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  • Swapping a VAT for failing income tax is good policy

    Posted by Bruno Behrend on July 27th, 2010 (All posts by )

    Check out Bruce Bartlett on the VAT here. Rather than surrender, as Bartlett does, why not win?
    ___

    Premise 1 – As our Federal government runs away from the entitlement mess they themselves created, some states are starting to see bankruptcy looming on the horizon. As the left clamors for tax increases to feed the beast, the right sits back and says “no” to everything, ignoring the fact that the left is going to get their tax increases by simple operation of time and demography. This may be good strategery in the short term, but the right is setting itself up for miserable failure, as they will forced to become the “tax collector for the welfare state.”

    Premise 2 – The reliance on the income tax as a revenue generator has failed miserably. First, the right, since the 1980s, has been so successful in removing much of the working poor and middle class from the tax rolls. This makes much of the electorate immune to what is now pretty much a siren song for “tax cuts.” This has resulted in dramatically weakening one of the right’s most powerful political tools.

    Second, the income tax is a horrible way to collect revenue. When times are good, only the rich now pay, and when times are bad, revenues collapse, as we can see in places that rely on the steeply progressive income tax (CA and National Budget). Add to this fact the negative impact that progressive income taxation has on investment and incentives, and you have a very destructive tax.

    Premise 3 – The right, and this includes the libertarian and conservative think tank sector as well as the Republican party, is making a substantial strategic error in ignoring the potential (political and economic benefits) of a massive tax swap. By dissing every proposal for revenue increases (and No, tax cuts aren’t going to work with a $1.4 trillion deficit and a hangover from a 25 year spending/debt/tax cut binge), the right is falling for the trap of arguing for tax cuts for a shrinking class of people while arguing against a superior policy – namely broadening the tax base and making everyone pay for the welfare state that still has substantial political support.
    ___

    If the above premises are substantially true – and I can make an extended and extensive case that they are – then our “center-right” leadership is failing us in merely saying “no” to all tax proposals, and gambling on the ability to drag this cycle of stupidity around one more time.

    The solution is to make the case for a massive overhaul of the tax system, and transition the system from one that relies on income (corporate and individual and Soc. Sec.) taxation to one that relies on taxing consumption (VAT, National Sales Tax, or FairTax). This is a wonderful opportunity for a party of ideas (Republicans, before they succumbed to corrupt Hastertism) and a vibrant think tank community (before they began to resemble an echo chamber of conservo-libertarian apparatchiks promoting stale doctrine) to lay the ground work for a 3rd and 4th “American Century.”

    There are even more new ideas (and political and economic benefits) to go along with this new (and superior) tax policy.

    Why aren’t we talking about increasingly popular ideas like constitutional spending caps? Why aren’t we lauding the replacement of the the bureaucratic entitlement state with a yearly stipend for every American (see Fair Tax rebate or Charles Murray)?

    Instead of fighting against a welfare state that most Americans still support (Soc. Sec., “health care reform,” and public education), why aren’t we framing our ideas as the “individualization” of government assistance through retirement accounts, health savings accounts, and scholarships and education savings accounts?

    The question is whether enterprising politicians will run on these better policies, and whether they can get enough airplay to persuade the voters that they are workable (they are). My greatest fear for our nation is that we are already too far gone down the the road of ruin. We seem to be like that obese person who is just old enough and just heavy enough to avoid the hard work of getting back in shape or forgoing that “satisfying” meal.

    It just might be that we are already too morally and intellectually lazy to engage in the difficult, but worthy, task of promoting better ideas instead of regurgitating ideological talking points (and I proudly consider myself an ideologue) across a widening political gap.

    It’s time to close that gap with an honest airing of ideas, a heated and potentially divisive debate, and a last-ditch attempt at resetting the fiscal course of the nation. Rinsing and repeating another cycle of the last 20-30 years isn’t going to cut it.

    I frankly could care less if any or all of this is “politically difficult.” So was ending slavery or defeating Communism. The people who argue for “politically doable” deals are the same intellectually flaccid hacks who got us into this mess.

    We Americans pride our selves on being “exceptional” in some way. As some one who agrees with that sentiment, I think it’s clear that we are at a fork in the road. One path (the more difficult one) leads to a renewal of purpose and promise, recreating a nation of self-governing citizens, while the other path (easier) is to succumb to being another ‘Euro-style super state’ that goes from crisis to crisis, adding greater government control of our lives along the way.

     

    60 Responses to “Swapping a VAT for failing income tax is good policy”

    1. Jonathan Says:

      I don’t think libertarian/conservative voters are going to be willing to take this bet until they feel that one of the political parties represents their interests. Nobody trusts today’s Republicans not to sell out the taxpayers. There’s too much risk of ending up with a VAT and an income tax. Better to do fiscal triage via radical spending cuts. That way there will be pain but at least we save the productive potential of the private economy, which is the only thing that will rescue the country in the long run. We won’t be able to grow our way out of the mess if we miscalculate politically and bog ourselves down with more taxes.

      People will take risks and put up with pain if they trust their leaders. We are not there yet.

    2. Lexington Green Says:

      I agree with all this. We should build this shift around a campaign to repeal the 16th Amendment. Threatening to make the income tax illegal will force thinking on alternatives. Getting rid of it will ensure that we substitute consumption taxes, and don’t end up just piling them on top of each other.

