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VAT A Vay To Lose

Ramesh Ponnuru notes that seeming to express support for the Fair Tax might have been one of the reasons why Republican Tim Burns was beaten by Democrat Mark Critz in the PA-12 election.  Looking at the ads that both sides ran, it was amazing how Critz was able to outflank Burns on the tax issue (though Critz's ads focused on taxes for "outsourcing" while the DCCC carried most of the water in attacking Burns on the Fair Tax issue.)  I was also struck that Burns had no positive tax agenda that I could figure out aside from simply being against any future tax increases.  Not bad I guess, but could he have come up with something positive?

I think the problem with Burns and the Fair Tax is part of a general problem with moving our federal tax system from one oriented to taxing income to one oriented to taxing consumption.  How do you get to such a system without either a) increasing taxes on middle-income earners while cutting them on the wealthy or b) setting the consumption tax so low that there is not a sharp reduction in federal revenues that will either cause the deficit to grow even more gargantuan or necessitate even larger spending cuts than we currently need to bring the deficit under control.  Any plan that combines tax increases on the middle class and tax cuts for the wealthy is just politically dead.  It becomes a parody of trickle down economics.  It becomes trickle up, then trickle down economics.  You could try explaining to middle-class people that even though taxes on them will increase and taxes on the wealthy will decrease, the resulting economic efficiencies will lead to rising overall living standards for everybody.  Good luck with that.  Any plan that reduces government revenues past their current level will have to contain a politically palatable set of spending cuts alongside the huge cuts we will already have to make to get the government to live within its means at current revenue levels.  Good luck with that too. 

Those problems seem to bedevil both of the best known conservative plans for moving to a consumption tax oriented system.  Ponnuru made the case for why the Mike Huckabee-supported Fair Tax would lead to a middle class tax increase.  I'm not sure I trust every assumption built into this report by the liberal Citizens for Tax Justice, but I haven't seen any evidence disputing the argument that Ryan's plan (which includes a VAT) would amount to a tax increase for many middle-class Americans.  If there is a good debunking of the report's assumptions I would like to see it as I would like to think well of Ryan's plan.

So where does that leave us in our difficult fiscal situation?  Well, I'll bore you by again suggesting Robert Stein's combination of tax cuts for middle-class parents and ending the double taxation of corporate dividends, while ending a series of tax deductions that will mean many high earners will pay more.  The current 35% highest marginal rate will kick in earlier for many of the wealthy, but unlike with Obama's plan, the highest marginal rate doesn't actually go up.   There is alot to be said for a plan that will save middle-class working parents thousands of dollars and encourages investment and growth without increasing the deficit. 

 

Categories > Politics

Discussions - 3 Comments

VAT is nothing but a way to regulate every aspect of our lives.

The "fair tax" is bogus, and even if it were to be somehow installed, the backlash would be tremendous. How did the libertarian right ever latch on to this loser? Who thinks that adding a 30% surcharge to EVERYTHING we buy is a good idea? People NOTICE that, whereas the income tax is almost stealthy by comparison.

Personally, I've often thought of the "fair tax" as a crypto-anarchist scheme to bring down the government. It's insane, really.

The flat tax is the way to go. 20% from everyone, no excuses -- rich people pay more, poorer people pay less by design. And it could be scaled down to 5 or 10% for the very poorest people. But everyone pays SOMETHING. Think of the savings in simplicity and the ability to anticipate one's personal or business tax burden. The economy would grow enormously.

Leave consumption alone. Brutus is correct -- consumption taxes are an invitation for government intrusion.

Redwald, depending on the exemptions that are built into a flat tax (and just about every flat tax plan that I have seen includes some) or what taxes the flat tax is designed to replace (just the income taxes? payroll taxes? investment taxes? would it be applied to income from investments? inheritance income?), a flat tax would either tend to operate as either a middle class tax hike or cause a decline in revenue or both. The revenue decline would not be so bad if one could come up with set of spending cuts that would offset the revenue losses. The problem is that, even if we keep revenues level, huge and politically unpalatable spending cuts would be needed and even largr spending cuts would only make the job harder.

Any flat tax cut plan that had a chance to be enacted (and there are a huge number of potential variations) would need to answer the questions of a) how does it change the tax burden of people in the middle 60% of the income distribution? and b) how much revenue does it bring in compared to the current tax system?

One way out of the impasse is to assert that the flat tax would provoke so much growth that any revenue loss would be made up in new growth. though that argument wul have to be taken up with economists of both left and right and before a public that is, increasingly aware of the dangers of the difference between what the government has promised to pay out and what the government is taking in.

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