Tax Reform: End the Corporate Income Tax to Grow Economy & Wages

The Corporate Income Tax, today, collects just 1.8% of GDP, and accounts for only 8% of total federal revenues.  By comparison, at its peak in 1952 the CIT amounted to one-third of federal revenues.  Corporations have employed every legal resource to reduce their tax liability, and while some multi-national corporations park profits in lower-taxed countries, others with less ethical boundaries claim overseas subsidiaries in tax havens and transfer their profits to a mailbox.

With the CIT having been perversely minimized, the VATinfo website has endorsed the concept of sweeping tax reform, at once eliminating the Corporate Income Tax and replacing it with a Value Added Tax, and combining it with a progressive Personal Income Tax employing a large standard deduction and no other deductions.  VATinfo’s rough “Smart Tax” calculation…based upon IRS tables with insight provided by IRS and the Tax Policy Center at Brookings Institute…projected that a VAT tax rate of 9% would be required to replace the CIT and offset a Personal Income Taxes cut for incomes under $100,000.  (The plan envisioned eliminating the PIT for filers with Adjusted Gross Income under $50,000…two-thirds of all filers; reducing the PIT by 56% for those with AGI between $50,000 and $75,000; reducing the PIT by 17% for those with AGI between $75,000 and $100,000.)

In December 2013, the National Bureau of Economic Research released a working paper, “Simulating the Elimination of the U.S. Corporate Income Tax,” with very reinforcing conclusions.  Foremost is the understanding that when U.S. capital moves to a lower-taxed country, U.S. workers suffer a loss in labor demand and real wages.  And, the reverse would be true were the U.S. to end the CIT.  The study projects that capital would flow to the U.S. resulting in “a rapid and sustained 23 to 37 percent higher capital stock.”  “Higher capital per worker means higher labor productivity and, thus, higher real wages.  Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12 percent higher and those of skilled workers end up 13 percent higher.”

The NBER study concludes that while the economic gains from eliminating the CIT would fall short of replacing the revenue loss entirely (requiring an increase in taxes on wages, or a consumption tax), there would be relative distributional gains accruing to both skilled and unskilled workers, i.e., addressing income inequality.

Solar Panel Maker Seeks Duties v. China (Trade Problem VAT Would Fix)

What a shame!  At one time it looked like the manufacture of solar panels would be an arena in which the U.S. could work towards energy independence, grow manufacturing jobs and compete successfully.  However, China, following a trade model of government subsidies and dumping has managed to put most American solar panel manufacturers out of business.  Those manufacturers that remain in the U.S for the most part import Chinese solar modules and only assemble the finished panels here.  One of the holdouts, SolarWorld Industries America, the German subsidiary, has petitioned the Commerce Department to impose new duties on solar modules that with loopholes currently escape duties.  (See NYTimes, 01/01/2014.)

Think about this:  China imposes a 17% VAT on imports, and, by virtue of the Value Added Tax mechanism, also subtracts the 17% tax burden from exports.  This creates a very large price wedge in itself against solar panels manufactured in the U.S. for domestic consumption.  Were the U.S. to similarly employ a VAT (in sweeping tax reform as a revenue-neutral replacement for the Corporate Income Tax and other taxes), domestic manufacturers like SolarWorld would be far less disadvantaged vs. Chinese and other foreign imports.  SolarWorld’s need for duties might even be entirely mitigated.

Improve Obamacare: Single-Payer (VAT) & Multiple Providers

In 2005, The New England Journal of Medicine published an article titled “Healthcare Vouchers, A Proposal for Universal Coverage” by Ezekiel Emanuel, MD, PhD and Victor Fuchs, PhD.  At the time, Dr. Emanuel was Chief of the Department of Bioethics at National Institutes of Health, and Dr. Fuchs was Professor of Economics and of Health Research and Policy at Stanford University.

(This proposal was updated and presented in detail in 2008 in a book: “Universal Healthcare, Guaranteed, A Simple Secure Solution for America,” Ezekiel J. Emanuel, Public Affairs, Jackson, TN.)