    3. Michael Kennedy Says:

      Why is every argument about deficits dominated by questions of how to increase revenue? Nobody ever seems to question why we need the spending we have. Since Obama was elected, the federal government has added 250,000 non-military employees. In the decade before, the federal government added 9,000 non-military employees.

      I don’t disagree about the VAT as a revenue raiser. The problem is that no country where it has been adopted has cut their income tax.

      In 1920, Harding and Coolidge faced the most severe recession in American history. War orders had been cancelled in 1918 and the Wilson administration had followed a Progressive program similar to that followed by Hoover 10 years later. What did they do ?

      On April 12,1921, President Harding went before a contentious Congress and presented his program for economic recovery which he called “A Return to Normalcy”. Harding’s normalcy program consisted of the following measures.

      1) A call for a national budget program (which was vetoed by his predecessor).
      2) National debt reduction
      3) Tax reduction
      4) An emergency tariff to protect American industry and farm commodities.
      5) Farm relief legislation (farm bankruptcies were up 20% from 1914).
      6) Immigration restrictions to protect American jobs.

      President Harding pushed hard for his program and got it passed by Congress in 1921. By late 1922, the economy began to turn around. Harding did not live to see it, but his normalcy program proved to be the foundation that Coolidge prosperity was built on. Harding’s successor, Calvin Coolidge had the wisdom to stay the course and build on Harding’s program. The American people were the beneficiaries of the unprecedented prosperity of the 1920’s. Unemployment was pared from its high in 1921 of 20% to an average of 3.3% for the remainder of the decade. The misery index which is a combination of unemployment and inflation had its sharpest decline in U.S. history under President Harding. The Gross National Product averaged 7% from 1924 to 1929. Wages, profits, and productivity all made substantial gains during the 1920’s. Harding slashed federal spending by two billion from Wilson’s last year and Coolidge maintained that spending level of 3.3 billion per year for the rest of the decade. The Harding-Coolidge tax cuts produced increased revenue that went to cut the national debt left by Wilson by one-third.

      That $2 billion cut was half the federal budget.

      Nobody knows about this and school children used to be taught to ridicule the phrase “Return to Normalcy.” Now, of course, they know nothing of this history, or much of any history.

      Harding has always been something of a comic figure with his mistresses and alleged illegitimate children although there are serious doubts about most of those claims. Wikipedia ignores his economic policies and their success as is typical. He has been misrepresented as a weak and unintelligent man and the story of the Depression of 1918-1922 is hard to find.

      The VAT would make the welfare state grow even faster and would not replace the income tax.

    4. CommanderCornflake Says:

      Although you might find some self-labeled statist Republicans who would support such a plan, I fail to see how any small government conservatives or libertarians would have any reason to support the main thrust of what you’ve outlined here.

      Essentially, libertarianism boils down to fighting for smaller government and lower taxes, (tightly linked and supporting concepts) regardless of the party that supports them. What you’ve described here is explicitly defined as a major, broad-based tax increase as a vehicle to raise revenue to support exponentially expanding social programs. Even if supporting such a plan could benefit a generic “republican” (which I’m dubious about)why would any libertarian or small government conservative support it?

      Aside from the primary proposal of the VAT, I think you’d certainly find libertarian support (and probably some general support among American voters) for constitutional spending caps and “individualization” of social security, medicare, and health insurance. However, on the first point, I don’t think our leaders will ever voluntarily impose true spending caps on themselves, regardless of party. On the second point, Republicans actually HAVE been fighting politically for “individualization” of all of the above (Bush’s aborted attempt to create private social security accounts, the huge ongoing battle over Obamacare, etc.)- one can’t pretend that this battle is not already occurring.

    5. Robert Schwartz Says:

      Are we designing a system for an ideal world or just trying to get by in this one? In an ideal world the VAT is a superior tax to the income tax which creates all sorts of weird and untoward economic distortions. In this world, giving Washington another tax is like handing a psychotic child a loaded gun. I am against it, unless and until we can abolish at least 3 independent agencies (CPB, NEA, NEH, just for starters) and three departments (Education, HUD, Agriculture).

    6. Bruno Behrend Says:

      There’s too much risk of ending up with a VAT and an income tax.

      IMO, that risk is very high right now, even post November, the need to fund Soc. Sec. and MediCrud, not to mention Obamacare, will force the issue.

      By arguing for replacement, even a phase-in/out, R’s can claim the better policy and the political high ground. 100% agreement on radical cuts, but the entitlement beast must be fed, even if put on a diet.

      The problem is that no country where it has been adopted has cut their income tax.

      Why not be the first? What R is going to lose a primary arguing for a swap? Who would vote for a compromise keeping both? It’s like we argue against ourselves.

      I agree 100% with steep spending cuts. We are dealing, of course, with an R Party too chicken to propose raising the Soc. Sec. Retirement age to 70.

      On the second point, Republicans actually HAVE been fighting politically for “individualization” of all of the above (Bush’s aborted attempt to create private social security accounts, the huge ongoing battle over Obamacare, etc.)- one can’t pretend that this battle is not already occurring.

      You are correct of course. Credit should be given where credit is due.

    7. Bruno Behrend Says:

      Robert,

      Fund my 2014 Senate campaign, and I’ll run on that. Excellent policy. Just FYI, I’ll let an entire party apparatus and political class argue for “just trying to get by in this” world.

      My belief system tells me to strive for the ideal.

      I know that we will never reach any ideal if we don’t put the ideal on record. We’ve spent decades “playing not to lose” out of expediency, and that is what got us here.

