Conservatives and the VAT
Last week, the Senate voted 84-13 for the following proposition: “It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery.” The sponsor was Senator John McCain, which is interesting because in his presidential campaign McCain endorsed a consumption tax, although not quite a VAT.
The Senate resolution seems to be part of a full-court press by conservatives against the VAT. In recent days, the Wall Street Journal editorial page, conservative bloggers, and columnists such as George Will have all written broadsides against the idea. Curiously, the left, which also usually opposes a consumption tax, has been fairly quiet in this round of overheated rhetoric.
Conservatives make two big arguments against the VAT, neither of which makes a lot of sense. The first is that it is a money machine that will suck trillions of dollars into the federal treasury that liberals will immediately spend. Now, it is true that if you give liberals trillions of dollars, they probably would spend every penny. But why would they spend consumption tax dollars more enthusiastically than income tax dollars?
Well, goes the argument, they’d do so because people would not know they are paying the VAT and thus would blindly accept rate increases. Really? Europeans seem more than familiar with their VAT. They certainly complain about it enough. By contrast, as I have noted many times, Americans seem entirely unaware of how much they pay in income taxes.
The Tax Policy Center estimates that a typical American remits less than a dime in income tax for every dollar he or she earns. Ask the next 10 people you see how much of their income they paid in taxes just a week ago and I suspect none of them will get it right.
The more bizarre argument against the VAT is that it is too efficient. Most economists agree that a well-designed consumption levy would tax nearly all spending at a low rate and thus have little effect on economic behavior. But to some, such as Casey Mulligan, it is a good thing if the tax law distorts economic decision making, picks winners and losers, and produces revenue in a clumsy and wasteful way. This might be called the “'nah, nah, I told you so’ argument.’ That is to say, the worst possible tax system is good because it will punish the economy to the maximum possible extent, and make us hate government even more.
If we aspire to such a mess, we are certainly on the right track. Indeed, as my colleagues Rosanne Altshuler, Katie Lim, and Bob Williams reported in their paper Desperately Seeking Revenue, if we try to get the deficit down to 3 percent of Gross Domestic Product by raising income tax rates, we’ll drive the top rate up to nearly 80 percent. Oh joy. Oh rapture.
It is not written that a VAT must supplement the income tax, as the right assumes. Mike Graetz has proposed one that would replace the income tax for nearly all households. And adding a VAT is hardly Nirvana. It will create its own administrative problems and there is a strong probability that Congress will complexify this levy just as it has butchered the income tax. Just think about all the exemptions states have made to their sales taxes.
But our current revenue system has reached its breaking point. To fix our terrible budget problem, we are going to have to cut spending. But we are also going to have to raise more revenue. And for the life of me, I don’t understand why we wouldn’t want to do so in the most efficient way possible. And that may lead us to a consumption tax in one form or another, Senate resolutions notwithstanding.