The Universal Healthcare, Guaranteed plan called for eliminating – for corporations – the direct burden of healthcare insurance, and providing healthcare vouchers to be used in a health insurance exchange that could also include Medicare.  The vouchers were to be funded by a dedicated Value Added Tax.  This method of funding the vouchers would have broad economic benefits.

The Value Added Tax is monetarily equivalent to a sales tax.  It differs in that VAT is added at each stage of production and distribution rather than only at the retail level.  Credits are taken for taxes paid at each stage, so the tax does not cascade (no taxes on taxes).  Unlike a retail sales tax, however, VAT is recognized under GATT rules (General Agreement on Tariffs and Trade) as a border-adjustable tax, i.e., subtracted from exports and added to imports.  This feature eliminates the burden of government expenditures from the price/value competition of goods and services crossing international borders.  Both domestically produced goods and imports are taxed the same.

The U.S. does not employ a VAT, which results in a competitive disadvantage in trade.  All our trading partners have a significant portion of taxes paid by VAT’s, so goods exported from those countries are coming in cheaper by the percentage VAT.  How much cheaper?  Cars from Germany, 17% cheaper.  Goods from China, 19% cheaper.  The Emanuel/Fuchs plan for healthcare vouchers would require a VAT of around 12% to cover everyone under 65 (with Medicare still covering those older). At 12%, the healthcare VAT percentage would be about the average percent of our trading partners’ VAT’s.  Imports would be equally burdened by the cost of U.S. healthcare, and our exports would no longer carry the cost of healthcare in their prices.  We could expect domestic production to be more competitive at home and abroad, fueling economic and job growth.  

The VAT would replace healthcare insurance provided by companies and individual insurance premiums.  Many corporations currently pay around 15% of wages for healthcare insurance premiums.  Ford Motor Company, for example, spends more for healthcare premiums than it does for the steel in its cars.  Again, companies would be freed of this direct insurance cost. 

But would the burden of the VAT be fairly distributed?  Some companies would increase wages to assist employees, and competition suggests those who did not would not attract the best workers.  Health insurance by companies became a method of competition in the marketplace for employees when wages were frozen during World War II, and companies added to this benefit to remain competitive.  Government, too, could assist with VAT payments through the EITC (subsidy to the poor and lower wage earners).

Emanuel and Fuchs addressed that question: “Some people reflexively reject a value-added tax as regressive. However, the distributional impact of the voucher proposal requires looking at the benefits as well as the tax burden. All things considered, the program is progressive, since it implicitly subsidizes the poor. It is not an accident that countries such as Norway and Sweden, which provide universal health coverage, make substantial use of value added taxes to fund social programs.” 

There is resentment in some quarters about the expensive cost of free services in hospital emergency rooms and obstetrics units.  But, with a VAT paying for healthcare benefits, everyone would be contributing towards these benefits.  And, since wealthier consumers purchase more goods and services, they would be paying for a greater proportion of the VAT receipts, adding to progressivity.  Furthermore, because the VAT would be dedicated to healthcare vouchers, the public would have a visual check on the cost of demanding more medical services, and, perhaps, be somewhat self-limiting.

So, why didn’t Congress embrace the Emanuel/Fuchs plan?  Republicans have been wary of introducing another tax base that would be used as a money machine for bigger government. Some Democrats fear VAT would be too regressive.  Larry Summers put it this way: “The reason the U.S. doesn’t have a VAT is because liberals think it’s regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” 

The Affordable Care Act will educate the public on the use of healthcare exchanges.  A smart Congress would do well to explore a dedicated Value Added Tax to fund healthcare vouchers used in the insurance exchanges.

(See the 9-minute video to learn how VAT would grow the economy and jobs – including a clear explanation by Bill Clinton)

Sullivan, Martin A., “U.S. Tax Exceptionalism,” TaxAnalysts.com, 09/16/13

“The United States is the only nation of any significant size without a VAT. The United States also has the world’s highest corporate tax rate. Those two facts are not unrelated. Despite ever-tightening budgets, governments around the world over the last two decades have steadily reduced their corporate tax rates. How were they able to do this? They made up lost corporate tax revenues by relying more heavily on their VATs…

…For economists this is a no-brainer. The corporate tax–with its arbitrary and excessive burden on the profits of certain businesses–is our most damaging tax. A broad-based consumption tax, like a VAT — which unlike the income tax is not inherently biased against saving and investment — causes the least harm to the economy. Replacing corporate tax revenues with consumption tax revenues is the most straightforward way to improve America’s tax competitiveness. Everything else is just nibbling around the edges.