      Since when is it bad policy to propose good policy.

    8. Zenpundit Says:

      Excellent post.

      It is a high risk strategy though. To work, there will have to be some tactical excellence beforehand to ensure that there will be diehard contingent of Senators who can kill a reconciliation bill where the oligarchy will try parliamentary shenanigans to preserve the income tax while getting a VAT (which will be their objective if a VAT swap picks up political steam- they are already hungry for tax-farming mechanisms like cap and trade and the regs that are inevitably going to emerge from Obamacare and the finance bill monstrosity).

      With that caveat in mind, there’s a great deal here to use as tools to seize the political initiative, a valuable thing in itself. To paraphrase Sun Tzu, taking one opportunity begets others.

    9. Paul Milenkovic Says:

      Oh goodness gosh no!

      I am a wage earner and also have a Schedule C small business, and the thought of the reporting and compliance with a VAT? The income tax accounting requirements are as nothing in comparison. Please, please spare us this monstrosity.

    10. Michael Kennedy Says:

      There will be plenty of opportunity to thrash this out in debates as I expect that the Democrats plan to run against Paul Ryan and his plans for saving Social Security.

      http://www.youtube.com/watch?v=Kpt83xV-b08

      http://www.youtube.com/watch?v=Q0a_DSuh628&feature=player_embedded

      Look at those two videos, especially the one with the Democrat chair of the budget committee. Watch how he uses the talking points for the fall. Start at 5:23; “privatize Social Security” and “Bush Agenda.” I wonder if people are as afraid of that idea now that they are staring into the abyss? This will be the fall campaign. There is nothing else the Democrats can do to hold off Armageddon but try to scare voters with Republicans’ suggestions to save the programs for at least some of the voters.

      This will be a backbone test for Republicans for 2012. A VAT is a national sales tax. Do it openly and it is regressive and hurts the poor; do it secretly and it is progressive and the poor vanish from the equation.

    11. Lexington Green Says:

      The more I think about this, the more clear it is that it is the only possible option. Bottom line: All of the Donks and most of the Republicans have already decided to impose a VAT on top of the income tax. They will do this even if the GOP has a majority, unless this alternative is proposed and pounded home. Republican candidates should be confronted with a demand at any public appearance, will you promise, today, now that you will not support a VAT or any national sales tax unless the income tax us is abolished. Otherwise we will have both next year.

    12. Jim Bennett Says:

      Paul is right. The VAT is a compliance monstrosity that imposes collection costs on business as bad or worse than income taxes. A straight national sales tax with exemptions on basic necessities would be far preferable. Abolishing income tax would provide massive relief to individuals and small businesses just from the end of compliance and audit activities.

      I absolutely do not trust our political establishment to start a new tax and end the old one.

      The governments at all levels are mostly in a pre-bankruptcy situation. Many different classes of people have been promised more than the governments have means to pay for. Remember that the fundamental purpose of bankruptcy is to prevent one favored creditor from getting paid at the expense of the others. Right now what we are seeing is a move to do exactly that — to pay government employees and pensioners in full over the coming years while shorting creditors like Social Security and Medicare recipients. I know I am going to be working long after the age of 65 and I’m OK with that — provided that the other creditors take comparable cuts.

      Life expectancy for males who have reached the age of 65 is around 83 – -let’s call it 85 to be generous. If Social Security recipients agree to raise the age at which benefits start to 70, that is a 25% cut in benefits on the average. So it would only be fair to cut non-military government pensions by 25% as well. (I consider military combat veterans to be “preferred shareholders” in the country because their investment was in a harder currency, and deserves priority in payout.) But civil government employees have sweat equity just like everybody else and don’t deserve a better deal. You had a contract, you say? Yeah, well, so did we. Bankruptcy is hell.

      Usually when a creditor starts to sense he is being shorted in favor of some other creditor, he will file on the debtor to insure the preferential payments are disgorged and everybody gets a fair share of the dissolution. I consider that the tea party is, in essence, serving the equivalent of bankruptcy papers on the Feds.

      Time to start thinking about what the reorganization looks like. And I don’t think this case merits leaving the debtor in possession.

    13. Bruno Behrend Says:

      Paul,

      If you read the piece by Bartlett, it seem quite simple. Further, almost no one talks about the fact that in Europe, the business gets to deduct the VAT he paid, from the vat he must pay.

      While this is seemingly complex as I think about it, the idea that it is worse that today’s tax code seems impossible.

      Let me be clear as to what I’m talking about here. We get RID of the income tax! No filing, no Capital gains, no dividend rules, no interest deduction!!! No need.

      Imagine the impact on savings and investment.

      Just FYI folks, note that I doubt the current system would allow people to do this? Any challenger from both parties would lose their primaries running on this.

      This is another reason I think the nation may need a third party, even if it’s impossible. Hoping I’m wrong.

    14. Mr Black Says:

      Here in Australia we have a cousin of the VAT, which is called the “Goods and Services Tax” (GST). It applies ONLY to the final point of sale, not to each stage of production and is currently levied at 10% of the final price. This somewhat eases the burden of reporting on the supply chain as well as makes it very clear to the individual what the exact tax rate is, where as a VAT hides most of its effect along the way.

      I’d be a huge supporter of a GST style tax base with no income tax and no corporate tax, or any other kind of tax really. It would solve a host of problems. Give it a go if you can.

    15. Bruno Behrend Says:

      I absolutely do not trust our political establishment to start a new tax and end the old one.

