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The new stealth tax that no one is talking about (yet)
The not-at-all-right-wing Lane Kenworthy writes:
Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT).
I would like to see a betting market in when this is first mentioned by the Obama administration. I don't think it will be very soon, but it will be within eight years' time.
Posted by Tyler Cowen on April 18, 2009 at 04:00 AM in Economics | Permalink
Comments
He recommends greater taxing of the middle class to reduce income inequality. I was in no danger of assuming he is right wing. Are you impressed by the consumption tax incentives part of it?
I also think we will have a consumption tax because there is overlap on both the left and the right for such a thing. That doesn't happen often. It might even be an improvement. However, as a scheme to hide revenues within layers of value-added, I'm not optimistic.
Posted by: Andrew at Apr 18, 2009 4:17:02 AM
ugghhhh. Scary thought.
But it's promising to think that prominent DC libertarians like Andrew Sullivan, Will Wilkinson, and others are dedicated to the free market cause. On the downside, I think they are more concerned about Sarah Palin and atheism.
The libertarian movement is pitiful.
Posted by: thehova at Apr 18, 2009 4:21:33 AM
Thank you! VAT will be coming at us soon. The money hole is too deep to fix any other way. I would gladly get in on this wager.
Posted by: galen bennett at Apr 18, 2009 4:23:14 AM
At this late hour I know I might sound a little unhinged.
But such influential members of the "libertarian/conservative" blogosphere like Andrew Sullivan, Tyler/Alex, etc....
they don't seem to care about the unprecedented growth of government which the Obama administration has in place. It's frustrating.
Posted by: thehova at Apr 18, 2009 4:36:42 AM
A federal consumption tax ("GST") worked for Canada, in that it turned large budget deficits into multiyear surpluses. However it turned out to be political suicide for the party foolhardy and brave enough to introduce it. The opposition party won a landslide victory on a promise to abolish it, which they promptly broke.
I disagree that it could happen in the US, however necessary or desirable. There is a ticking clock, a window of opportunity of about one year for a new administration to get major new policies through Congress. Beyond that honeymoon period, it's much more difficult and a president has to more or less permanently downsize his ambitions. A second term is often practically a caretaker phase: Bush's announced ambitions to reform Social Security quickly amounted to nothing.
The point is, the entirety of Obama's honeymoon period (and beyond) will be used up in a phase where all emphasis will be on desperately trying to stimulate consumer spending, not tax it.
Posted by: anonymous at Apr 18, 2009 6:04:30 AM
It's my belief that if Obama is going to mention this while in office, he has less than 4 years, not eight.
Posted by: Libertarian at Apr 18, 2009 6:56:00 AM
That tax should be called the Reagan-Bush-Bush tax, in honor of those who made it inevitable.
Posted by: capitalistimperialistpig at Apr 18, 2009 7:04:27 AM
The VAT has already been put up as an alternative tax scheme during the Bush administration - it was ignored, but it was in there. I can't remember when the tax reform committee came out with it though.
Assuming that major work on healthcare happens this year, and finishes next - I wouldn't be surprised to see a major tax overhaul happen in year 3.
So long as it includes a massive simplification - 30k exemption for singles, 70k for married people, 10% tax on income up to $100k after the exemption, 20% beyond this, appropriate corporate changes and reduction in the payroll tax - I'm kind of ok with it in 10% range(bring on the actuaries!).
As an add on to the system as is, no.
Bruce Bartlett is no left wing money grabber, either, I believe.
http://money.cnn.com/magazines/fortune/fortune_archive/2004/12/13/8214252/index.htm
http://www.forbes.com/2009/04/02/time-tax-reform-opinions-columnists-overdue.html
VAT Caveats from CATO
http://www.cato.org/pub_display.php?pub_id=4180
Posted by: Dave at Apr 18, 2009 7:18:53 AM
Perhaps, then, President Obama ought follow in Richard Nixon's China strategy and adopt the Fair Tax (http://www.fairtax.org/site/PageServer) and undercut the legs of the political opposition. He could, in a Machiavellian way, use their numbers, raise the percentage of sales tax by a couple of points to realize more revenue, tell the working guy that he's saving them money by eliminating their payroll taxes, tell the conservatives that he's effectively eliminating the IRS, tell corporations (as far as they are people!)and businesses that the income tax is dead and then save the economy by promoting a strategy of growth. Talk about a nudge!
