VAT Tax Redux, New Proposal, and Barone’s piece in SF Examiner

This lonnnnng post was prompted by an email linking Michael Barone’s latest SF Examiner piece, which asks Republicans “Now what?” after assuming some strong gains in November.  I have a few ideas on the “now what?” question, and I can’t think of a better place to post them than on this excellent blog.

First, I can’t thank you all enough for the excellent commentary and critiques on my recent “Swapping a VAT for failing income tax is Good Policy” post a week or so ago.  I’ve commented on many of your ideas, and I think you’ve changed my mind on a thing or two, which you will notice below.

I wanted to follow up that post with another proposal that fixes the primary problem with going to consumption taxes, which is their impact on the working poor and middle class. One benefit of a consumption-based tax regime is that it captures money from every transaction, making every one a part of the solution to our fiscal mess.  It is also far more stable than a highly skewed progressive system that only taxes the rich. (Social Security notwithstanding)

The most difficult political and policy problem preventing the adoption of a consumption based tax system is that it places a “burden” on the working poor and middle class. (burden being interpreted both in policy and political terms)

Simply put, in a consumption tax system, the lower end of the earning spectrum pays a much greater share of their income in taxes than the rich.  Many will argue that this is “unfair.”  Leaving that argument aside, it is fair to say that this problem MUST be resolved before any politician is going to risk moving the entire system away from income taxes.

I propose such a solution in this post, beginning with my answer to Barone’s “Now What?”


Now what? Here’s what! BREAK EVERYTHING!! (Just break it in slow motion)

The solutions proposed below are envisioned to be enacted as sweeping reform.  I see them as design to re-set America’s fiscal and cultural course.  Note that I don’t take credit for the ideas because others have actually been proposing them for decades.  It’s just time some wrapped them up in a bow and integrated them as a unified, workable platform.

If I had the time to work on my now-shelved book on a 3rd Party, I would write a chapter or two for each of these ideas, laying out accurate numbers and analysis for why they are great ideas.  Absent the time to do that, I decided to propose them here and get your great feedback again.


More and more polling data is showing that Americans across the political spectrum are looking for more than the run-of-the-mill pabulum spewing forth from our brain-dead, morally disgusting, and corrupt “ruling class.”

From Rasmussen link above – “Yet despite all the bad economic news, 67% of Political Class voters think the United States is generally heading in the right direction these days. Things look a lot different to Mainstream Americans. Among these voters, 84% say the country has gotten off on the wrong track.”

I see the next few years as a wonderful opportunity to propose  bold, aggressive, and sweeping reforms. The insiders of both parties will pooh pooh such talk, and blather on about how important it is to change by increments.

I think the incremental strategy is an utter failure.  It has literally created the mortgage mess, the tax code, the regulatory Rube Goldman-Sacks apparatus, and provides the foundation for every other serious problem we face today.  It is time to scrap incrementalism, and boldly propose transitioning out of every bad policy and toward good ones.  With that in mind, I propose the following agenda.

1. Constitutionally Cap Spending

Propose and promote a Federal Balanced Budget Amendment while passing Gramm_Rudman II in the interim. You may not get the Amendment, but you will be able to organize politically around it for 3 election cycles.  Americans are appropriately worried that the ruling class is bankrupting America.  Give them something to rally around that will have 60% approval ratings for the next 10 years.

This plank stems from a simple concept that Republicans refuse to tell their rank and file voters. If you are spending, you are taxing.  Voting for tax cuts without cutting spending is a practice that must stop.

2. Individualize the ENTIRE Welfare State

Write comprehensive legislation that transitions Soc. Sec. and both Medicare and Medicaid into a system where  every American over the age of 21 receives a a $15,000 yearly stipend indexed to inflation.  Convert all health care and retirement systems to an open market of insurance offerings and savings accounts.Mandate that the first $5000 of this stipend go toward the purchase of these new health insurance, health savings, and retirement savings options.  Over time, Medicare, Medicaid, and Social Security will no longer be necessary.  After all, if you are going to mandate the purchase of insurance and save for retirement, what better way to do it than provide the money for it?