      Neither do I, but that simply can’t matter. We have to propose solutions, and the existing tax isn’t one of them.

      Though I’m not one of those who believes the twaddle that “we are the government,” there is something to be said for the argument that we certainly can impact it. I can make a case to the left and right that a national sales tax, VAT, or GST is better for the entire nation.

      If the marketing succeeds, the bill can pass. Why is it that we concede the battle before even waging it, particularly in this environment.?

      Love this blog, BTW. More fun than a barrel of monkeys.

    16. Leo D Says:

      It’s absolutely true that republicans (George Bush and Ronald Reagan in particular) went a long way to excusing a larger and larger percent of the population from paying any income taxes. A family of four with two kids under 17 now has to earn over $46,000 to be liable for even one dime of federal income taxes. That’s good for them and bad the rest of us in that such people don’t have any ‘skin in the game’.

      One way to do a swap of VAT for income taxes that probably makes more sense than the difficult job of repealing the 16th amendment is to make the VAT tax on each item purchased transparent (so that as it accumulates it is fully visible to the end consumer) and fully deductible, dollar for dollar, from one’s income tax.

      It would require record keeping for sure, which people are loath to do for local sales taxes, but since virtually all goods sold in the US would be subject to it, (unlike the various state sales taxes) and credit/debit card records are made available to consumers and for most consumers represent virtually all their purchases and would provide proof of payment.

      This way everyone, drug dealers, white collar money launderers, and small businesses that work ‘off the books’ alike, end up paying taxes hitherto only paid to states through sales taxes. That alone should capture a large part of the $300 to $500 billion in federal income taxes not now paid by such ‘off the books’ people. It wouldn’t pay the $1.47 trillion in current deficit (FY 2010) but would be a health start and would be a return of the idea that all should pay for the benefits of living in America.

    17. richard40 Says:

      I agree with others here that we should not support a VAT unless it is coupled with a total repeal of the income tax, and repeal of the 16th amendment. If we do it any other way, then as others have stated, we will end up with both the income tax AND the VAT, which would be even worse.

    18. Tedd Says:

      Here in Australia we have a cousin of the VAT, which is called the “Goods and Services Tax” (GST).

      Same in Canada, and I would recommend it for the same reasons Mr. Black does: it makes the tax rate clear and obvious to everyone, and it has lower collection cost. Also, moving from an income tax base to a sales tax base encourages savings relative to spending.

      It’s certainly a risk that you’ll get a sales tax while keeping the income tax just as high. But I think many small-government advocates put too much emphasis on reducing taxes. Lower taxes are a result of smaller government, not a cause of it. Putting the emphasis on lower taxes is like pumping yourself full of decongestants but not taking any steps to cure the cold: you feel better in the short term, but it just makes you more sick in the long term.

    19. John Campbell Says:

      You cannot wait for perfection as you slide into the abyss. In Canada too we have a GST tax, which is a paperwork hassle for businesses, but it is a reminder to everyone that the government costs and takes money from you no matter what your station in life.

      This tax is much broader that the one it replaced – a manufacturers tax placed on most manufactured goods. That tax was hidden while the new GST is out in the open. If we still had the previous hidden tax, I am sure it would have doubled by now while the GST has declined from 7% to 6% – politics I know but still hard to raise such a clear tax.

      The GST tax was hated at the time and brought in by a previous Conservative government that had the guts to enact several unpopular economic measures at the time. The only can they kicked down the road was Canada’s growing and unsustainable deficit that finally forced the Liberal party to address later – in the 90’s. Canada had the good fortune of hitting this wall earlier than other countries.

      I believed that the newly enacted GST at the time made it more difficult for the Liberal party to later raise this level of taxation, forcing them to be more aggressive in cutting government spending. They had promised to remove it at the time it was enacted when they returned to power, but what do you know – it survived because the country was fighting to regain fiscal responsibility and the tax made too much sense at the time, and I think it still does. Everyone should pay as you go.

      My judgement would be that the GST has been good for Canada, rather than relying solely on a progressive income tax system. The tax system must be made more transparent and honest. The GST is a less sneaky and broader method of taxation – more truth is better for everyone, except most, if not all politicians.

      In the US, you have to put out the fire before getting too wrapped in the medium and longer term. Good luck – I am pulling for you.

    20. Steve Says:

      You mean “I couldn’t care less.”

    21. peter Says:

      You mean “I couldn’t care less.”

      No, he means “I could care less”. It is sarcasm. That is the tone in how it has been said in the last 20 years.

    22. Michael Kennedy Says:

      One factor that would greatly assist in tax reform would be cutting spending. I was very disappointed in Reagan over this but he had the DEmocrats in control of Congress except for one brief period when Bob Dole (I would take almost any Democrat over Dole) ran the Senate. It was Dole who delayed the Reagan tax cuts and thereby lost the Senate for him in 1982.

      Bush had Hastert, another Illinois machine pol who got out before the FBI got to him. I blame Hastert for most of the growth of spending under Bush.

      Give us a 15% cut in federal spending and tax reform becomes easy. All those lefties who say the coming tax raises are just “going back to the Clinton rates when the economy was booming.” My response is, “OK. Lets go back to that level of spending, too.” 2008 spending levels would lead to a balanced budget, let alone 1998 levels.

    23. setnaffa Says:

      How about taking out sliding scales and creating a “fair to everyone” tax?

