I outlined it yesterday, to a small group at GMU. My tale went as follows:
1. The United States is on an unsustainable fiscal path.
2. For whatever reason, long-term interest rates don't reflect this problem. There will either be a sudden collapse of demand for government securities, or the current market already is figuring we will get a VAT. Either way it is more revenue for the government or a Greece-like scenario writ large.
3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum. They might be willing to cut spending once a financial crisis arrives (though maybe not), but then there will be days or only hours for decisive action.
4. We could, for now, wait and postpone fiscal reform. That means encountering a sudden collapse some number of years from now. We will then clean up the budget in some way, but under a TARP sort of mood rather than what we might do today.
5. We'll get a better deal, and make wiser decisions, if we do it today rather than in a panic. Plus another financial crisis would prove deadly to both the budget and to the quality of economic thinking.
6. There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax. Spend some of the rest on health care for the poor, if that is the deal on the Democratic side.
I am by no means convinced this argument is correct but I would like to hear the strongest arguments against it. No one I talked to succeeded in defeating it, other than mentioning they don't like the idea of more revenue for the government. You will notice I structured the argument to be as neutral on the "left vs. right" question as possible.
You'll notice the use of a pivot here: the common "right-wing" views that a fiscal crisis would be awful, voters are irrational, and governments make bad decisions in panic times, are used to favor a VAT.
I wonder: how many people agree with this argument, but they are unwilling to say so because they don't want to weaken their bargaining position if and when a "deal" is put on the table.
Addendum: You'll notice that on Sunday Greg Mankiw mentioned that a VAT might be the best of available alternatives.
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Just finished New American Economy in which Bartlett makes a good case for a VAT. Politically it is a non starter currently but it is certainly worth consideration. I think most people who argue for “smaller government” don’t really grasp the extent to which spending would have to be cut to bring the budget even remotely close to balance. I have a very difficult time taking this group seriously unless they include the programs they’d be willing to do without. Give up your SS? Medicare? Farm subsidy? Mortgage interest deduction? Great. Still have systemic deficits as far as the eye can see and most of the “smaller government” crowd don’t make it past giving up your SS. Its merely an abstraction for the majority of these people. Gives them a complaint without having to shoulder the burden of making it happen.
Larry Summers said it best: “Liberals oppose a VAT because it is regressive and conservatives oppose it because it is a money machine, but a VAT might come when liberals realize it is a money machine and conservatives realize it is regressive.”
> There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax.
Credible? Yes, there are probably folks who will agree to that deal, but we all know that the deficit reduction and other things won’t last, if they happen at all.
If they can collect or borrow money, they will spend it. We need to address both of those problems, and a VAT doesn’t address either one.
We need govt bankruptcies to teach smart people that they shouldn’t lend money to govt. (If dumb ones insist lending afterwards, we should accomodate their desire to donate to govt by declaring bankruptcy again and again.) Governments should never be allowed to borrow money, and the only way to accomplish that is to make govt debt worthless.
That leaves taxes. Increasing revenues won’t cut spending.
td: “I think most people who argue for “smaller government” don’t really grasp the extent to which spending would have to be cut to bring the budget even remotely close to balance.”
Oh, I think we do. I think we realize that smaller government is not going to happen in one year or two years or even three.
Many of us also realize that raising tax rates or introducing new taxes is not going to bring the budget evenly remotely close to balance. Tax increases inhibit economic growth, reducing the growth in tax revenue. On the other hand, Kennedy in 1963, Reagan in 1983, Clinton in 1997, and Bush in 2003 all cut tax rates, then watched the economy grow enough that tax revenues surged.
@Doc Merlin — you wrote “Tea Party movement is evidence that at least part of the populace cares deeply about fiscal responsibility.”
Sorry, but any movement whose members cry, “Get your Government hands off my Medicare” has zero credibility with regard to fiscal responsibility. Medicare and other entitlement cuts are absolutely essential to a return to fiscal responsibility. Raising the retirement age will help SocSec. Implementing a needs test will force wealthier seniors to shoulder a larger burden of their health care costs. Implementing a health care plan containing mandates and that is deficit neutral, as Obama’s plan is, will open up the insurance industry to millions more customers, a huge win for everyone.
That said, a VAT is the best and fastest way to raise needed revenue. There is no way out of this crisis without raising revenue. And there is no option but to mandate that funds raised via a VAT are earmarked specifically for deficit and long term debt reduction, not increases in spending. Until Congress and the president grow the stones to pass a VAT, we are going to be stuck. In fact, the commenter above who suggested that the threat of a carbon tax will change behavior. The threat of a VAT will have the same effect. Read Bruce Bartlett if you want really strong information about it. Sadly, however, I fear that you won’t given the tenor of your several posts in this thread. You seem to want to blame liberalism for all the problems, when the current $1 trillion deficit was caused directly by unparalleled spending by a Republican adminstration and congress.
Oddly enough, the very same people who say “You can’t drill your way out of the problem† (in opposing offshore oil drilling to help solve an energy crisis) rarely seem to say “You can’t tax your way out of the problem† for a debt crisis.