The benefits of the above proposal are numerous.  First, the unsustainable, unfundable, and broken government medical system is replaced by an individually-driven  dynamic market of new services.  Second, America’s saving and investment rate will sky-rocket and savings from increased efficiencies will be monumental.  Lastly, to receive these benefits, you must be an American citizen, which solves almost all of the cost issue of illegal immigration .

I call it “individualizing the welfare state” for a reason.  It threads the needle of left and right dogma. Conservatives and libertarians can’t bring themselves to understand that Americans want a safety net, and the left can’t understand that the current net is in tatters, and utterly fails the people it is intended to help. The proposal above saves the “social welfare net” in way that is sustainable.

How do you pay for all this? First, we may need to increase revenues as we shed the failed or failing legacy systems. As we flush out the culture of these destructive programs, we will begin to see large cost savings in the out years.

If the legislation is proposed properly, it will layout a 10-20 year transition plan to the new system.  Over time the money spent on Social Security, Medicare, and Medicaid (no longer necessary) will be spent far more wisely by actual people.  Much of the existing private and public bureaucracies will die on the vine (a good thing), and the best aspects of that bureaucracy will serve to advise the millions seeking the best way to allocate their stipends.  As for the tax system necessary to finance all this, see below.

3. Destroy the existing tax system. Phase out ALL Taxes based upon income (Corp, Personal, Soc. Sec. & Capital Gains) while phasing in a consumption tax-based system.

Before your heads explode, just remember that ALL income, FICA, investment gains, and corporate taxes are GONE when this is done.

For the foundation of this proposal, check out my earlier post on the swapping income taxes for a VAT.  That post contains the premises on which I base my proposal, as well as some fantastic critiques.  As I read through the critiques, I refined my ideas.  Here is the new general outline.

Abolish all taxes on income and investment. Convert over to a full consumption tax system, taxing all services and new goods at the point of sale. Separate out Energy, Gasoline, and Financial instruments for special treatment.

A. Set a new Goods and Services Tax high enough to pull in about 50% of needed funds.

A broad “Goods and Service Tax” (GST) is far superior to our current insane tax code.  The current code crawls up our butts to invade our privacy.  It distorts corporate and individual spending and investment, and it is failing to collect enough money to finance our government.  Just get rid of it whole and entire.

I chose GST because it is more inclusive and workable than the “The Fair Tax” or the complex VAT.   As for the size of the tax, it may be as high as 20-25% on all goods or services.  As you contemplate that negative aspect, realize that you are no longer paying income tax on any of your income.  It’s a wash of sorts.  For all of those folks who haven’t been paying any income tax as our Military, Medicare, and roads are financed, it’s time for you to pony up to the bar and take your medicine.  There’s no free ride, or at least there shouldn’t be.

B. Put a BTU tax on energy set to take in 20-25% of the budget.

For starters, this satisfies greens and lefties who want to do something about carbon and green energy. Rather than create corrupt and worthless “cap and trade” schemes, just tax energy directly.  This will allow investment to flow into energy reduction ideas that are far more likely to succeed than allowing Enrons and Goldmans to create instruments of financial ether that only serve to go from your energy bill to Wall Street rent-seekers.

Also, this tax will get us energy-glutton Americans to stop wasting energy by the bucket load, which we stupidly feel we have a right to do as some form of birth-right.  We don’t.

C. Set the price of Gas at $5/gallon and have the Federal Government to pocket difference.

First off, I don’t have the budget or the staff to crunch the numbers, but this should get the remaining 20-25% or so needed to approach “revenue neutrality,” which is mostly a pipedream to pursue anyway.  Any such proposal would be far more dynamic for any static scoring system.

The first effect of this consumption tax (again, phased-in) would be to crush demand for gasoline in America.  Chinese and Indian growth is a factor, but America is the 800 lb. gorilla driving gas prices. Once you break the back of ever increasing demand here in the US, the price of oil won’t go over $50/bbl for quite a while.  This likely give the Federal Government. a relatively stable source of income for a decent interval.  Of course, it can be tweaked as necessary.

The side benefits of this policy are large. Again, 100s of new energy saving ideas will flow to the market without the stupidity of Cap & Trade schemes.