      How about massively cutting spending on things that aren’t the Federal or State governments’ legitimate business?

      How about only keeping deduction for charitable donations and a few other things like that?

      And how about not blaming “the right” when both major parties are at fault for the graduated tax rates, the odd ways to deduct income from taxation, and most taxes are hidden by taxing corporations who just raise prices to compensate…

    24. Paul A'Barge Says:

      Yay for this. A National Federal Sales Tax instead of the Income Tax. That way everyone pays at least something toward the expense of government.

      Bring it on.

    25. Optimus Primed Says:

      re: Canada and the GST. Let’s not forget you still pay federal income taxes.

    26. Steve White Says:

      I’d certainly favor a GST over a VAT just for the transparency as stated by others, and to have it replace, not supplement, the income tax.

      But let’s be clear what the rate will be: high.

      The federal government currently spends ~ 23% of GDP while taking in 16% of GDP (thereabouts). The personal and corporate income taxes, and the social security tax, provide most of that money.

      If we substitute a GST and eliminate the income tax, the GST will need to be right around 33% on every purchase. Purchases, personal and business, make up 2/3 of our GDP, so I’ve read, and we’ll need a very high GST to replace the revenue lost by eliminating the income tax. 1/3 of 2/3 puts the bite on our GDP at right around 22% or so.

      You can imagine how the Dhimmicrats would play that — taxing the poor into starvation while letting the rich keep their money, etc.

      If you make the GST similar to that of Canada’s, say 6%, where do you get the rest of the money? That means you end up keeping the income tax, which others have noted is exactly what the political class in Washington wants, so that they can raise either when convenient.

      So before you can sell a GST to the public, be prepared to answer the question about what the rate has to be in order to eliminate the income tax.

    27. Harun Says:

      The right should pray that the Democrats pass a VAT. They should oppose it by not too much – let the Dems do it.

      Then the right should campaign to reduce income tax to make the VAT revenue neutral.

      If the right helps the Dems do a VAT, then we will end up with both taxes and not revenue neutral. Do you think the Tea Party will vote the GOP into office if its supports a VAT? No. Thus, they would run 3rd party candidates, and the dems would be kept in power.

    28. gs Says:

      It’s a lot easier to discuss sweeping proposals about how to tax than to tackle the spending issue.

      “It’s the spending, stupid.” Sometimes simplistic sound bites are correct.

    29. theBuckWheat Says:

      A tax on income also allows government to destroy financial privacy. Just as importantly, a government that is free to spend as much as it wishes, either by unrestrained borrowing or the ability to print money, will also grow in size and scope. This gradually destroys the liberty of its citizens. This is especially true when government inflates the currency and then taxes the “income” due only to rising prices of assets like homes and precious metals. Whatever we do with the tax system, we must totally eliminate the government’s ability to tax income, and when we do, we must retain the ability to keep government spending under control.

      Lastly, taxes have two functions. The fist is obvious: to pay the bills. The second is just as important: to make the cost of government tangible to every citizen. It is dangerous to insulate too many people from the cost of the government they are voting for. A sales tax or VAT would constantly remind people of the cost of government, even if they were people at the lowest levels of income or personal wealth.

    30. John Says:

      Sh’yeah, right. lol We’d just get stuck with both an income tax AND a VAT tax.

      Imagine for a second, that a swap did take place and the income tax was eliminated. How long would it be before Democrats and their media mouthpieces were shrieking about how “unfair” it is that the rich “weren’t paying their fair share”? Thirty seconds?

      The NYT and WaPo would have the stories written before the inl dried on the swap legislation.

    31. Owen Courrèges Says:

      Bruno,

      I agree 100% with steep spending cuts. We are dealing, of course, with an R Party too chicken to propose raising the Soc. Sec. Retirement age to 70.

      Really? House Minority Leader John Boehner has proposed just that. McCain advocated raising the retirement age to 68 during the last election. The GOP has been out front in pushing an increase in the retirement age, even though that has political consequences.

      I think you’re right that we can embrace the VAT as a replacement for a less efficient tax. However, I think you incorrectly see the VAT as being under serious consideration. Although we’re nearing fiscal crisis, the VAT remains unpopular on both sides. Democrats see it as regressive, while Republicans see it as a cash cow for government. The compromise you propose does nothing to mitigate Democratic opposition to the VAT — to the contrary, it only enhances it by simultaneously eliminating progressive taxes. You’ll never get the left on board.

      I could be reading the situation wrong, but unless we have a major, realigning event, I don’t hold out hope for fundamental tax reform. I think it’s more likely that we’ll be able keep taxes relatively low and pass entitlement reform to limit eligibility.

    32. Chester White Says:

      Wait a sec. My wife and I work for decades and pay a crapload of taxes along the way and manage to save something.

      Now you want to put in a VAT and tax the crap out of the meager remnants AGAIN when I go to spend some of it finally?

      Then an estate tax comes along to do it all over with the balance someday?

      By God, I think not, unless you give me credit for what we already paid.

    33. TheOldMan Says:

      How about making tax withholding optional and having the default be quarterly tax payments? When people take a good look at what they are paying, we will see action on budget cuts. Paycheck tax withholding hides the true cost whereas writing a check every three months will make it obvious.

    34. Lexington Green Says:

      “Sh’yeah, right. lol We’d just get stuck with both an income tax AND a VAT tax.”

      Sh’yeah, right, that is what is going to happen ANYWAY.

      Everybody seems to be in denial about that. Except Bruno. And me. Ha.