Tyler, do you have any thoughts regarding this idea? It seems to be well studied.
Mike Doherty
Posted by: Mike Doherty at Apr 18, 2009 8:36:16 AM
Interesting. The one thing about a VAT is that, while it would bring in money from the middle income groups, they already think that they are heavily taxed, which is of course not true. So, if people falsely think that they are paying substantial income taxes, and then we instead have them actually pay substantial VATs, will they view it as an even swap? My household of 4 earns somewhat more than double the median household income, and we pay very little in federal income taxes, typically between 5 and 10%. I would suppose that most of the tea party crowd doesn't pay much in taxes either. Rich people pay lots in taxes. Period.
Posted by: liberalarts at Apr 18, 2009 8:46:31 AM
...higher taxes coming for average Americans (?)
No risk at all in making that assertion... no matter who's in the White House or Congress.
The taxation trend line over the past century could not be more clear.
The real 'stealth' tax is Federal inflation... debasement of the Dollar.
Posted by: ogden at Apr 18, 2009 9:07:01 AM
Australia, Japan, Canada all brought in VAT in the last 20 years.
In each case, it was a fiscal success, but political suicide for the party in power. The Canadian Tories were cast out of power for 14 years, and in fact ceased to exist (before reconstituting). The LDP in Japan lost the only election it has ever lost in the postwar period.
I expect the US to stagger on for a good few years before it appears. Let the Republicans get re-elected with a majority, and persuade themselves there is no realistic alternative.
Posted by: valuethinker at Apr 18, 2009 9:10:02 AM
I don't see a VAT from the Obama administration -- it's too transparent. His form broad-based taxes will be stealth taxes. In particular, the revenues from the auction of carbon credits will be used to pay for bigger government (but it will be presented...probably successfully...not as a broad-based tax, but will be spun as 'punishing' big polluters). Still, there is a limit to what can be done with stealth taxes.
I also don't see enough broad-based support in the U.S. for anything like the high European levels of government services that Kenworthy wants a VAT to support. Not only wouldn't Americans accept the VAT, I think, but they wouldn't accept, for example, large numbers of able-bodied people subsisting on long term 'disability' payments.
Obama has made a pretty big deal about taxing the rich only. He may be able to redefine 'rich' a bit (from top 5 percent to top 10 perhaps), but I think a large, middle-class tax increase would be political suicide. His emphasis on taxing the rich is comforting, in a way--the money's just not there to pay for greatly expanded government. And it's especially not there now--I believe we will soon learn that the stock and financial market meltdowns will have sharply reduced the incomes of the top 1%.
Posted by: Slocum at Apr 18, 2009 10:05:49 AM
Everyone,
As long as we are operating in a fiat money world, we do not have to pay this stuff back. Taxes do not have to be raised.
Federal deficits create money. It is the only way to create money. The Fed buying treasuries does not create net money - it only exchanges short term money for long term money.
Just because economists do not understand accounting and banking does not mean you should fall into the same trap.
The only thing that taxes do is create the initial demand for a money. We are not in any danger of having too little demand for U.S. dollars.
The sooner people start to understand this basic accounting, the sooner we can start to have practical conversations about taxes.
Posted by: mickslam at Apr 18, 2009 10:08:25 AM
Obama has already committed political suicide. He has raised spending so much that it cant possibly be paid for by the rich. He will have to raise taxes on the middle class. Of course, he can try to put that off until after his reelection, but the reality will probably set in before. In fact, we are only in April of his inaugural year, and there are already protests around the country. Does anybody expect these things to go away?
Posted by: Danny Toone at Apr 18, 2009 11:24:33 AM
My impression is that Obama wanted a carbon tax. Some portion of the carbon tax would go to cutting back on social security payments. Given the fiscal situation at the time, another portion could be used for debt reduction.
Political suicide, but given the strength of environmentalism and that the tax would hit corporations first and only indirectly impact consumers via higher energy rates, it may be slightly lesser suicide than a VAT.
I think a $2 federal tax on gasoline, with 100% being given back to payroll tax reduction, would be far more effective. It would really hurt long distance truckers but then can switch to natural gas anyways....
Posted by: charlie at Apr 18, 2009 11:59:56 AM
Hmm, after reading http://www.economicmobility.org/assets/pdfs/PEW_EMP_FEDERAL_SPENDING.pdf, I am becoming convinced that US tax data is presented in a deliberately misleading way with respect to the top 20%. The breakdown always seem to go like this (e.g. preference rates on cap gains by quintile:)
Q1: 0
Q2: 0.1
Q3: 0.4
Q4: 2.0
Q5: 97.6
Nicely sums to 100% or so, and makes you feel pretty good if you're in the top 20% (and most people able to interpret the data are probably in the top 20%.)