Another HUGE benefit from this policy is the impact it will have on Saudi Arabia, Sadrist trouble makers in Iraq, Mullahs in Iran, and Chavez & Putin.  As the demand in the US drops and prices with it, our most serious enemies with oil reserves all take a massive economic hit, at least in the short term.  No more financing terror.  No more fomenting revolution in Central America, no more blackmailing the EU with energy shut offs.  A $5.00 gas price saves America billions (possibly trillions) in defense spending.

As for negatives, please disabuse yourself of the nonsense that this will kill the US Auto industry. It’s already dead.  Unions, bad management, and cheap gas are what killed the US auto industry. High gas tax countries build better cars, and have been for decades. Deal with it!

D. Set up a low transaction tax for ALL financial instruments, exempting NO ONE! Take 2-3% on the purchase and sale of every security transaction. This could be considered gravy, in terms of budget items.

I have no idea how much money this might bring in, but without a capital gains tax to deal with, and a growing nation of savers and investors, I’ll bet it out paces capital gains taxes quickly.  Any thinking person can see that it is better policy from virtually every angle.  Also, it shouldn’t be hard to calculate how much it brings in initially, again, accounting for the fact that it will be impossible to predict exactly what the number will be.

E. Tertiary taxes issues

Lastly, set up a low, equal tariff for ALL goods & Services coming in from overseas. Start phasing out “managed trade” and return to free trade.

If you have any ideas for other items, feel free to comment.

All of the above is proven from both a real (see 50 laboratories of democracy), and a philosophical perspective. My personal view is that it is simple, elegant, and brilliant policy, all proposed at one point in time or another by people much smarter than I am.

It is the culmination of decades of groping toward some workable plan for a better system that works in concert with American exceptionalism  instead of against it.  We need a tax and social system that serves a nation of self-governing people free to choose what they believe is best for them.  The current tax and social system is written for a nation of morons continuously voting in the worst people, who in turn promote the worst policies for the worst reasons, all layered into an unworkable pile of chaos, easily gamed by the corrupt people who benefit from it.

What I outlined above contains something good for millions of individual Democrats and Republicans (you know, decent citizens). However, there is nothing above for the greedy, corrupt, and morally illiterate “ruling class” of the Party, Media, Corporate, NGO, and Entertainment idiocracies. Sadly, therefore, the first politician to actually propose a grand plan for a better way will be drummed out of their respective Democrat or Republican parties instantaneously.

I may be wrong, but I think we will need a third party to run on a platform similar to what is outlined above.  I don’t think the Republicans have the will to propose bold ideas, and the Democrat leadership lacks the ability to look beyond their insipid class war rhetoric and ideology.

Sadly, both parties have gamed the system so that a rational, centrist, honest, and transparent 3rd party is nearly impossible to set up on a national basis.  If there is any chance to prove the concepts, they lie in creating such a movement in a state or a city.  Use the same principles and apply them to that locale.  States approaching bankruptcy and destroyed by public unions (Illinois & California) are probably the best places to start.

But that’s another post, if not an entire book.

17 thoughts on “VAT Tax Redux, New Proposal, and Barone’s piece in SF Examiner”

  1. Krauthammer proposed something similar to your point D gasoline price controls with variable tax rake a few years back. The problem with assuming immediate, vast demand drops as a result, though, is that they ignore the structural dependence of most of the country on individual automotive mobility. Even ignoring rural America for a moment (which politicians with national hopes cannot afford to do), you’re not going to convert metropolitan Atlanta, Phoenix, Dallas, Houston or Raleigh-Durham as currently built into majority transit-serviceable areas. It just can’t happen.

    And the parts of the country where housing density and pre-WWII rail infrastructure would lend themselves to retrofitted transit systems have bled jobs and population to those places over the last 30 years.

  2. Ah, but a man’s reach should exceed his grasp,
    Or what’s a heaven for?

    Robert Browning “Andrea del Sarto”, line 98

  3. Bruno

    Nice to have you over here. I have done a lot of posts on taxation if you click on taxes you will see them in the side bar.

    I am not for or against radicalism in tearing up the tax code but will have to look through what you’ve written.