      Is nobody paying attention to this? Our Ruling Class has already decided that we need a VAT on top of the existing taxes.

      The Brookings Institution says so.

      Paul Volcker says so.

      WaPo says so.

      Choke it down, guys. THEY are going to jam a VAT down our throats.

      The only hope of getting any benefit out of it is proposing a Big Swap.

      Otherwise, watch, you’ll see, Congress, likely with a GOP majority in the House, will impose a VAT next year, and we will pay all of it, and we will have gotten nothing in exchange.

    35. Duke Says:

      A false choice. It is not acceptable to quadruple government spending, then cut it by a quarter or a half and use the massive remaining deficit as justification to tax more. It matters not whether taxes are collected on income or via VAT. First cut federal spending, not a bit but back to levels of 10 or 20 years ago before Obama’s printing press. Let’s use Clinton’s final budget for bi-partisan common ground. This VAT or income tax false choice is like the beltway’s immigration ploy; we can’t do anything unless its all comprehensive. Well we did the comprehensive thing in 1986 and the politicians never enforced the border. We citizens are not about to be snookered again. Cut current spending to 16 or 17% of GDP and then we’ll talk about tax policy changes.

    36. Andrew in Toronto Says:

      And in Canada, Australia and everywhere else with a VAT or GST they still have the income tax. Don’t kid yourself that you won’t get both.

    37. Anonymous Says:

      The right answer is to stop the income tax, and only N months later start the VAT. The time between would act as “stimulus” and permit a measurement of the growth limiting characteristics of each tax regime. One way to measure a characteristic function of a system is to “pluck” it, suddenly releasing tension and then gather information on its behavior when the tension is released. Another way is to add stress to the the system from the relaxed state and again, measure the change from the relaxed state.

    38. Songdog Says:

      It would be suicidal for conservatives and libertarians to allow a GST or VAT tax before a stake was driven through the heart of the income tax, or we would surely end up with both. Remember the great tax double-cross of the 80’s? Reagan traded lower rates for the elimination of most deductions, but we didn’t even make it out of George H.W.Bush’s term before the rates were on the way back up again. George Mitchell got both higher taxes and defeated Bush in the process.

      Given the elastic doctrine of Congress’ powers under the commerce clause, I wouldn’t bet much that even repeal of the 16th amendment would eliminate the risk.

    39. Dougger Says:

      It is time for enough state legislatures to vote for a Constitutional Convention.

      Only through a Constitutional amendment (or the threat of one) can we swap out our tax code without ending up with both a VAT and an income tax. A national sales tax is actually preferable to the VAT for many good reasons.

      In the past just the threat of a Constitutional Convention has been enough to get Congress to do the right thing. They fear losing their unlimited commerce clause powers more than anything, so they will pass whatever legislation is prompting the call for a convention in order to avoid losing even more power by the states amending the constitution.

      It is high time that the States take the lead.
      They have the power to do it.

    40. punditius Says:

      The income tax will not go away. The objective should be to restrict it, and to make sure that the restrictions stick.

      So we need a Constitutional Amendment (1) authorizing a value added/sales tax, and (2) limiting the income tax to a flat rate not to exceed 10% except for temporary (time-limited)increases requiring a 2/3 vote (for national emergencies like war.)

    41. Bruno Behrend Says:

      And in Canada, Australia and everywhere else with a VAT or GST they still have the income tax. Don’t kid yourself that you won’t get both.

      As I’ve said often, regarding this post. Here are your options.

      1. Getting a VAT or GST, added to our awful Income tax, based upon the simple operation of entitlements and budget growth.

      or

      2. Having a pretty good opportunity to repeal and replace the income tax simply by running on that platform in the right cycle (i.e. NOW!)

      Republicans and conservatives can’t seem to understand that the old cycle – tax cuts, booms w/ revenue increases, busts with revenue collapse – isn’t going to happen again, and would be bad if it did.

      First, the spending picture is WAY TOO BLEAK. Second, another round of cuts with any Boom, will be a feeble boom, and a more spectacular revenue bust, which WILL get us the VAT or GST.

      We have 2 choices Andrew. Both taxes, based upon operation of politics and economics, or the abolition of the income tax in exchange for a consumption tax.

      My idea is better policy, better politics, as well as the SAFER strategy. This post shows the ONLY way we avoid a “both” scenario.

    42. Taoist Says:

      The national sales tax only at the point of retail to the consumer that Australia and Canada have (that several of you seem to like) as a complete replacement for our income tax pretty much IS the idea of the FairTax. That’s why so many people support it. It’ll be a much cleaner and simpler tax code.

      A VAT tax, on the other hand, has huge costs of compliance, as has been pointed out before in this thread.

      As is also pointed out, the real danger is in ending up with both a consumption tax and an income tax. That’s why the FairTax has such strong language about expiring if the income tax isn’t repealed.

    43. SamA Says:

      As discussed above, a GST or National Sales Tax would have to be 25% or higher to totally replace the current income tax. This is a rate high enough to encourage smuggling, black markets, etc. Expect existing organized crime groups to spot the opportunities here.

      VAT avoids encouraging this sort of activity, by shifting the incentives around, at the cost of vastly increased paperwork. The returns to sub-rosa activity are much smaller at any given stage in the production chain, and the later stages would lose more money in taxes already paid on inputs than they would gain in taxes avoided on their outputs.

      It’s not clear to me which is better public policy, in the long run.

