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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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Porter, Eduardo, “Broader Tax For Fighting Inequality,” New York Times, 11/28/12

November 28, 2012 By

“…Progressive taxes make it hard to raise money because they distort people’s behavior. They encourage taxpayers to reduce their tax liability rather than to increase their pretax income. High corporate taxes encourage companies to avoid them. High taxes on capital income also encourage avoidance and capital flight. High income tax rates on top earners can discourage work and investment, too. So trying to raise a lot of money with our progressive tax code would probably not achieve the goal and could damage economic growth.

Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending, like gas taxes and value-added taxes on consumption. The Nordic countries, for instance, have very low tax rates on capital income relative to income from work. And they have relatively high taxes on consumption. In Denmark, consumption tax revenue amounts to about 11 percent of the nation’s economy. In the United States, sales taxes and excise taxes on cigarettes and other items amount to roughly 4 percent.

Liberal Democrats have long opposed them because they fall much more heavily on the poor, who spend a larger share of their incomes than the rich. But these taxes have one big positive feature: they are difficult to avoid and produce fewer disincentives to work or invest. That means they can be used to raise much more revenue.

Public finances are under strain today on both sides of the Atlantic, as governments struggle to cope with our long global recession and the aging of the baby boom generation. In Southern Europe, the pressure to pare back universal welfare systems is intense. In the United States, political leaders on both sides of the partisan divide have realized that even our relatively meager package of social goods cannot be sustained with our slim tax take.

But the United States has one option that most of Europe’s flailing economies do not. Its tax revenue is so low, comparatively, that it has more space to raise it. A more efficient, flatter tax schedule would allow us to do so without hindering economic activity.

Bruce Bartlett, a tax expert who served in the administrations of Ronald Reagan and George H. W. Bush, told me last week that he thought federal tax revenue could increase to 22 percent of the nation’s economic output, well above its historical average of 18.5 percent, without causing economic harm. If President Obama tries to go down this road, however, he may have to build a flatter tax code.

“We should reform the tax system, no question,” William Gale, a tax policy expert at the Brookings Institution and co-director of the nonpartisan Tax Policy Center, wrote in an e-mail. “We are going to need to move beyond the current set of tax instruments to raise the needed revenues — a VAT and or a carbon tax seem like the obvious ways to go.” And Mr. Bartlett, who writes a column for The New York Times’s Economix blog, also pointed out: “We can’t get all the revenue we need from the rich. Eventually, everyone will have to pay more.” “

http://www.nytimes.com/2012/11/28/business/combatting-inequality-may-require-broader-tax.html?pagewanted=all&_r=0

 

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Alm, James and Asmaa El-Ganainy, “Value-added Taxation and Consumption,” Tulane University Economics Working Paper 1203, July 2012

August 7, 2012 By

Does the value-added tax affect consumption?  Using a sample of fifteen EU countries over the period 1961-2005…we find that the effective VAT tax rate is negatively correlated with the level of aggregate consumption.  More precisely, a one percentage point increase in the VAT rate leads to about a one percent reduction in the level of per capita aggregate consumption.  This result is consistent across various estimators, alternative time periods, and additional explanatory variables.  To our knowledge, these estimation results are the first attempt to include explicitly and to estimate directly the effects of the VAT on consumption behavior.

Our results have the clear implication that policymakers should consider the potential impact of the VAT on households’ consumption decision when designing a VAT.  Our results are also consistent with the often-stated view of proponents of consumption taxes that taxing consumption rather than income generates more savings, and so leads to higher growth.

Of course, there are many considerations that influence any decision to tax consumption versus income.  The effects on consumption choices are clearly important, but other dimensions also matter: how are other aspects of behavior (e.g., labor supply, portfolio choice, tax evasion)affected, what are the distributional effects of different forms of taxation, how does a country make the transition from one major tax base to another, what are the administrative dimensions of taxing different tax bases, how are different levels of government affected by income versus consumption taxes, how does consumption versus income taxation affect the international decisions of firms and individuals, to name just a few.  Even so, our results demonstrate that greater use of the VAT has led, at least in EU countries to less consumption and more savings, a finding that has broader implications for the choice of a consumption tax versus an income tax.