Of course, that move would make a tax system less progressive. To address this, economists suggest providing rebates to low-income households to make up for their disproportionate burden. Another idea that does not get enough discussion is to simply accept that a more competitive tax system will become more regressive and to use additional VAT funds to expand social programs to help America’s struggling poor and middle class.

It is not the political left, however, that is the main obstacle to the U.S. adopting a VAT. Conservatives are dead set against the idea even though they hate the income tax and at every opportunity seek to reduce taxes on saving. That is because they fear the VAT is a money machine that, once in place, will make it too easy for government to expand to European levels. In contrast, conservatives and business groups outside the United States loudly endorse the expansion of VATs as good replacements for corporate taxes. Whether or not those fears are well founded, we must recognize that as long as we adopt the approach of relying primarily on income and corporate taxes to fund our government–whatever size it is–we are stifling U.S. competitiveness while the rest of the world moves ahead.”

http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/MSUN-9BLEG5?OpenDocument

OECD, “Consumption Tax Trends, VAT/GST and Excise Rates, Trends and Administration Issues,” December, 2012

Spread of VAT.

The spread of VAT has been the most important development in taxation over the last half century.  Limited to less than ten countries in the late 60’s it has now been implemented by more than 150 countries.  VAT now raises approximately 20 percent of the world’s tax revenue and affects about 4 billion people.  The recognized capacity of VAT to raise revenue in a neutral and transparent manner has drawn all OECD member countries to adopt this broad-based consumption tax, except the United States, which continues to employ retail sales taxes at the state level (and below) rather than apply a federal consumption tax.  Its neutrality principle towards international trade has also made it the preferred alternative to customs duties in the context of trade liberalization.

VAT has become a major source of revenue for the OECD member countries that have implemented it.  Over the last twenty-five years, the share of VAT as a percentage of total taxation has almost doubled passing from 11.2% on average in 1985 to 19.2% in 2009, this share remaining stable since 2000.  These taxes are globally the third important source of revenue for governments, behind social security contributions (27%) and personal income taxes (25%) but far above corporate income tax (8%); specific consumption taxes (11%) and property taxes (5%).  These ratios vary considerably between countries, but in 27 of the 33 OECD countries with VAT, the tax accounts for more than 15 percent of total taxation.  Following its adoption by a growing number of countries, a shift occurred within the category of taxes on consumption so that while the share of VAT rose, the revenue from consumption taxes on specific goods and services (mainly excise taxes) fell from 16% to 11% over the same period.”  p. 44

The revenue from general consumption taxes stabilized after 2000 as a percentage of both GDP and total taxation.  This followed a period of many years of increasing importance.  Between 2000 and 2009 the Czech Republic, Denmark, Estonia, Germany, Hungary, Korea, Luxembourg, and Sweden were the countries where general consumption taxes have increased the most as a percentage of GDP (by at least 0.5 percentage points), while in Canada, France, Greece, Iceland, Israel, Italy, Portugal, Spain and Turkey and the United Kingdom the percentage fell by at least 0.5 percentage points.

Over the longer term, OECD member countries have relied increasingly on general consumption taxes.  Since 1965, the share of these taxes as a percentage of GDP in OECD countries has more than doubled, from 3.3% to 6.7%.  They presently produce 20% of total tax revenue compared with only 11.9% in 1965.