    44. Sailfish Says:

      Let’s be honest here. This is nothing more than a scheme to transfer the tax burden from the wealthy to the middle class. The wealthy spend a lot less of a percentage of their income than the middle class and thus, their tax burden would be reduced significantly and the middle class’s burden would need to rise dramatically in turn, in order to maintain the equivalent tax revenues. The poor would still be left pretty much immune to this since a lot of their consumptive goods are provided for from the government in the form of welfare.

      This proposal is nothing more than a red herring, passing itself off as a cure to the current spendthrift ways of our government but, as in most shell games, is nothing more than a slight of hand trick looking to reduced the tax burden of the wealthy and passing that burden down to the middle class.

      Good luck with that.

    45. Michael Kennedy Says:

      Sailfish, do you really believe the wealthy pay any significant amount of income tax ? What you are talking about is the upper middle class entrepreneur who would much prefer a tax with miniscule costs of revenue procurement and enforcement. So would the small businessman. The truly wealthy have their money in various shelters and trusts and pay very little tax. Income tax is for little people but you seem to have a belief in fairy tales so good luck to you.

      It isn’t just the Kerrys and Kennedys and Rockefellers. One of our female obstetricians was married to a wealthy businessman (This was 20 years ago). His Dun and Bradstreet report, the hospital administrator told me, ran to 52 pages. That was just his assets. When you get to big numbers like that, taxes are a minor annoyance. They can shift incentives, of course, which is why taxes are important.

    46. rosignol Says:

      Sh’yeah, right, that is what is going to happen ANYWAY.

      Perhaps what Clair Wolfe described as ‘that awkward stage’ is coming to an end.

    47. sportutegirl Says:

      Bernadecke has said that no matter what the tax rate is, the amount collected is always 20% of GDP. Then he goes ahead and proposes another tax in the form of the VAT. If we need more revenue and we can only get 20% of GDP no matter what the rate is, why don’t we raise the GDP instead? Maybe Laffer was right. Maybe by LOWERING taxes, we increase the GDP and get 20% of a bigger GDP. We are definitely on the dark side of the Laffer curve, now.

      I really think the problem is spending, not taxes, and the big part of that is the entitlements, like Social Security. Everybody is proposing painful cuts in Social Security. Well, I entered the workforce in 1978 and have had my retirement age raised and raised again and my taxes raised and raised again, so I, and my generation have paid enough.

      Why don’t we limit Social Security to people who have worked and paid in their entire lives? A lot of people who draw checks have never paid in, adult children of payees, for example. Many people have worked for only a few years in a job that pays SS and draw for their entire lives. Raise the number of years to qualify from 10 to 25. Make it full time, at at least minimum wage to qualify for a ‘year’. What we have now is a joke. Get rid of the SSI, so called crazy checks that go to children, sometimes adult children, that have never paid in. If you want to help them, give them welfare. Limit Social Security to citizens, who have worked and paid as citizens.

      Limit disability income to the truly disabled. License an army of camera phone whistleblowers who record proof of a disability check recipient’s lack of disability, by letting anyone collect a bounty for collecting evidence of disability fraud.

      Limit Medicare to citizens who have paid in their entire life, not just any idiot who happens to be in the US and turns 65. We have paid some hefty Medicare taxes, and the people in the higher income levels paid the most for Medicare, as there is no cap. Yet, will we get a gold plated Medicare plan, for the increased tax burden? No, higher earners just pay more, but get the same Medicare as everyone else who happens to turn 65, citizen or no.

    48. Anonymous Says:

      VAT? Firstly, the usual pitch is that it would replace at least the income tax, if not all taxes. Dream on! Has it ever happened? Does the UK no longer have an income tax? FRance? ANYWHERE???

      But as I have been trying to point out for yearsm we already have VAT, just not called that. I have realised this since before my voice changed: a Reader’s DIgest article in, I think, the late Fifties showed that if government taxes, fees, etc. were stripped form a twenty-two-cent loaf of bread (this was at least fifty years ago, remember) it would cost under two cents.

      From the article you cite –

      The way a VAT typically works is like this. A farmer grows wheat and sells it to the miller. A tax is paid by the farmer on the sale price of the wheat and is included in the price. When the miller sells the flour made from the wheat, a tax is assessed on that sale as well. But the miller subtracts the tax he paid when he bought the wheat. When the baker buys the flour, he pays the tax included by the miller, which also includes the tax paid by the farmer. When the baker sells bread made from the flour, the tax is assessed once again. But as in earlier cases, the baker gets credit for all the previous taxes paid.

      So, how it it done now?

      A farmer grows wheat and sells it to the miller. A tax is paid by the miller on the sale price of the wheat. When the miller sells the flour made from the wheat, a tax is assessed on that sale as well. When the baker buys the flour, he pays the tax included by the miller, which also includes the tax paid by the farmer. When the baker sells bread made from the flour, the tax is assessed once again.

      In other words, almost exactly the same as already happens – except that it is a national tax, and that probably-spurious rebate of previous taxes for the miller and baker.

    49. Ken Hahn Says:

      You may be right as far as you go but there is a gigantic flaw in the reasoning. You will never get rid of the income tax. You may suspend it and replace it with a VAT but as quickly as you do the campaign by the left to get the wealthy to pay their “fair share” begins and it doesn’t matter a bit if the rich pay almost all of the VAT. Sooner or later you will get a Congress that will reinstate the income tax and it will not replace the VAT but supplement it. You will have both. A VAT or national sales tax is not a bad idea in isolation but when you consider the political realities it is a catastrophe.

