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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.