted right-wingers….(M)y friend Larry Kudlow criticized me for wanting to “Europeanize the American economy.” Their concern is that the VAT is a money machine that will lead to higher taxes and bigger government precisely because it is such a “good” tax.

I myself held this same view for many years. But eventually I decided that it was stupid to oppose something because of its virtues. Opposing a VAT because it’s too good is like breaking up with your girlfriend because she is too beautiful.

In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost.

Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.”

http://www.forbes.com/2009/10/22/republicans-value-added-tax-opinions-columnists-bruce-bartlett.html

 

 

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Stockman, David A., “Paul Ryan’s Fairy-Tale Budget, The New York Times, 08/13/12

August 14, 2012 By

“…A true agenda to reform the welfare state would require a sweeping, income-based eligibility test, which would reduce or eliminate social insurance benefits for millions of affluent retirees. Without it, there is no math that can avoid giant tax increases or vast new borrowing. Yet the supposedly courageous Ryan plan would not cut one dime over the next decade from the $1.3 trillion-per-year cost of Social Security and Medicare.

Instead, it shreds the measly means-tested safety net for the vulnerable: the roughly $100 billion per year for food stamps and cash assistance for needy families and the $300 billion budget for Medicaid, the health insurance program for the poor and disabled. Shifting more Medicaid costs to the states will be mere make-believe if federal financing is drastically cut.

Likewise, hacking away at the roughly $400 billion domestic discretionary budget (what’s left of the federal budget after defense, Social Security, health and safety-net spending and interest on the national debt) will yield only a rounding error’s worth of savings after popular programs (which Republicans heartily favor) like cancer research, national parks, veterans’ benefits, farm aid, highway subsidies, education grants and small-business loans are accommodated.

Like his new boss, Mr. Ryan has no serious plan to create jobs. America has some of the highest labor costs in the world, and saddles workers and businesses with $1 trillion per year in job-destroying payroll taxes. We need a national sales tax — a consumption tax, like the dreaded but efficient value-added tax — but Mr. Romney and Mr. Ryan don’t have the gumption to support it.

The Ryan Plan boils down to a fetish for cutting the top marginal income-tax rate for “job creators” — i.e. the superwealthy — to 25 percent and paying for it with an as-yet-undisclosed plan to broaden the tax base. Of the $1 trillion in so-called tax expenditures that the plan would attack, the vast majority would come from slashing popular tax breaks for employer-provided health insurance, mortgage interest, 401(k) accounts, state and local taxes, charitable giving and the like, not to mention low rates on capital gains and dividends. The crony capitalists of K Street already own more than enough Republican votes to stop that train before it leaves the station.

In short, Mr. Ryan’s plan is devoid of credible math or hard policy choices. And it couldn’t pass even if Republicans were to take the presidency and both houses of Congress. Mr. Romney and Mr. Ryan have no plan to take on Wall Street, the Fed, the military-industrial complex, social insurance or the nation’s fiscal calamity and no plan to revive capitalist prosperity — just empty sermons…”

http://www.nytimes.com/2012/08/14/opinion/paul-ryans-fairy-tale-budget-plan.html?ref=opinion

 

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Hollings, Sen. Fritz, “Fighting in Trade War,” HuffingtonPost.com, 08/10/12

August 11, 2012 By

“Fundamental to an industrial policy is the Value Added Tax that’s rebated on exports. The Corporate Tax is not rebated. 150 countries compete in globalization with a VAT. Not having a VAT is killing manufacture in the United States. A U.S. manufacturer exporting to China pays the 35 percent Corporate Tax and is levied a 17 percent VAT when the exports reach Shanghai. But a manufacturer in China exports to the United States tax-free.

The economists caution against a VAT saying it’s complicated, a money machine. The VAT is not complicated — easily implemented with computers. The tax is on the difference of cost and materials and the sales price.

The VAT has no loopholes, giving us instant tax reform. The VAT is self-enforcing so we can cut the size of government (IRS). Running annual deficits in excess of a trillion dollars we need a money machine. Last year the Corporate Tax produced $181.1 billion in revenues. A 7 percent VAT for 2011 would have produced $872 billion in revenues. With spending cuts we can balance the budget in two years rather than ten years.

Canceling the 35 percent Corporate Tax and replacing it with a 7 percent VAT immediately releases a trillion dollars in offshore profits for Corporate America to create jobs in the United States and jumpstart the economy.

But the president and Congress refuse to consider this tax cut. They fight in every war but the one necessary.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/fighting-in-trade-war

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Gale, William G., “Inoculate the Budget from Health Care Reform,” TaxPolicyCenter.org, 05/08/12

May 13, 2012 By

“The medium- and long-term deficits that will result from debt-financed health care spending will inexorably dampen economic performance. They will sap up capital, reduce our ability to grow, burden future generations with debt, and perhaps even influence the military and diplomatic stance of the country. We cannot, and indeed should not, wait for effective health care reform to rein in the budget deficit. Health reform is a process; it will take time to get it right as we learn about what works and what doesn’t. We won’t get it right on the first shot.