    50. Robert Bridges Says:

      I would like to see a response to Chester’s comment. I am in the same boat as he is: we have saved a significant portion of our income for retirement, and a VAT would amount to double taxation as we spend that money in retirement. After watching other spendthrifts over the past 40 years, this would be the final insult.

    51. Lexington Green Says:

      “You will never get rid of the income tax.”

      We got rid of slavery. We amended the Constitution. After a war.

      We got rid of prohibition. We amended the Constitution. No war on that one, thankfully.

      The 16th Amendment can be repealed. That gets rid of the income tax. Here’s the Amendment:

      1. The 16th Amendment is repealed.

      2. Congress may not impose any income tax under any other express or implied power. Congress is forbidden to impose an income tax.

      That can be done.

    52. wtfo Says:

      VAT would be a disaster. The large percentage of people with little or no income tax liability would be faced with a jump in prices/cost of living, with little or no increase in take-home pay even if you remove the income tax entirely. People making $10/hr are paying little, if any, income taxes and get a few hundred dollars back every spring. It will transfer a lot more burden to the lower classes, not just the middle class.

      Both income and VAT taxes discourage productivity, and property taxes negatively impact efforts at self-sufficiency. You need taxes from somewhere… but democratic governments have demonstrated repeatedly that they are unwilling and incapable of controlling spending in order to maintain sane rates of taxation.

      The main appeal of a VAT for governments is that the public usually doesn’t connect the dots between the “tiny” raise in VAT rates and the large resulting increase in retail prices.

    53. Lexington Green Says:

      Most people commenting are living in a dream world. There is going to be a VAT because the Democrats and the Republicans — the ones we have now — want more money, power and control and will not cut spending. It is already baked into the cake.

      Or, actually, most commenters are responding to the title and not reading the post.

    54. peter jackson Says:

      Although swapping the income tax for just about anything would be an improvement, even a VAT, at the end of the day swapping income taxes for a VAT is trading one tax on production for another. It also is unfortunately invisible, like current taxes on businesses, which is another minus.

      To move to the next level we need One Tax: a point of sale (retail) tax on everything at a single uniform rate to replace all other taxation. By not allowing any exemptions we would be able to keep the rate as low as possible.

    55. Jonathan Says:

      Lex, I don’t agree that imposition of a VAT is a done deal. It won’t happen if enough voters oppose it. Remember Bush’s immigration reform? Meanwhile there is risk that a legislative attempt to trade VAT for the income tax would go awry. If many of the commenters are guilty of responding to the title and not reading the post, the proponents are guilty of evaluating their idea mainly in terms of its hoped-for outcome and underweighting the risks.

    56. Mr Black Says:

      As to the point which has been raised numerous times; what to do about those who have saved for a lifetime or who have paid into SS for a lifetime.

      SS is the easy fix. It could pay out benefits equal to those paid in as soon as the sales tax is introduced. This will initially burden the federal government but it is a burden that will rapidly shrink away and will be much smaller than current entitlement assumptions. The recipient could also will any remaining benefits to their family if they pass away before collecting the full amount. COLA/inflation adjustments should of course apply.

      Savers.. I’m not so sure.

    57. tehag Says:

      ‘Second, the income tax is a horrible way to collect revenue. When times are good, only the rich now pay, and when times are bad, revenues collapse, as we can see in places that rely on the steeply progressive income tax (CA and National Budget). Add to this fact the negative impact that progressive income taxation has on investment and incentives, and you have a very destructive tax.”

      I sure hope I read this wrong, but it seems to be saying that the VAT tax is superior because when the economy takes a down turn, the VAT tax continues to raise revenue by taxing people punished by the recession, and that this is good, because the government needs a steady income stream no matter how much the peasants suffer.

    58. tehag Says:

      I’ve advocated a VAT/income tax switch for decades, with two provisos: a constitutional amendment that bans an income tax at all levels of government (and that includes misnamed production taxes and severance taxes which are levied on minerals) and a constitutional amendment that sets the rate of the VAT tax, so that any change in rate requires a new amendment.

    59. Lexington Green Says:

      “… the proponents are guilty of evaluating their idea mainly in terms of its hoped-for outcome and underweighting the risks.”

      We disagree about the risks. I see a virtual certainty that the existing DC consensus, that new revenue sources are needed, and that a VAT is the way to get that new revenue, will prevail. The current fiscal situation is unsustainable, and no one is going to propose serious spending cuts, since all the money goes to entitlements. There is no public consensus for entitlement cuts.

      I watched, Bush, Obama and McCain stand together on a podium and support TARP, which was the greatest single feat of highway robbery in history. All parties, with their cronies in the banking industry, supported a gigantic ripoff of the American people.

      The VAT will be no different.

      Watch.

      A GOP majority in the House, if it happens, probably won’t change anything.

      The only way to derail this is to put an alternative proposal on the table.

      Merely saying “no VAT” is not an alternative proposal.

    60. Bruno Behrend Says:

      All,

      This has been an amazing discussion, and I believe I will post a commentary taking into account all the excellent made by both sides.

      I also plan to post a second leg to the proposal, which will address the issue of the impact of such a swap on the lower income quintiles. If some one has a suggestion as to an economist or two who might cogently comment on this, I would really enjoy it.

      Please e-mail me your suggestions at bruno[at]extremewisdom(dot)com.