    I think that taxes need to be compared against some world-wide standards because the US is an uncompetitive place to do business.

    One thing that I recommend before you recommend new policy is to understand the impact of the current policy against “good” tax policy.

  4. “Also, this tax will get us energy-glutton Americans to stop wasting energy by the bucket load, which we stupidly feel we have a right to do as some form of birth-right.”

    Are you claiming that the price of our energy is artificially low? Or is it more along the lines of robbing banks because that’s where the money is?

  5. Re: Structural dependence…

    The 2007-8 run up in prices caused one of the first ever significant drops in US demand (4%, though I’d have to find all the cites)

    One of the reasons we need to spike the prices is to end the “structural dependence.” It simply won’t end itself. It’s a bit of the opposite of supply side. (“If you force it, they will build it,” over “If you build it…”) Therefore, in all the cities mentioned, the simple act of increasing the cost of a lifestyle will have some long term and some short term effects. There are millions of cars and miles of roads. If we are still an entrepreneurial culture, the impact of the costs will increase new options immediately while longer term ideas are implemented.

    I don’t know if this requires some playing around with the stipend formula. All I know is that gas taxes are something we can control. The only way to lower income and soc. sec. is to earn less money.

    There is also excess capacity in mass transit. Metra & CTA could merely double the number of trains in the cycle. Fire some bureaucrats and hire some trainmen. I’m not saying it’s easy. It’s just what we have to do.

    The existing system is failing, and absent bold reforms, we will get the worst of all worlds in any event.

    There are costs, as well as benefits to living in rural areas. Why should their choice of location be subsidized. Let people pass the costs up the food chain. Remember that no one is paying any income taxes anymore.


    I don’t know whether I’ve nailed every point, but I think what I’ve laid out is far more labor and capital friendly than the existing system.


    I wish I knew the answer. On one hand, you could argue that the current price is the “market price”, and therefore not “artificially low.” I would therefore respond by pointing to the current system and argue that the cost of producing income for our families is artificially high, as is the cost of investing in stocks and bonds.

    The income tax string is played out. Maybe in 50 years it is good policy, though I doubt it.

    As for my seemingly judgmental point, I plead guilty. Seeing an entire nation leak energy from every pore is annoying to me.

  6. A high gas tax bothers me for a few reasons.

    First among them is that it has a significant negative effect on the mobility of the poor and less well off. For them, cutting back on personal travel, i.e. vacations with the kids, visits to friends and family, city/state attractions and so on, is an easy way to save money and make up the difference but the good things about their lifestyle take the brunt of the impact. Isolating poorer people through heavily taxing their transport seems like a bad way to go about raising revenue.

    Secondly, we really don’t know that an alternative to gasoline is possible at our current level of technology. It might take decades before some onforseen breakthrough in energy production occurs. And despite the claims of environmentalist know-it-alls there is really no way to know what that breakthrough will be. Pouring money into research in the WRONG direction is no solution. In the meantime, the only practical fuel source for personal vehicles and trucking is taxed with severity, increasing the price of virtually every other item in the supply chain too, and that will be on top of the new consumption tax.

    Despite those concerns though, your proposal is vastly better than the current system and most alternative systems that could be imagined. The essence of the concept is very good.

  7. Mr. Black,

    I knew that the gas tax would be the one most difficult to get past the American people. Rural commutes and vacations for the lower middle class being the biggest concerns.

    The amount might be played with, but I think the impact might be less than imagined. To be sure, if you planned a week long driving vacation, the price would definitely increase. Let’s say 6 tanks of gas was going to be $270, but is now $450 (66% increase) Your vacation just got $180 more expensive.

    If you factor in hotel, camping fees, meals, etc., is that increase a deal killer? As for the western mountain states and those who must drive long distances for work, there will be a huge impact as well. Is it a deal killer?

    Every trucking company will be impacted, and containerization and rail may get a huge boost, but benefits will ensue as well. This plan may dramatically improve the local economies of areas where jobs have fled for better ‘tax climates.’ Local distribution networks may proliferate to adjust.

    It may be easier to absorb than we think. Some research links.