As we work to restrain health care cost growth, we must, at the same time, inoculate the future deficit from the inevitable failures of health reform.

We can do this by choosing a federal health care spending level and stipulating that any spending above that amount must be financed on a current basis with a tax. For example, if federal health care spending were allowed to grow at the rate of GDP plus 0.5 percent (a rate proposed by both President Obama and Rep. Ryan), any health spending in excess of that growth rate would be financed with tax revenues in the next year.

Suppose we used a value-added tax (VAT) to finance excessive health spending; using a VAT in this way would accomplish several goals and simultaneously mitigate general concerns about the VAT. Most importantly, the deficit could be controlled; the grinding economic effects of persistent long-term deficits could be avoided even before society resolves the economically difficult and politically treacherous questions raised by trends in health costs.

In addition, the proposal would link health care spending and the means to pay for such spending. When considering whether health spending should rise, voters would have an explicit choice between higher spending and higher taxes on the one hand or lower spending and lower taxes on the other.”

http://www.taxpolicycenter.org/publications/url.cfm?ID=1001608

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Barro, Josh, “Soak the Old? Why a VAT Is Distributionally Fair, Forbes.com, 05/03/12

May 5, 2012 By

“I have three responses to the regressivity complaint. The first is that a VAT is regressive, but not as regressive as commonly thought. Part of the reason that a VAT appears regressive is that it is paid at the time of consumption, so it appears that savers are avoiding the VAT. In fact, saving only delays your VAT burden; savers accrue tax liabilities that are payable at the time of consumption…

…(T)he Tax Policy Center shows how a VAT burden is distributed when taking account of the fact that a VAT burden attaches itself to investments, even if it is not paid in the current period. They find that a 5 percent VAT with a comprehensive base costs 5.7 percent of income for those in the bottom quintile and 4.3 percent for those in the top quintile.

Secondly, VAT is just one component of the overall tax code. The regressivity of the VAT can, and should, be offset in part by greater progressivity in other areas of the code. Some of the proceeds of a substantial VAT should go toward progressive cuts in the payroll tax or policies that exclude a significantly larger share of households from the personal income tax. Expanding the Earned Income Tax Credit would be another possibility.

Third, the tax code should get more regressive as government spending rises as a share of GDP. Regressive taxes tend to be more efficient taxes, and efficiency in tax collection becomes more important as the government needs to collect more revenue. The rising tax share of GDP also partly reflects increased spending on means-tested entitlements, which is progressive. Even financing such programs with regressive taxes is progressive on net.

The transition complaint is that introducing a new VAT amounts to a one-time tax on existing assets. Think of it this way. Imagine that a country used to have only one tax, an income tax, and then abolished it in favor of a VAT. The taxes might have the same rate, but a person who had saved lots of money would end up paying twice: income tax at the time he earned and saved, and then VAT when he finally spent.

In a vacuum, this would indeed be an important equity concern with the VAT. But we are not in a vacuum. Instead, we are in a situation where people in retirement are claiming entitlement benefits whose cost now far outstrips their dedicated revenue sources. Today’s retirees got a great deal, working when payroll taxes were low and collecting benefits whose costs are high. And the political consensus is that they are untouchable: Social Security and Medicare will have to be fixed by the young paying higher taxes and taking benefit cuts.”

 http://www.forbes.com/sites/joshbarro/2012/05/03/soak-the-old-why-a-vat-is-distributionally-fair/

 

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Hollings, Sen. Fritz, “Making Romney Electable,” HuffingtonPost.com, 04/25/12

April 25, 2012 By

“The voters are frustrated. The country is fighting in all the wars but globalization. Globalization is nothing more than a trade war with production looking for a cheaper country to produce. Every country develops an industrial policy to protect its economy. Our industrial policy is to call for “free trade” and have Corporate America develop China’s closed market. The United States needs to develop an industrial policy to make Corporate America want to invest and create jobs in our country.

Fundamental to an industrial policy is a Value Added Tax, which is rebatable on export. The corporate tax is not. A U.S. manufacturer exporting to China is taxed twice: the 35 percent corporate tax and a 17 percent VAT when the product reaches China. But U.S. manufacturers in China import their product into the U.S. tax-free. We are not only building China’s economy, but Germany’s. The BMW plant in South Carolina doesn’t make the engine or technological parts in South Carolina. They are produced in Germany, shipped at 3 percent cost; assembled at 3 percent cost and BMW produces a motor vehicle in South Carolina 13 percent cheaper than Detroit. Using its 19 percent VAT, Germany probably has as many manufacturing jobs in the U.S. as it does in Germany — which we welcome.

