The main reason one should resist Tyler’s idea is political economy. The VAT is such an efficient machine that the temptation to use it to obtain more tax revenues is always there. History shows that VAT rates generally go up quickly but rarely go down. New Zealand initial 10% rate was raised to 12.5% in 1989. There are now talks that it will be raised to 15% to help with the current fiscal situation.
Fred has lots of dire words for the VAT but there's no comparative analysis indicating that spending cuts will prove viable. Fred also neglects to mention that after New Zealand adopted the VAT (or GST, 1986), the country moved from being one of the least free in the Western world to one of the most free, economically speaking. New Zealand is actually the best case scenario and if anything it is unrepresentative in the positive direction. I believe the economic liberation of New Zealand could not have happened, had the reformers had to institute massive spending cuts instead of the VAT. (By the way, I did live in NZ in the early 1990s.)
New Zealand also used its VAT to help get their national finances in order, an option which many MR commentators have suggested is impossible. Not every fiscal deal falls apart; many last for ten, twenty years or more so again it is a question of probabilities, relative to the "cut spending" path.
Under the fold, I'll whine about being misunderstood by trigger-happy critics...plus I'll tell you what I really think...
Here's another response to my post on the VAT. It misrepresents my position and ignores how changing demographics will make it harder — much harder — to restrain spending than it was during the Clinton years. It is hard for me to see how such a simple point could be missed.
Here is a post by Dan Mitchell on the topic. He offers up some words which I find enlightening:
The bad guys do not want to control the size of government and the good guys do not want to raise taxes…Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight.
That's an example of using "us vs. them" thinking to avoid the problem-solving mode. There aren't many "guys" — good or bad — who actually favor cutting spending and thus the problem arises. (And the one "cutting spending" advocate cited by Mitchell — Paul Ryan — also happens to favor a VAT.) Impugn it as you wish, but "losing gracefully" isn't so bad when you have only a few million people on your side! There are worse ways to lose and another financial crisis — much bigger next time because it's Uncle Sam himself – is one of them. We still need to see a comparison of the relative probabilities and Mitchell is reluctant to serve that up, instead retreating into moralizing about "which side are you on?" and a call for toughness.
In economics, be suspicious when you read discussions of "whether" rather than "how much" or "with what probability." I am sure I would not wish to institute a VAT today, as on top of other considerations we are still in a recession. But let's say the years progress and we don't see spending cuts or even declines in the rate of increase. After how many years of this path would you consider a VAT?
What if government default were a week away and there wasn't enough short-term spending to cut? Would you consider a VAT then? I hope so. How far back toward the present will you go in considering a VAT? Once you're willing to confront the hard questions most of us are on a spectrum, however much the tax cutters might wish to posture. The way to get closer to the truth is to start with the conditions under which you're wrong, not to list all the reasons you think you are right.
In the meantime I'll still call for spending cuts but I don't see a lot of good answers to my initial query about whether we might have to end up supporting a VAT. What I do see is conservative and libertarian commentators who don't know what to do next — either practically or intellectually — if spending restraint doesn't pan out. Right now, to me, the chance of that looks pretty high.