Home > Andreas Kluth, Bruce Bartlett, Clive Crook, constitutional law, FairTax, George Will, VAT > VAT Watch, ctd: Responses to Critics

VAT Watch, ctd: Responses to Critics

I’m all set to attack George Will’s particularly bad column on the VAT and I get beat to it by more able writers.  Will disparages the idea of a VAT because he thinks adding it on top of the income tax makes our bad tax system worse. I agree with his central premise that having a VAT just replace the income tax would be best but the rest of his argument doesn’t hold up. 


Before I get to my main critique, here’s Bartlett teaching Will a lesson on the 16th Amendment:

The 16th Amendment issue should be seen for what it is: a red herring. If people don’t think we should have both an income tax and a broad-based consumption tax at the national level, fine. That’s a good debate to have and I for one don’t oppose abolishing the income tax and replacing it with a VAT. But the idea that we must repeal the 16th Amendment as a precondition for consideration of a VAT in order to prevent the possibility of having both an income tax and a VAT is not a serious proposal. It’s just a trick to put up an insurmountable barrier to adoption of a VAT without addressing the questions of how we will stabilize the national debt without higher revenues or why a VAT is a better way to raise those revenues than higher income tax rates, which is the default option in the absence of a VAT.

The 16th Amendment just clarified that Congress could tax income with direct and indirect taxes.  It’s a pretty complicated issue because the Founding Fathers never made it entirely clear what separated direct and indirect taxes. What’s important is that Congress can enact an income tax with or without the 16th Amendment.  
Bartlett in Forbes and Clive Crook in National Journal counter the odd argument that we shouldn’t enact a VAT because it works well.
Bartlett:

In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost. 

Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.

Crook:

But opponents of a VAT are surely under an even stronger obligation to say what spending they would cut, unless they are saying that a deficit of 6 percent of GDP is no problem. Let’s hear from them. Show us how to cut 6 percent of GDP from federal spending — approximately a quarter of the current total — without popular outrage and real economic distress. Show us how to do it without gutting Social Security and Medicare, or seriously compromising national security. And tell us how to make it politically feasible.

[…]

If blocking the growth of the state is your overriding priority, you might oppose a VAT precisely because, as taxes go, it is a good one. By the same logic, of course, you should strive to make the income tax even worse. The rule would be, collect revenue in the most damaging ways possible. That will raise the price of Big Government and tie the liberals’ hands. 

I’ll also continue to stress that despite Will’s claim that “adoption of a VAT would proclaim the impossibility of serious spending reductions” there is little evidence that not raising sufficient revenue by starving the beast stifles the growth of government.  We don’t have a VAT now and it hasn’t seemed to dampen anyone’s enthusiasm for adding new programs.  Maybe, as Crook points out, widening the tax base with a VAT would make more people understand that they actually have to pay for more government. I’d support that, but I’m skeptical of it having that effect. 

I’m also disappointed George Will (who I normally enjoy) has to disparage the motives of the Obama administration.  

Believing that a crisis is a useful thing to create, the Obama administration — which understands that, for liberalism, worse is better — has deliberately aggravated the fiscal shambles that the Great Recession accelerated. During the downturn, federal revenues plunged and spending soared. And, as will happen for two decades, every day 10,000 more baby boomers are joining the ranks of recipients of Medicare and Social Security, two programs with unfunded liabilities of nearly $107 trillion.

Really? There are plenty of respectable arguments for taking strongly different approaches to deal with the recession that wouldn’t have increased spending nearly as much (Mankiw and Ed Glaeser come to mind) but the idea that there aren’t mainstream economic arguments for taking exactly the approach Obama and his economic team took to save the economy (not destroy it) is ridiculous.  Maybe Obama actually wanted to improve the healthcare system to improve people’s lives – I don’t see much reason to believe he only wanted to put the country on a path to bankruptcy in order to raise taxes.  Will, no serious person wants to raise taxes or thinks they are a good thing in and of themselves.  Responsible governors just understand that we have to pay for the government we have not the government we wish we had.   

On a related issue, I want to direct readers attentions to Andreas Kluth’s tax day pitch for the FairTax. Maybe unknowingly he responded to my asking for ideas for a simpler tax: 

If someone has a better idea for a more efficient and simpler tax I’d be happy to support that. 

I remember reading about the FairTax years ago when Neal Boortz’s book came out and liked it then. Kluth makes the case in a way that only Kluth could.  Who else could advocate tax reform with allusions to Croesus and Diogenes!? I don’t want to excerpt any of it because the whole post is really worth reading. A familiar theme on Hannibal Blog is the value of simplicity and here the FairTax, as Kluth stresses, excels. I’d be happy to support a VAT or the FairTax. My main concern is that the VAT has a better political chance of becoming law. It’s been introduced before and at most received only 76 congressional votes. 


Mostly likely, a VAT could be enacted while dialing down the income taxes as necessary. For healthcare reform a new system developed from scratch such as voucher system like Zeke Emmanuel’s or a complete HSA system coupled with a national catastrophic fund would be vast improvements over any reform that keeps our current base model in place.  But that seems to be politically impossible. The lesson from healthcare is that the same is probably true (although I’d love to try) for tax reform. In America, even comprehensive reform has to be incremental. Get a VAT in there and then squeeze out the clutter.  Anyone think that Obama could sell the FairTax to enough on the left and right to pass it while throwing out the rest of the tax code (with all its political giveaways)?  Worth floating, at least.  

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  1. April 26, 2010 at 8:25 pm

    Thanks for the link! I have to make myself smart in a systematic way on the main differences between a VAT and the Sales Tax (with Prebate) that I "endorsed". Also on the differences between both of those and a pure Flat Tax.Have you analyzed the differences?

  2. April 27, 2010 at 8:21 pm

    Honestly, I haven't researched the FairTax in depth. When it was gaining popularity when Boortz's book came out I read a few articles and was intrigued at the time. Your post reintroduced it into my consciousness. The main difference between a VAT and a sales tax is that the tax is levied at the stages of production with a VAT as opposed to at the sale. This, supposedly, increases compliance and reduces taxing the "same" item multiple times. Of course, any simpler tax system would probably increase compliance over the labyrinthine system we have now. Another major difference is that I've read a VAT can raise more revenue more efficiently. With the FairTax, I hear the 23% number talked about, but my understanding is that is kind of a math game to reach that number. The real rate is 30% to get close to a revenue neutral tax rate. That said, taxing a such a high percentage (or probably higher!) would reduce support for passing such a policy. I'm not as sour on the idea as Bruce Bartlett is (at least in 2007) but he makes some valid points in this attack on the FairTax. In principle I like the idea of a prebate or some way to make any type of consumption tax more progressive. I suppose it's possible to offer a prebate with any type of tax system. A negative income taxlike one Milton Friedman proposed first intrigued me for its progressive attributes and simplicity. I still think taxing consumption makes more sense – even more so after your illuminating thoughts on the nature of wealth. I'm sure I'll be looking more into these issues so stay tuned.

  3. April 27, 2010 at 11:53 pm

    I'm impressed. You've covered the field.

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