The people are tired of the campaign. All they have heard for a year is that both candidates are for jobs, but the plants keep closing in their states. They have caught on to ten year plans to balance the budget; to do filibusters to fundraise; taxing the rich to balance the budget; appeals to their pride and charades to create jobs. Candidates and media worry about Medicare that goes broke in 2024 and Social Security that goes broke in 2033 but not the country that’s already broke. The people are frustrated because the country is fighting all the wars but globalization. They are looking for the candidate to do something real to create jobs and pay for government. Replacing the 35 percent Corporate Tax with a 6 percent VAT does something real. The VAT has no loopholes; gives instant tax reform; produces billions to eliminate deficits and creates millions of jobs.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/making-romney-electable_b_1453065.html?utm_source=Alert-blogger&utm_medium=email&utm_campaign=Email%2BNotifications

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Lind, Michael, “A Radical Tax Solution,” Salon.com, 04/24/12

April 24, 2012 By

“Michael Graetz of Columbia Law School points out that “the United States is a relatively low-tax country, but not with respect to income taxes … We typically collect about 12 percent of GDP in corporate and individual income taxes, while the OECD nations average about 13 percent. The biggest difference is that most other nations rely much more heavily on consumption taxes than we do: 11 percent of GDP in the OECD compared to about 5 percent in the United States. Indeed, we are the only OECD nation that does not impose a national level tax on sales of goods and services.”

This raises the possibility of a fourth option for American tax reform, distinct from the phony centrism of Simpson-Bowles (closing loopholes while lowering rates for the rich and cutting entitlements for the majority), radical conservatism (the single flat tax) and conventional progressivism (relying for more revenue chiefly on higher personal income taxes combined with bigger tax credits). The fourth option would reject the goal of revenue neutrality and acknowledge that, in a nation with an aging population, federal taxes can and should be permanently increased to pay for Social Security, Medicare and Medicaid. (These, like the rest of the American healthcare sector,  need to be made solvent by price reduction and price regulation, not rationing). Much or most of the needed additional revenue should come from the adoption by the federal government of a VAT.  A federal VAT’s revenues could be shared with state and local governments, partly replacing existing sales taxes.

 http://www.salon.com/2012/04/24/a_radical_tax_solution/singleton/

 

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Porter, Eduardo, “A Tax Code of Politics, Not Practicality,” NYTimes.com, 04/10/2012

April 10, 2012 By

“Our byzantine tax code is built upon a longstanding political deal: Democrats wanted a tax scale with higher rates for richer Americans to finance social programs aimed at the poor and the middle class. Republicans countered by pushing for tax exceptions, exclusions and deductions that shielded the incomes of the rich from the taxman and reduced government revenue.

This compromise has left us with a loophole-riddled code that isn’t very good at raising money. The richest 1 percent of Americans, who make $1.5 million on average, pay 28 percent of their income in federal taxes, according to the nonpartisan Tax Policy Center. That’s way below the top rate of 35 percent. The rest of us also pay little. The bottom 85 percent of taxpayers have an average federal tax rate of 12 percent. The poorest 25 percent pay less than 1 percent of their income — $77 a family, on average.

Compared to other developed countries, the United States doesn’t collect much tax at all. Tax revenue at all levels of government adds up to less than 25 percent of the nation’s gross domestic product, putting us behind every other rich country and even some poor ones. Among the 34 nations in the Organization for Economic Cooperation and Development, only Mexico and Chile collect less in taxes. The average across the O.E.C.D. is 9 percentage points higher.”…

“…(F)ederal tax revenue has not surpassed 21 percent of the nation’s output. Last year it was under 15 percent. Not only is our tax code bad at raising money, it is also plagued with perverse incentives that, added up across the population, can push us to distort the economy and slow it down”….

“ …What would a better tax system look like? Most other rich countries have one. While each country has a different version, they share a core feature: they raise a lot of money taxing people’s consumption, at the point of sale.

Consumption taxes create fewer perverse incentives because taxing what people buy doesn’t affect their choices about work and investment. If anything, such a system might promote savings, generally good for growth. These taxes are also easy to collect and hard to evade. They don’t add complexity to your tax return. Because they produce few perverse incentives, they can be used to raise a lot of money.

Consumption taxes are supported by a vast majority of economists. They underpin Western Europe’s welfare systems, which are based on the proposition that all citizens are entitled to similar income support and services to guarantee a minimum standard of living, and that everybody should pay proportionately for them. Denmark and Sweden collect about 10 percent of their gross domestic product with a value-added tax, a modern tax on consumption.

In the United States, by contrast, states raise only 2.2 percent of G.D.P. through various sales taxes.  There is no federal consumption tax at all.

A federal consumption tax has been proposed more than once. A report last year by the Congressional Research Service found that for every 1 percent levied in a value-added tax, the federal government would raise up to $55 billion a year. This new source of money could help change the political deal underpinning our tax system and pave the way to cull loopholes and reduce our top tax rates.”

 http://www.nytimes.com/2012/04/11/business/economy/a-tax-code-of-politics-not-practicality.html

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