Desperately Seeking Revenue: The Panel
This was my day: I went to the dentist. I spent an hour being interviewed on end-of-life issues. And I listened to four tax experts commiserate about the massive fiscal hole we have dug for ourselves and how we can shovel our way out. I’ve had better.
Yet, the Tax Policy Center panel, called Desperately Seeking Revenue, generated more than the usual budget gloom and doom. True, TPC co-director Rosanne Altshuler presented some truly hair-raising projections of the depth of the problem: In sum, she made two points: 1) Unless we act, we will add $11 trillion over the next decade to the national debt, roughly doubling what we already owe. 2) It is not possible, in any reasonable world, to close that gap by hiking income tax rates alone. Thus, the title of both her paper on the subject (written with colleagues Bob Williams and Katherine Lim) and the panel: Desperately Seeking Revenue.
Today’s panelists agreed on the nature of the problem, but not on the solution. Rosanne thinks a Value Added Tax will inevitably become a key element in any revenue-raising exercise. Victoria Perry, the tax policy division chief at the International Monetary Fund, noted that every other developed nation in the world already has a VAT, and they’ve got plenty of experience they can share on how to manage one.
But not everyone thinks a VAT is the way to go. Ted Gayer, the co-director of economic studies at The Brookings Institution, would fill the hole in part with a carbon tax–a levy that would have the twin benefits of both reducing greenhouse gas emissions and raising somewhere between $60 and $80 billion in new revenues annually over the next decade. That wouldn’t be nearly enough to fix the fiscal problem, so Ted would also auction the broadcast spectrum (worth another $100 billion or so a year), and cut tax subsides for employer-sponsored health insurance and mortgage interest. And while spending was not a topic today, Ted could not pass up the opportunity to suggest cutting promised Medicare and Social Security benefits. Ted makes friends everywhere he goes.
That’s why I’m not sure his revenue changes would be politically more acceptable than a VAT. Ted's proposed tax hikes would surely help with the budget math, however.
Jim Nunns, chief of the New Mexico tax policy division and long-time tax analyst at the U.S. Treasury, sees some short-term opportunities to raise revenues through the income tax base, although he too would eventually turn to a VAT. Jim and Victoria agreed that one common concern about the VAT—that it would create severe problems for states that rely on a sales tax—may be overblown. Victoria said that Canadian provinces are living quite well with a federal VAT. And Jim felt states in the U.S. could also manage.
In fact, he added, a national VAT could actually help states in at least one respect. Today, sales taxes are complex and inefficient in part because they are shot full of exemptions. What is tax-exempt food? What is taxable candy? How do states tax goods and services sold over the Internet? With a VAT, Washington would set that tax base, potentially allowing states to dodge the special interest politics that creates these distinctions.
We are just beginning this discussion. But pay attention, because one thing is certain: There is no way we will come close to balancing the budget by just cutting spending. New taxes must be part of the equation. And that presents a golden opportunity to fix an Internal Revenue Code that desperately needs repair.
Excellent point – check out gorgeous chart from the Washington Post: http://www.washingtonpost.com/wp-srv/special/politics/budget-2010/index.html
We also do need to look at means-testing for Social Security – so some octogenarian might get pissed that he's too rich for Social Security – and the problem in that scenario is what again?
A VAT also takes the lid off of payroll taxes if it is used to replace them – meaning that VAT taxes on higher income individuals would be collected on all income over the current caps.
One more thing. If the income tax only hit the high earners, there is less of an incentive for a home mortgage deduction, since the deduction would simply lower the floor on the taxable income while resulting in an increased tax rate. In other words, you could have a floor of $75K/$150K if you do without the deduction and tax at a 6% to 15% rate or you could put the floor at $50K/$100K and allow mortgage interest and increase the tax rates to 20% to 25% (Michael Graetz's proposal).
No one is saying that the rich should not be taxed further. What was being said was that the increase is not sufficient. The advantage of the VAT is that it gets both payroll and profit and could be used to eliminate both corporate profit taxes and payroll taxes. It is also harder (though not impossible) to attach special interest credits to – especially if you enact it from scratch or make it look like you are.
It's good that a VAT is under serious discussion. People usually listen to TPC recommendations. The more it is suggested here, the more pallatable it is in the policy community overall. It should not be an add on to the existing system, however, but a replacement for parts of it.
There should actually be two VATs:
- a subtraction VAT to fund entitlements (including military retirement and any Child Credit paid directly to employees) that consumers never see on their receipt. This VAT would replace payroll taxes and a portion of low rate income taxes.
- the standard receipt based VAT to fund discretionary spending (including domestic defense spending) that consumers do see. This VAT would replace the rest of low rate income taxes.