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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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Toder, Eric, Jim Nunns and Joseph Rosenberg, “Implications of Different Bases for a VAT,” Tax Policy Institute, 02/12

February 19, 2012 By

“The federal budget outlook is unsustainable over the long run.  The latest (June 2011) projections by the Congressional Budget Office (CBO)1 show the ratio of publicly-held debt held to GDP, which was 40 percent at the end of 2008, rising from 69 percent in 2011 to 187 percent in 2035 under their Alternative Fiscal Scenario, which assumes that current federal spending and revenue policies will largely continue.  Even under CBO’s Extended-Baseline Scenario, which assumes that all of the 2001-2003 tax cuts expire at the end of 2012, the AMT will no longer be patched, and that Medicare and other health-related spending will be held to modest growth rates, debt held by the public is projected to rise to 84 percent of GDP by 2035.  Rising debt levels increase the chance of a fiscal crisis, a sudden spike in the interest rate the federal government must pay on its debt that would necessitate large adjustments to spending, revenues, or both.  More gradual adjustments could be better designed and less damaging to long-run growth and social welfare.

Two prestigious groups, the President’s National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force, both recommended a sweeping set of changes in taxes and spending policies to address future deficits and eventually reduce the ratio of publicly held debt to GDP below its current level.2  The Debt Reduction Task Force recommendations included adopting a “debt reduction sales tax” structured as a value-added tax (VAT).  A VAT is a broad-based tax on household consumption that is collected incrementally by businesses at each stage of their production and distribution of goods and services.  VATs are an important source of revenue for nearly all countries, and among major countries, the United States is alone in not imposing a VAT.

VATs around the world typically exclude certain consumption items from the VAT base for policy or administrative reasons.  This paper describes the policy and administrative reasons for exclusions from the VAT base and the design of a rebate as a substitute for base exclusions to address distributional objectives.  The paper then analyzes the effect of possible exclusions from a U.S. VAT base or a rebate on the VAT rate necessary to achieve a specific deficit reduction target and on the distribution of the tax burden.   Two options for the base of a VAT are analyzed: a broad base, which would allow the lowest rate necessary to meet the specific target for deficit reduction, and a narrower base that is designed to address the distributional effects of a VAT by omitting items that are disproportionately consumed by lower-income households.  A higher rate would be required on this narrower base to meet the deficit reduction target.  A third VAT option that takes a different approach to addressing the distributional effects of a VAT also is analyzed.  This option uses the broad base of the first option but provides a rebate to households, so it would also require a higher rate than the first option to meet the deficit reduction target.”

 http://www.urban.org/uploadedpdf/412501-Implications-of-Different-Bases-for-a-VAT.pdf

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Clinton (Again) Endorses VAT

December 30, 2011 By

In his new book, “Back to Work: Why We Need Smart Government for a Strong Ecconomy,” Knopf, 11/08/11, President Bill Clinton again calls for (see TV interviews under “Audio/Video”) a shift away from income taxation to a consumption tax:

“Among wealthy nations, we now have the second-highest corporate tax rate in the world, and because of recent changes in other countries we’re now the only wealthy nation that taxes income earned overseas when it’s brought back home.  We’ve also fallen to seventeenth in the level of our research and development tax incentives.  We have to become more competitive.  Big corporations don’t get hurt by the current system.  They just put plants in other places, create good jobs there, and leave their earnings there.

In the future, we’ll have to design a progressive revenue system that relies more on personal income and consumption taxes, like the value-added tax, which also would help to increase our exports…making our products more affordable in other markets.”

 

 

 

 

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NYTimes: Flat Tax Doesn’t Solve Inequity Problem, Robert H. Frank in “The Problem with Flat-Tax Fever,” 11/06/11

November 6, 2011 By

Robert Frank attacks the Flat Tax as inequitable and as a mirage to solving the problem of complexity.  But, the Perry incarnation is only the latest, but not the purest presentation of the Flat Tax.  The complexity resides in the retention of various deductions (loopholes), which in the ideal are eliminated in their entirety.  Mr. Frank does not discuss the simplification potential, but concludes his piece with a brief submission of his preference for a progressive consumption tax.  There is no acknowledgment, however, that his preferred tax would also favor the highest earners, as they have the most disposable income and therefore the very disproportionate ability to save.  Most economists would agree that increased savings are important to our economic success, but there is no discussion of this in the column.