This is especially true for VAT, which is the largest source of general consumption taxes, accounting for 6.4% of GDP and 19.2% of total tax revenues.  VAT is now operated in 33 of the 34 OECD countries, the United Stats being the only country not to have adopted a VAT.  In 1977, fourteen of the current OECD member countries had a VAT.  Greece, Iceland, Spain, Portugal, Turkey, Mexico, Japan and New Zealand introduced VAT in the 1980’s while Switzerland followed shortly afterwards.  The Easter European economies introduced VAT in the late 1980’s and early 1990’s, some of them adopting the EU model with their future EU membership in mind.  The tendency for VAT rates to rise over the long term also contributed to the growing share of general consumption taxes in the tax mix.” p. 61

OECD Consumption and VAT Tax Trends (Table: VAT Percentages by Country; General Consumption Taxes by Country (% of GDP; % of Total Taxes); VAT Taxes by Country (% of GDP, % of Total Taxes)

 

Simpson-Bowles and a Smarter Tax System to Spur Growth

Sen. Alan Simpson and Erskine Bowles have released their newly revised plan for curbing the deficit and reducing the debt.  Included in the plan is a call for $600 billion in increased tax revenues to be accomplished by reducing deductions for corporate and individuals while reducing tax rates.

In calling for this approach to tax reform, Simpson-Bowles takes aim at our bloated, inefficient tax system:

Reform the Tax Code in a Progressive and Pro-Growth Manner. The current tax code is complicated, confusing, costly, anti-growth, anti-competitive, unfair, and riddled with well over $1 trillion of tax expenditures – which really are just spending by another name. Tax reform must reduce the size and number of tax expenditures to reduce the budget deficit and lower marginal tax rates for individuals and corporations. At the same time, tax reforms must maintain or improve the progressivity in the tax code and promote economic growth. Tax reform will make the tax code more efficient, effective, and globally competitive.”

The last goal, to create a “globally competitive” tax system cannot be overemphasized.  In this era of globalization, the U.S. remains at a major competitive trade disadvantage by virtue of its tax system.  Eliminating this disadvantage is the prime key to growth that government policy could provide.

According to the new Census Bureau report, the 2012 U.S. trade deficit dropped nearly $20 billion to $540 billion, mostly due to a decrease in expenditures for foreign oil.  But, our manufacturing trade deficit reached a record deficit of $684.5 billion, an increase of 7%.

The goods deficit with China increased $20 billion, to $315 billion from $295 billion, accounting for 58% of the imbalance. U.S. exports to China increased $6.7 billion (primarily soybeans and civilian aircraft, engines, equipment, and parts) to $110.6 billion, but imports increased $26.3 billion (primarily cell phones and other household goods) to $425.6 billion.

The goods deficit with European Union increased from $99.9 billion in 2011 to $115.7 billion in 2012.  Exports decreased $3.3 billion (primarily non-monetary gold and petroleum products) to $265.1 billion, while imports increased $12.5 billion (primarily passenger cars, civilian aircraft engines, and petroleum products) to $380.8 billion.

Achieving Growth through Tax Policy.  The most positive reform to stimulate growth in exports, domestic production and jobs would be to replace the Corporate Income Tax with a Value Added Tax.  VAT is now utilized by all our trading partners and over 150 countries to exclude the cost of government from the price/value relationship of goods and services in international trade.  By definition under GATT rules, unlike corporate income taxes, the VAT is border-adjusted, i.e., subtracted from exports and added to imports. Without a VAT of our own, imports have a decided price advantage, and our exports carry a price disadvantage.

Replacing the CIT by a VAT would eliminate the double-taxation of dividends, encourage the return of multi-national profits now parked in countries with lower corporate tax rates, and stimulate foreign investment here.  Imports would carry an equal burden, so American goods would become more competitive at home and abroad.  An additional consideration to stimulate jobs would be to replace the corporate contribution to FICA by the VAT to reduce a direct disincentive cost to employment.

Governor Mitch Daniels, echoing Herman Kahn of Hudson Institute, once suggested that replacing our current tax system by a VAT coupled with an individual income tax with a high threshold would produce a tax system that is fair, competitive, and stimulative for growth.  And, with zero tax preferences (no exclusions and deductions), gone would be the corrupting lobbying for loopholes, once and for all.

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

“…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

 

Bartlett, Bruce, “Tax Reform That Works; Building a Solid Fiscal Foundation with a VAT,” New America Foundation, 11/30/12

In advocating a Value Added Tax, this concise paper by Bruce Bartlett takes on the myths about VAT and the mistaken political resistance to it.  It is highly recommended in the context of the realities of the “fiscal cliff.”  The link to the article is repeated at the bottom of this entry.