A residual income tax would fund net interest, overseas and naval deployments and debt repayment – including paying back the highway trust fund (which remains mostly funded by excise taxes) and the Social Security Trust Fund.
Except in times of crisis, like the recent recession (and any future double dip) the VATs must fully fund the items of expenditure they are associated with.
If you really want teeth in budget enforcement, you could budget the VATs and associated spending regionally, with regional caucuses and vice presidents who must labor under a balanced budget requirement. That would certainly result in balance and less spending.
Well, I bought my condo for $257K and its new assessed value (based on recent sales) is $147K. Not quite half, but I kind of hope it starts to go up again.
TARP funds will all be paid back – they were not appropriated and the debt that financed them will be repaid as well.
All in all, spending will fall and the revenue projections for payroll taxes will be seen as overly conservative. Indeed, much of the future debt relies on conservative long term economic gloom as well. These assumptions are probably not justified.
Under a dynamic Keynesian model, increased revenue from high income earners will take money from the savings sector (where it chases secondary market wealth or is invested overseas) and put it into either spending or deficit reduction, thus increasing consumer spending overall and further reducing the deficit. This is why the original tax increases under Clinton worked so well.
Assuming permanent war in the Middle East is also a conservative assumption that may not come to pass. A peace dividend would go a long way in lessening spending without breaking faith with the elderly.
After the economy comes back, a VAT would be more palitable, especially if it was used as a substitute for payroll and low rate income taxes.
There are already more flag officers than ships, so cutting the size of the Navy is not what is needed most. Cutting Admirals and consolidating staff operations is more needed. Most mobility is aireal nowadays.
Why aren't defense spending cuts included in their ideas. I believe that the United States spends at least 3 times more than the next biggest military, and for what? Our Navy is 7 times bigger than the next. Are we still worried that Spanish Men of War are going to sail on New York? I'm not saying we need to abandon defense, but lets end the corporate welfare for defense contractors, and focus on our biggest threats, radical terrorists, instead of a mid 20th century style military.
Um, remind me of the obvious again? Why is it possible to get the needed revue through a VAT, which basically takes money from poorer people, when it's not possible through an income tax, which takes money preferentially from richer people? Isn't it richer people who have most of the money, especially in recent decades?
These “obvious” conclusions that rich people can't/shouldn't be taxed any further, after all the tax reductions they've gotten in the past 30 years, seem awfully loaded to me.
Mr. Gleckman,
Great post and thanks for making the panel audio available. Towards the end of the panel (and alluded to in this post) there is a quick discussion of the interaction between a national VAT and state sales tax. I was hoping you might be able to expand on this relationship. Would states chose to repeal their individual sales tax in lieu of federal revenue sharing? Or, perhaps piggyback onto the VAT like many do with state Income tax? And, would a national VAT allow states to broaden their base to include internet sales, given the ICC legal implications involved?
All told, a really great panel, keep it up.
The public is skeptical that the $800B of TARP was well spent. Personally I won't believe that the government is seriously budget constrained until the real estate values in the DC area drop as much as they have in California. Until then, the voters can be expected to respond: “Why take more of our money when we are obviously hurting more than government employees?”
Government's promises need to be broken and taxes need to increase. But first things first. History has shown that promised spending cuts rarely happen. Voters will insist on real cuts up front. Even simultaneous spending cuts will not suffice.
Everybody knows that federal spending is propping up the whole DC area, largely insulating it from the recession. Show me a 50% drop in home prices in the Maryland and Virginia suburbs first. Then I'll say that it's time for tax increases on the rest of us who have already experienced the recession.
Thanks for the post and the report. It is a great report in highlighting the dire nature of the budget issues before us and suggesting solutions. Perhaps both a VAT and a carbon tax are needed. I think a VAT can help states truly reach a broad-based, low rate, uniform consumption tax that doesn't pyramid. A carbon tax can also help the struggling highway trust fund.
To help “sell” it, there should be an income tax rate reduction but with some base broadening there as well including reducing the employer-provided health insurance exemption to help health care reform efforts. All tax expenditures should be regularly reviewed so modifications can be made to address those that no longer (if ever) make sense, such as deducting mortgage interest on a second home. Base broadening could be aided by adopting a unified budget report that shows all government spending. For example, the “cost” of the mortgage interest deduction would be shown next to spending by the Housing and Urban Development Department. The “cost” of tax breaks for higher education would show up next to other federal spending on grants and loans for higher education. If this level of transparency were available, I think base broadening would be made easier for lawmakers because more of the public would demand it.
Thanks for the great work and keeping these issues in the forefront.