A (tax) New Money Machine for the U.S. (value added tax)

[papau]

http://www.latimes.com/news/opinion/la-op-bartlet29aug29.story

A New Money Machine for the U.S.
The old ways can't keep up. We need a value-added tax to meet revenue demands.
By Bruce Bartlett
Bruce Bartlett is a senior fellow at the National Center for Policy Analysis.

August 29, 2004

WASHINGTON — The United States needs to adopt a value-added tax. Passage of the prescription drug legislation last year demonstrated that there is no longer any hope of holding the line on government growth — especially when Republicans voted for the multitrillion-dollar entitlement program.

That being the case, the only relevant question is how to finance the growth of government. A value-added tax, or VAT, isn't the complete answer. Other taxes are also going to rise. But a value-added tax is the least bad way of raising the needed revenue because there is little likelihood that spending will be cut enough to avoid that necessity. If some of a VAT is used to finance improvements to the tax code, more total revenue could conceivably be raised at less economic cost.

Under the Congressional Budget Office's most likely long-term scenario, Medicare and Medicaid spending alone will consume 21.3% of gross domestic product by 2050 — more than all federal spending today. Social Security will add 6.3% more, meaning that federal revenue will have to rise by nearly 12% of gross domestic product from where it is now even if interest on the debt is ignored and every other government program, along with the Defense Department, is abolished.

Congress isn't going to go that far, which means that federal spending would rise to about one-third of GDP over the next several decades, absent substantial and highly unlikely changes in major entitlement programs. Given that Republicans just created one of the biggest such programs in history with the prescription drug legislation and that Democrats want to expand healthcare to the uninsured, we can assume this is a bare-minimum estimate.

In effect, the United States would slowly move toward European levels of spending as a share of GDP. And if we spend like Europeans, we will have to tax like them too, and embrace a value-added tax.<snip>


This suggests there is substantial room for raising broad-based consumption taxes in the U.S. without overburdening the economy. A very broad value-added tax levied on virtually all personal consumption could raise about half a percent of GDP in revenue for each 1% tax rate. But this sort of value-added tax is highly unlikely, though it would be best to treat all consumption equally. In practice, it is unlikely that more than 30% of GDP would be taxed, meaning that a 10% VAT would raise revenues equal to 3% of GDP — about $350 billion this year. We could raise twice that at a rate no higher than now exists in most European countries.<snip>

Some years ago, economist (now Harvard President) Lawrence Summers quipped that the reason the U.S. doesn't have a value-added tax is because liberals think it's regressive and conservatives believe it's a money machine. We will adopt such a tax, he said, when liberals realize that it is a money machine and conservatives see that it is regressive. Perhaps that day has come.

[Centre_Left]

1. Too bad...

Such a tax would drive the economy into a deep recession, but I suppsose that's the price we pay for our lack of fiscal restraint.

[bemildred]

2. I think we should try screwing the rich and corporations first.

Who knows how much money we could extract from them via
confiscatory marginal rates and the "death tax", eh?

[Inland]

3. two reasons against

1. Nobody knows how much tax they pay, since it occurs at each step of production of a product (each step where there is "value added") and is wrapped into the cost. That's why politicians like it and citizens don't hate it--nobody knows anything, and it removes accountability from the government. That is why the VAT is a money maker--unlike an income tax, where at least you know what you pay, you won't know what you pay under a VAT. It seems anti-democratic.

2. To keep it from being regressive, you have to creat exemptions. Exemptions--esp when they mean a difference of 20% or so in the price--will be a bone of contention as every seller of goods or services tries to fit in. the result can be a nightmarish burden on business. Go to a Hortons in Canada and each doughnut is taxed differently. Of course, this adds to the ignorance over what you pay.

[papau]

4. Fiancial transactions are always "zero rated" so no tax on Ins Co's

and Banks and Wall Street!

Seems like a good GOP idea!