Tyler,
You make a compelling case. Whether we like it or not, left or right, conservative, liberal, or libertarian, the U.S. is on an unsustainable path and we have two choices: fix it now and endure some pain or fix it later and endure a LOT of pain. But the devil is in the details…how do you get ideologically opposed groups with entrenched interests and collective myopia to do something that requires forethought, consensus, enlightened self-interest and sacrifice–oh, and fundamentally undermines the anti big government position of conservatives and libertarians? I don’t know that you can achieve success here, but certainly the plan you suggest offers a valid way forward. But I doubt there is the political will to make it happen. So in the absence of that, we default to the second choice: fix it later, though the fix may render this nation in a completely different fashion. We cannot govern and manage 300+ million Americans and continue to live the illusion of a free market economy in the manner that has become de facto over the past 30 years.
Keep pushing for a VAT, it is at least our best hope before the real pain comes.
Nik
td: “I think most people who argue for “smaller government” don’t really grasp the extent to which spending would have to be cut to bring the budget even remotely close to balance.”
I think this is wrong. At least for me it is.
I think we could
Freeze nominal military spending
Elimiate all Farm Subsidies
Index Social Security to inflation not wages
Gradually increase eligibility age for Soc Sec
Gradually (both in time and over income) means test Social Security
Mandate that per capita Medicare/Medicaid spending growth be limited to inflation (or posibly GDP growth). Create an institution to evaluate medical proceedures and figure out what should be covered given the annual spending constraint to optimize health.
I think these cuts would get us pretty close.
If not we should adopt an imigration program similar to Canada that allows immigration for those likely to be young net tax payers into the system and allow immigration of 1-2% per year.
If that does not do the trick then I might be willing to sign up for tax increases.
Our elected reps have proven themselves to be scoundrels; why would we want to give them more of our hard-earned money? They are addicted to power and our money; we need to starve the beast and kick them out of office. If you’re looking for other solutions, consider Congressman Paul Ryan’s Roadmap for America’s Future: http://www.roadmap.republicans.budget.house.gov/
Wow! What a lot of dreamers here. No one has mentioned the FACT that we have all become special interests today. Cut SS. Are you kidding? Cut Medicare? You must be joking? (By the way, SS recipients and Medicare receipients are the largest voting block out there.) Cut the military? Try that one with the congress and the military establishments in their district! Face it….this country has become a country that doesn’t want to pay for anything. (Note the personal debt/government debt—-it is all the same people.) And here is the kicker: we elect celebrities who tell us what we want to hear but have no brains, no vision, no backbone and no will. Almost everyone here reminds me of the people of Detroit, MI. They still support the Lions, year after year after year and they continue to fail…..So, dream on people. It’s too far gone in almost every area of American life. I quit on GM 30 years ago because I saw what was happening. But it took 30 years for them to go bankrupt. For the last ten years my financial advisors have been telling me that Medicare will bankrupt this country, yet nothing has changed. In fact, we’ve added a drug script program without any way to pay for it! So get your heads out of the sand and give this country a cold, hard stare and admit this fact: Nothing will change until there is absolutely no way to avoid change (and by then China will have kicked our butts)!
Your premise that a VAT can solve issues with government spending is a false one. Government is always willing to spend more, even when they don’t have it. Nothing will solve the problem at hand, due to the many factors that have caused it to begin with. A) Government spending is out of control. It is so because special interests are all able to write legislation to take from others by force that which they could not do so in a market economy. These special interests include public as well as private organizations. B) The government itself has a monopoly on money creation and supply and they choose to use this monopoly power to benefit specific special interests.
Most assuredly with the debt levels and the fiat money we have today, there is no way we can pay it back. We owe $12.1 trillion today. That’s over $39,000 per citizen! That’s not including interest, the current budget deficit, nor our unfunded liabilities like Social Security. Estimates for those are at $60 trillion, or an additional $193,000 per person!
The only way that this can be paid back is by destroying the value of the dollar. If you make the value of the dollar less, that means you owe less. That means taxpayers like you and I suffer because our money doesn’t purchase as much in the future as it does now. Inflation is purely a Federal Reserve (government) phenomenon, no more, no less.
The only thing additional taxes will do to our economy is cause further harm and anguish to the US citizen. To say that the only way to fix the current situation is to give the very people that caused it more of our money is like asking the fox to guard the hen house. Your presumption that somehow our politicians will now pay back their debts with additional taxes stolen from the productive masses is not only laughable, but it borders on insanity.
The market is the solution. The government is not.
VAT is a lousy idea. There is not a single country in the world with a VAT and spending programs such as universal government health care which can balance its budget. Not one. Unless you count maybe a couple of tiny countries with massive oil reserves, possibly Norway or Brunei. They’re going to run out of oil sooner or later, and the rest of the countries are complete junk. Canada, Japan, all of western Europe. High taxes, heavy debt, war, welfare, domestic spying, govt-controlled media, protected industries, bloated bureaucratic salaries and pensions, privileged unions, official corruption. These are all leading to ruin.
And because of the demographic trends which were caused by the high-tax welfare state, they are going to be ruined a lot faster than many people think. Free, unlimited medical care and generous government pensions, with ZERO incentive to either save money for old age or to go to all the expense and trouble of raising children to be the next generation of tax slaves. Why bother working hard, saving money and rearing children when Big Brother can simply print and borrow money?
Advocating that the USA should imitate (even more than it does now) the destructive social and fiscal policies of those other soon-to-ruined socialist states is a pathetic joke on the American people. The democratic socialist state is a pyramid scheme.
How about a VAT combined with a major increase in the Earned Income Tax Credit?
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