Unfortunately, Mr. Frank’s unarguable conclusion is that our politicians are most unlikely to approve a new tax, backed-up by the fact that half the members of the Debt Commission (“supercommittee”) have pledged not to do so.

Mr. Romney and President Obama have yet to declare one way or the other on sweeping tax reform, but the possibility remains, in spite of the pledges taken by members of Congress and Senators, that either might propose a new and different plan.  The cleanest, most competitive system for replacement of our outmoded and corrupted tax code would be a clean sweep replacement by a VAT and a FlatTax on personal income with a high threshold.  The tax could be balanced between the VAT and Personal Income Tax, so as to retain (increase) progressivity, and the bottom quintiles could be protected from the VAT via the Earned Income Tax Credit.  The border-adjustable VAT would make exports more competitive and imports less so.  Such a plan was once floated by Gov. Mitch Daniels, but has not reached the light of day without a champion in the presidential campaign.

 

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Bloomberg.com Editors: Value-Added Consumption Tax Would Make U.S. Deficit Reduction Easier, 08/16/11

August 16, 2011 By

When lawmakers on the congressional supercommittee charged with solving the U.S.’s fiscal problems get to work, they will quickly realize that, without fundamental tax reform, their job will be arduous.

They would do well to consider an innovation that every developed nation except the U.S. has already employed: the value-added tax.

The government’s structural budget deficit — the gap that must be closed to achieve long-term sustainability — is now between 5 percent and 6 percent of annual economic output, or more than $800 billion. That’s more than the defense budget, and over 10 years would be about four times larger than the $2.1 trillion debt-ceiling deal Congress just passed. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of gross domestic product. Just getting taxes back to the average would cover about half the gap.

The question, then, is what kind of tax increase would be the least-bad option. Simply raising rates would be politically difficult, to say the least, and would waste an opportunity to change the country’s unduly complicated tax system. The deficit commission led by Republican Alan Simpson and Democrat Erskine Bowles has rightly advocated an income-tax reform that would eliminate most deductions, lower rates and get more people to pay what they owe. Along with such reforms, a VAT could generate a lot of added revenue with minimal cost, and might even provide a short-term stimulus to the economy.

Sales Tax

First developed in the middle of the 20th century, the VAT is similar to a sales tax. The crucial distinction is that it is collected in stages along the supply chain, an approach that spreads the burden among all businesses and ensures that goods don’t get taxed multiple times before reaching the consumer.

Under a 10 percent VAT, for example, a farmer selling $20 in wheat to a miller would charge $2 in tax, which he would pass on to the government. If the miller made flour from the wheat and sold it to a baker for $40, he would collect $4 in VAT. But he would remit only $2 — the difference between the $4 he collected and the $2 he already paid when he bought the wheat. If the baker used the flour to make cakes and sold them for $100, he would collect $10 in VAT and remit $6, because he already paid $4 when he bought the flour. Ultimately, the final consumer pays the whole tax. Businesses collect it on behalf of the government.

More Efficient

The system may sound complicated, but it’s actually much more efficient than other types of tax. All the buyers and sellers along the chain already keep track of the transactions for their own books, and the VAT is very difficult to game or cheat: If you consume something, you pay the tax. Estimates of administrative costs range from 0.5 percent to 1 percent of the amount collected, compared with more than 3 percent for state and local sales taxes in the U.S. In onepaper, a group of economists found that replacing the entire U.S. tax system with aconsumption tax like a VAT would increase the economy’s long- term output by 9.4 percent.

Democratic opponents of the VAT point out one big flaw: The tax falls more heavily on the poor, who mostly spend rather than save their income. Many countries try to compensate for this regressive trait by exempting basic food items and other necessities — an imperfect fix that complicates the system, distorts the economy and doesn’t adequately help the poor.

An income-tax credit, in which all taxpayers receive a cash payment to offset VAT paid on a fixed, minimal amount of purchases, would work better. A study by the Urban Institute and theBrookings Institution found that such a credit could turn a VAT into a progressive levy, with the bottom fifth of earners gaining 1.7 percent in after-tax income (see chart). It would also provide an added incentive for people to come out of the shadows and into the income-tax system.