    Other developments might impact this as well. Demand may be less elastic than with other items, but innovation is pretty elastic. We may see more car pooling, better cars, car transports, increased rentals from rail stations, Amtrak may become “profitable.” More vacations closer to home, etc.

    For my part, I think the negative reaction may be less than people think. First, it would be phased in, creating time to adjust, and b) Europe has been living with these prices for decades, they build better cars (with a larger variety) and still buy and drive like crazy.

    Heck, why we Americans don’t (or can’t?) buy the latest diesels is a question that needs to be answered. That alone solves 50% of the price hike issue.

  8. 1. We live in the age of the living constitution. The words now mean whatever is convenient to the ruling class. Therefore any balanced budget amendment will have zero effect on spending.

    2. Giving new taxes to the ruling class is like giving money to the Taliban. They don’t even thank you for the money before they line you up and shoot you.

    3. You are still young and you deserve your chance to change the country something really stupid like we did.

    4. Gasoline prices will be $50/gal in 2012 with special coupons for the ruling class and farmers. Inflation is coming. This will end the suburbs. People will live in company housing next to where they work so they can walk to work. They will buy everything they need at the company store. Health care from the company doctor. Rites from the company shaman. Almost like the 1800s except Company will be owned by the government.

  9. Sol,

    Cheery this morning, aren’t we?

    Thanks for calling me “young,” as I’m nearly 50. I’m actually wise beyond my years, so I know that a good plan, well-presented, might actually succeed.

    Get on board. No need to be a curmudgeon.

  10. “Put a BTU tax on energy set to take in 20-25% of the budget”

    Many forms of manufacturing are energy-intensive. This would do serious harm to the future of US-based manufacturing.

    “this tax will get us energy-glutton Americans to stop wasting energy by the bucket load, which we stupidly feel we have a right to do as some form of birth-right”

    People and corporations *pay* for energy, along with other resources. Disincentivizing energy use leads to inefficiency in the use of other resources, including capital and human labor.

  11. A couple of small points. I am not an economist but that doesn’t seem to be a requirement anymore.

    One of the reasons we need to spike the prices is to end the “structural dependence.” It simply won’t end itself. It’s a bit of the opposite of supply side.

    Study the California electricity price spike that led to the recall of Gray Davis. I lived at the time in an area supplied by San Diego Gas and Electric. There was an interesting phenomenon. Some of the best information is actually from a local radio talk show host who really made a study of it. Here is a rough account. I can’t find his account but will keep trying.

    There is a commenter here who also knows a lot about it. My point is that there was rapid alteration in behavior that might have adapted fairly well to the new rates which were multiples of the previous rates. The governor panicked, however, and the rates were rolled back by pure subsidy.

    My other comment is on health care. Everyone seems to assume that a “system” is necessary to provide care. This leads to these clumsy behemoths like Medicare and Obamacare. The French have a pretty good system that is considered the best in Europe. They also have an excellent medical innovation history and have had an excellent pharmaceutical industry although I don’t know how they are doing right now. The basic principle is an insurance program, based on payroll deduction, that pays a flat price for a long list of medical services. The patient and doctor are free to arrive at a private arrangement. What this means is that the payment from the plan, not necessarily the government, is based on what the plan can afford. The built in escalation we see in our system is absent.

    For the poor, there are free clinics. One of our many mistakes is insisting that everyone have the same level of care, as if everyone drove Volkswagen beetles.

  12. “Many forms of manufacturing are energy-intensive. This would do serious harm to the future of US-based manufacturing.”

    Yes, in Isolation. What would the other parts of the reform do on the plus-side?

    Everything is tradeoffs.

  13. David wrote: Many forms of manufacturing are energy-intensive. This would do serious harm to the future of US-based manufacturing.

    There is an article in the WSJ today where an employer lays out how it costs $72K to pay a worker $44K.

    There are going to be dynamic events occurring that create mis-allocations under any system.

    European nations like Sweden, Germany and France all seem to manufacture things quite nicely with VATs, gas taxes, and higher energy costs. Another article talks about how Canada is close to becoming more economically free than we are.

    I’m not saying there won’t be a transition period where we shake out winners and losers. The fact is that we are all losing more under this system, and if we don’t get in front of the politics quickly, we are going to get all these taxes WITHOUT getting rid of income taxes.