“…In my opinion, the greatest potential to break the tax reform gridlock is to get away from the model of cutting popular tax preferences in order to pay for rate reductions. That is the political equivalent of World War I-style trench warfare. I think it makes more sense to adopt a different approach, one more akin to Douglas MacArthur’s strategy of leapfrogging Japanese strongholds in the Pacific during World War II, leaving them impotent.

The tax equivalent of MacArthur’s strategy would be to leave in place all the existing deductions and credits, but make them irrelevant for most people. Prof. Michael Graetz of Columbia University has devised exactly such a plan.  He would institute an exemption of $100,000 for married couples ($50,000 for singles, $75,000 for heads of households).  All the existing deductions and credits would remain in place and could still be used by those with incomes above $100,000, but for the vast bulk of taxpayers they would become irrelevant because they would have no taxable income against which to take them. About 100 million of the 140 million people now required to file federal income tax returns would no longer have to do so.

Graetz would replace the lost revenue with a value-added tax (more below) combined with a rebate mechanism to relieve the regressivity on those with low incomes and also replace refundable tax credits for the poor. A recent analysis of the Graetz plan by the Tax Policy Center concluded that it could be done in a deficit-neutral manner with a VAT rate of 12.4 percent – well below the rates that prevail in Europe…”

“…For many years, official Republican Party platforms have opposed a VAT for the United States. The 1992 platform said such a tax in Europe “has resulted in higher prices, fewer jobs and higher levels of government spending.”  The 2008 platform said, ‘In any fundamental restructuring of federal taxation, to guard against the possibility of hypertaxation of the American people, any value added tax or national sales tax must be tied to simultaneous repeal of the Sixteenth Amendment, which established the federal income tax.’  The 2012 platform repeats the same language.

Fear that a VAT might come on top of the income tax and hence constitute some sort of double taxation is only one of many conservative objections to a VAT.  (No country imposing a VAT has ever abolished its corporate or individual income taxes, although excise and other taxes were often replaced.)

The irony is that the VAT is probably the best tax ever conceived from a conservative point of view. As a broad-based tax on consumption, it creates less economic distortion per dollar of revenue than any other tax – certainly much less than the income tax…”

“…A VAT would address a common conservative concern about the growing percentage of the population that pays no federal income taxes. In 2011, 46 percent of all returns had no federal income tax liability according to the Tax Policy Center.  It’s unrealistic to think that income taxes will be imposed on such people once they have become exempt. A VAT would be a way of getting all Americans to pay for the federal government’s general operations…”

“…Perhaps the strongest evidence that the VAT was considered the conservative tax reform is that it is the foundation of the flat tax, which is still supported by practically every conservative tax reformer. The flat tax, originally devised by Hoover Institution scholars Robert Hall and Alvin Rabushka, is a subtraction-method VAT with one twist; businesses are permitted to deduct cash wages paid from the base on which they calculate the VAT. Workers pay the same rate on their wages less only a personal exemption. The purpose of this adjustment is to create transparency so that everyone sees the tax they are paying, and to redress its regressivity.

This is not the only case of conservatives supporting a VAT when it suited them to do so. When former California Gov. Jerry Brown, a Democrat, proposed a VAT plus a flat rate income tax in 1992, this was widely hailed by supply-side economists such as Arthur Laffer and Gary Robbins. Similarly, conservatives have recently embraced a proposal that would have replaced California’s state income tax with a VAT.

In Congress, Rep. Paul Ryan, Republican of Wisconsin, chairman of the House Budget Committee and the Republican Party’s nominee for vice president in 2012, received high praise from conservatives for his “Fiscal Roadmap” plan that would eliminate the national debt by slashing spending. But its first version would also have replaced the corporate income tax with what he called a Business Consumption Tax that is, again, a type of VAT. Sen. Jim DeMint, Republican of South Carolina, generally considered to be the most conservative member of the Senate, cosponsored this legislation.

Nevertheless, whenever a VAT for the U.S. is suggested, conservatives are the first to denounce the idea. It is an article of faith among them that the VAT is a money-machine that must be fought to the death…”

http://growth.newamerica.net/sites/newamerica.net/files/policydocs/Bartlett_Bruce_VAT_NAF_November_2012.pdf

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

“…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

 

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

“”(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