Then comes the usual sleight of hand: the top quintile breakdown:
top 10%: 95.0
5%: 91.8
1%: 80.1
.5%: 76.0
.1%: 58.2
Oooh, those numbers don't sum to anything reasonable. So we try looking at the bands:
20%: 2.6
10%: 3.2
5%: 11.7
1%: 4.1
.5%: 17.8
.1%: 58.2
Nearly 60% of that tax benefit is going to 1/1000 households. 50/1000 households get the bulk of what is left, and everyone else gets practically nothing.
If you are in the top quintile, but not in the top few percent, you might as well use the fourth quintile data, it will be far more reflective of your actually situation.
Posted by: gorobei at Apr 18, 2009 1:53:43 PM
Politically, the benefit of VAT is that it's hidden from the people who actually pay it. That's why it's been so successful in Europe. It's non-progressivity resolves the contradiction in the hallucinatory demagoguery now on display that believes taxing the rich can pay for all the government we're signing up for.
@gorobel - Your point seems to have it exactly backward. That 58.2 "benefit" you're talking about it actually the fraction that the .1 pay, not the benefit they receive. Also, I think your figures are wrong. It's the top half that paid 97.6%, not the top quintile.
Posted by: Larry at Apr 18, 2009 3:28:58 PM
Larry,
Here's the comment from the paper of Table (Share of Select Federal Tax Expenditures by Cash Income Percentile, 2006):
"As shown in Table 1, nearly 98 percent of the tax benefits from the capital gains and dividend exclusion flow to top quintile households, while the bottom quintile receives zero. What is more, these tax benefits subsidize deposits and not actual accumulations, allowing particularly higher-income households to shift savings out of non-tax-advantaged accounts to the tax-advantaged ones simply to reap the tax benefit."
It seems pretty clear that the paper is talking about a tax benefit that largely goes to the top .1% households.
And, yes, the table says 97.6% of that tax benefit goes to the top 20%. Which makes sense if you think about, say, a change in dividend taxation rates: a median household with $50K taxable stock paying a 2% dividend = $1K/year, a 15% dividend tax vs marginal 20% income tax means $50/year. Contract that with $50M stock and a marginal income tax rate of 35%.
Posted by: gorobei at Apr 18, 2009 3:54:18 PM
Lenworthy's point was also made by Irving Kristol in "Two Cheers for Capitalism" in 1979; an indication that even the neocon's occasionally made good points.
Posted by: Rod at Apr 18, 2009 4:51:01 PM
Valuethinker,
That's not entirely true, the Australian Prime Minister who brought in a VAT (after previously saying he would never do such a thing) went on to lead the country for a further nine years!
Posted by: Ham at Apr 18, 2009 5:32:25 PM
What mickslam said. It's scary how few people understand fiat currency and the function of deficits.
Posted by: Chuck E at Apr 18, 2009 6:03:02 PM
"The one thing about a VAT is that, while it would bring in money from the middle income groups, they already think that they are heavily taxed, which is of course not true."
If you're struggling to pay your mortgage, your bills, to put food on the table, pay for education for your children, save money for future education, save money for home repairs, save money for vehicle repairs, save money for retirement, and you see a very substantial part of your annual income go to the goverment in the form of taxes, then yes, it's perfectly reasonable to feel you are "heavily" taxed. That you may not be as heavily taxed as are individuals in other nations - who do not need to save or spend when their government provides off-setting services with their taxes - does not mean you are not "heavily taxed."
(Nor does the fact that you
Posted by: PM at Apr 18, 2009 6:53:46 PM
I HATE VAT.
I am OK with a consumption tax. In fact, I favor a consumption tax over an income tax.
But, I want the tax to be "in your face" painful. I want people to be reminded of the tax every time they buy something. The problem with a VAT is that ii is buried.
A VAT is more evil that Milton Friedman's idea of "tax withholding".
Posted by: Dave Barnes at Apr 18, 2009 9:48:56 PM
Why do people think the end user does not see the VAT in Europe? This is separately listed on any invoices one receives.
Posted by: anonymous at Apr 19, 2009 1:21:21 AM