    We need to stop “playing not to lose” and start playing to win.

  14. We must cut costs before we start raising taxes.

    Social Security and all other government retirement plans threaten to bakrupt the US. Fortunately the government never has to keep its promises. This is called sovereign immunity.

    Social Security and all other government retirement programs are indexed to compensate for the effects of inflation. If the retirement age were indexed to compensate for changes in life expectancy then there would be no shortfall.

    In 1940 life expectancy was was 63.8. FDR set the retirement age at 65 in the expectation that most people would never live that long. We should preserve FDRs intention that retirement age must come 1.2 years AFTER people are expected to die.

    Life expectancy in 2008 was 78.4, therefore retirement age in 2008 should be 79.2. This will save many trillions of dollars.

  15. On reflection, I’m turning against both the energy tax and the gas tax.

    I’m opposed in principle to forcing average citizens to take annoying yet trivial conservation measures by taxing energy out of their reach. Nuclear and coal reserves are essentially unlimited for any timespan worth talking about here, taxing them to reduce energy use for no reason other than to reduce energy use seems… mean spirited. But on a more practical level, everything a person does in the modern world requires cheap energy. When energy costs rise, freedom of choice and freedom of action fall in direct proportion. The ability to enjoy comforts decreases. The market will set the right balance of energy efficiency without the need of punative taxes to create a whole host of false economies which are only viable with the massive distortions the energy tax would create.

    I don’t buy into the AGW hypothesis so reducing fossil fuel consumption on principle does not wash with me. It is government energy rationing under another name in service to an idea that is far from proven. There is no danager of an oil shortage for at least several generations, the only danger is the increasing restrictions on recovering it due to various (IMO) false and selfish justifications. When there is a well on every known reserve and not enough is being produced, only then will I be convinced of the need to immediate rationing.

    A society that can use the greater part of its wealth in consuming and innovating will advance technology much faster than one in which heavy tax burdens sap the economic life from every field of activity. I still favor a very broad based GST style consumption tax and I’m not saying energy should not be taxed at all, only that the rate should be minimal so as to encourge the greatest exploitation of new technology, even if it is energy intensive technology.

  16. Mr. Black,

    I would be more than happy to consider placing the entire energy sector under a goods and services tax if it raised enough revenue to fund the transition to a better system.

    That said, the level of energy use is high enough, and the base broad enough to potentially raise revenue with a generally low tax rate.

    I broke BTU/carbon out specifically to put them under a LOWER rate than the GST.

    Also, like many who suffer from “it would be better for me” libertarianism, you seem to miss the fact that energy extraction and production places costs on the culture as well as benefits.

    (see Exxon Valdez, BP spill, Coal accidents, environmental effects.)

    Before you retch your guts out over my mentioning these things, take note that selling the proposition of a massive beneficial reform requires enrolling SOME of the left to support it.

    Does ANYBODY on the right or center-right even understand politics anymore? Have we just gotten used to the INSANE status quo where both sides take power only to pass one-sided policies?

    I don’t pretend to have all the answers, but I will close as I always do. The current tax and welfare system is a) unsustainable, and b) massive consumption taxes are inevitable in any event.

    You can say “no no no no no no no no” until taxes are rammed down your throat, or you can use this golden opportunity for a grand bargain that resets a better course for this nation.

    If people want to get from point A to point B, they will find a way to do it. You all have just gotten so used this awful system that you prefer the devil you know to the potential angel you don’t.

  17. Good god, please work on your math. $15k per person over 20 is going to be on the order of $3-3.5 trillion per year, or 20% of GDP in a massive tax it then give it back loop every year. Plus whatever bridge program you need for current recipients, as $15k won’t equal current benefits for a big chunk of that population. The GST’s going to need to be a lot higher than 20-25% to fund that proposal.

    I’m skeptical enough of the political prospects of actually converting 100% to consumption taxes vs the more likely outcome of ending up with both. So on top of that we start up a massive flow of cash and somehow expect politicians to neither siphon off big chunks of it nor start changing the rules?

    No, no, a thousand times no.

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