Who Needs An Economist When You Have A Lawyer?
On the Becker-Posner blog, the two offer their opinions on whether the US should institute a VAT. Here’s Posner:
Our public debt is soaring at a rate of more than $1 trillion a year, and for political reasons it is extremely unlikely that the debt will be brought under control by higher tax rates, spending cuts (or forbearance to adopt new spending programs), or a rate of economic growth faster than the rate of growth of the public debt. The fact that the dollar remains the strongest major currency, which is why it remains the dominant international reserve currency, is enabling the Treasury to borrow at low rates. But this will not last if we continue on the road of fiscal imprudence; and as interest rates on the public debt rise, compounding the deficit, we could find ourselves in the position that Greece is in.
Most important, by discouraging consumption in favor of savings, a VAT would reduce the interest rate on our public debt and the Treasury’s dependence on foreign lenders.
Becker, the Nobel Prize winning economist, explains why most economists support a VAT, but once he wades into political economy his reasoning is less sound. He also repeats the familiar trope that because a VAT is so good it’s actually bad.
The downside of a value added tax to anyone concerned about growing government spending and taxing is very much related to its upside; namely, that a VAT is a more efficient and relatively painless tax. As with all taxes, proposals to increase the rate of taxation on value added runs into opposition from individuals and companies hurt by a higher VAT. However, since a VAT is easy to collect and causes fewer distortions in behavior than income and most other taxes, governments have an incentive to raise the VAT over time. In fact, value added tax rates do usually start low, but tend to grow rapidly over time. For example, the VAT rate in Europe started low but now ranges from 15 to 25%, and averages about 20%. In Denmark, for example, the VAT rate was 9% in 1962, but quickly rose to 25% by 1992, and has remained at that level.
Aside from the fact that he tells us that Denmark’s VAT has remained at 25% for almost 2 decades (do they grow rapidly over time or not?) he doesn’t explain how that is a terrible thing in itself. First of the all, the US and Denmark have very different political cultures and it wouldn’t be as easy for the US to raise the tax that much or to increase the size of the US’s welfare state to Danish levels. He also thinks that we couldn’t lower other less efficient taxes when passing a VAT (I think it’d be impossible to pass a VAT without lowering other taxes). The biggest flaw in Becker’s (and most other VAT opponents’) argument is the latent assumption that it’s more politically possible to decrease spending enough to restore fiscal balance than it is to lower other taxes while passing a VAT. Becker is a lot more knowledgeable on economic issues than I am, but that is crazy. I suspect his visceral fear of higher taxes has more to do with his opposition.
Of course, Becker’s main worry is the growth of government. This is where I part company with a lot of libertarians. Although I have a generally libertarian temperament, I can’t get behind a movement that is devoted to small government for its own sake. I tend to favor smaller government because it often is the best system for individual citizens and society as a whole. But if a particular situation is improved by bigger government or higher taxes then one shouldn’t balk simply out of ideology. Becker exhibits this libertarian tendency well in this case. Even when the cost of bigger government would go down, the economic distortions on savings and business would go down, he doesn’t favor a VAT because government spending would increase.
In another good overview of the issue, the New York Times recently had Greg Mankiw’s column on a VAT. He lays out what it is and why some love it and some hate it. He’s pretty “ambivalent” about it (his word) but has normal conservative worries that it will lead to European levels of government intrusiveness. His final point is his best though.
The bottom line, from both political perspectives, is that a VAT is neither blessed nor evil. It is a tool. We can use it to advance a larger government, a more efficient tax system or some combination of the two.
He’s right, it’s a tool. That you can fix things with a hammer or break things isn’t a good reason to oppose hammers. Conservatives should demand that if a VAT is put in place then many of the more distortionary taxes should be removed or greatly reduced (they can pick their most hated ones) and real cuts in government spending should pass along with it. Seems like a reasonable compromise to me. Seems like a reasonable compromise President Obama’s bipartisan commission could recommend.