Major Concern

Another major concern with the VAT involves state and local governments, which might consider a federal VAT to be in competition with their sales taxes. In reality, they are more likely to gain by converting their sales taxes into VATs. In doing so, cities and states could share administrative costs with the federal government and should be able to capture the sales of more service enterprises and Internet retailers, such as Amazon.com.

The VAT is also more conducive to investment than a sales tax, which tends to fall disproportionately on certain types of businesses, such as manufacturers. In Canada, for example, some provinces converted their sales taxes into VATs after the national government introduced its VAT in 1991. The converts saw a significant boost in machinery and equipment investment.

Third Objection

A third objection to the VAT, typically leveled by Republicans, is that the government would become addicted to the revenue it generates, hindering efforts to control taxes and spending. The experience of Canada, which ultimately lowered its federal VAT to 5 percent from 7 percent, suggests this concern is overblown. In any case, it can easily be addressed by making the VAT part of a focused deficit-reduction program.

A 10 percent VAT with an income-tax credit would generate revenue equal to about 2 percent of GDP, covering about a third of the U.S. government’s fiscal gap. If states converted their sales taxes, the combined rate would be about 15 percent to 17 percent, lower than in most European countries. The time needed to implement a VAT — as much as two years — could even provide a much-needed economic stimulus. If people knew the tax was coming, they would probably make big purchases now.

Make no mistake: The VAT would be a new tax. It would raise the total burden on U.S. taxpayers and, once it takes effect, would almost certainly take a bite out of consumer spending. But done in concert with broader tax reform, it would go a long way toward solving the country’s fiscal crisis.

If there’s a better way, we’d love to hear about it.

http://www.bloomberg.com/news/2011-08-17/consumption-tax-would-make-it-easier-to-reduce-u-s-budget-deficit-view.html

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Altshuler, Rosanne, Department of Economics, Rutgers University, Testimony Before the Committee on Ways and Means, Hearing on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

July 26, 2011 By

…“A VAT is a type of consumption tax that is similar to a retail sales tax but is collected in smaller increments throughout the production process. This form of consumption tax is part of the tax systems of nearly 150 countries worldwide. All OECD member countries except the United States have VATs. In 2007, revenues generated by the VAT represented almost 19 percent of the total tax revenues of OECD countries and about 20 percent of the total tax revenues of European OECD countries.

Adding a VAT to the U.S. federal tax system could help address the medium and long-term revenue shortfalls forecast for the United States. The VAT is particularly effective in raising substantial amounts of revenue in a relatively efficient manner and has proven to be an administrable tax.

If the U.S. were to adopt a VAT, it could rely on the experience and best practices of other countries in setting up and administering the tax. In addition to these attributes, the VAT has a number of other advantages. First, a portion of the revenues from a VAT could be used to finance reductions in statutory income tax rates. Two tax systems (a VAT and an income tax) with low tax rates may be superior from an efficiency and administration perspective to an income tax system with higher statutory rates. Second, given the size of projected future budget deficits, adding a VAT to our current system to generate revenues for deficit reduction alone would likely have positive effects on economic growth. Third, a pre-announced and phased in VAT might stimulate the economy by encouraging consumption in anticipation of the imposition of the tax.

Finally, while the states are likely to protest, a properly designed VAT may actually help force them to redesign or improve their retail sales taxes.”…

“…The VAT on its own cannot solve the country’s fiscal problems. And introducing a VAT has its own problems.  If we adopted the VAT, we would have to institute some form of rebate to offset its regressivity and make every effort to adopt the broadest possible base. We would need to increase IRS resources for administration and be attentive to a range of compliance issues. But we must recognize that near and long-term fiscal pressures will require that we raise more revenue from our tax system. The VAT is an efficient revenue raiser that is likely to be significantly less damaging to economic growth than increasing personal and corporate statutory rates. After considering the range of issues associated with adopting a VAT, I conclude that the United States may be best served by combining a base-broadening reform of the current income tax system with the introduction of a VAT.”

 http://waysandmeans.house.gov/UploadedFiles/Altshuler_Testimony.pdf

 

 

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