The new stealth tax that no one is talking about (yet)

The not-at-all-right-wing Lane Kenworthy writes:

Moderate or high levels of tax revenue can’t come solely from higher
rates or new taxes on the rich; the math simply doesn’t work. To
significantly increase spending on transfers and/or services, President
Obama and/or his successors will need to increase taxes on the middle
class. One way to do this would be via a federal consumption tax, such
as a value-added tax (VAT).

I would like to see a betting market in when this is first mentioned by the Obama administration.  I don't think it will be very soon, but it will be within eight years' time.

Comments

He recommends greater taxing of the middle class to reduce income inequality. I was in no danger of assuming he is right wing. Are you impressed by the consumption tax incentives part of it?

I also think we will have a consumption tax because there is overlap on both the left and the right for such a thing. That doesn't happen often. It might even be an improvement. However, as a scheme to hide revenues within layers of value-added, I'm not optimistic.

Thank you! VAT will be coming at us soon. The money hole is too deep to fix any other way. I would gladly get in on this wager.

A federal consumption tax ("GST") worked for Canada, in that it turned large budget deficits into multiyear surpluses. However it turned out to be political suicide for the party foolhardy and brave enough to introduce it. The opposition party won a landslide victory on a promise to abolish it, which they promptly broke.

I disagree that it could happen in the US, however necessary or desirable. There is a ticking clock, a window of opportunity of about one year for a new administration to get major new policies through Congress. Beyond that honeymoon period, it's much more difficult and a president has to more or less permanently downsize his ambitions. A second term is often practically a caretaker phase: Bush's announced ambitions to reform Social Security quickly amounted to nothing.

The point is, the entirety of Obama's honeymoon period (and beyond) will be used up in a phase where all emphasis will be on desperately trying to stimulate consumer spending, not tax it.

That tax should be called the Reagan-Bush-Bush tax, in honor of those who made it inevitable.

Perhaps, then, President Obama ought follow in Richard Nixon's China strategy and adopt the Fair Tax (http://www.fairtax.org/site/PageServer) and undercut the legs of the political opposition. He could, in a Machiavellian way, use their numbers, raise the percentage of sales tax by a couple of points to realize more revenue, tell the working guy that he's saving them money by eliminating their payroll taxes, tell the conservatives that he's effectively eliminating the IRS, tell corporations (as far as they are people!)and businesses that the income tax is dead and then save the economy by promoting a strategy of growth. Talk about a nudge!

Tyler, do you have any thoughts regarding this idea? It seems to be well studied.

Mike Doherty

...higher taxes coming for average Americans (?)

No risk at all in making that assertion... no matter who's in the White House or Congress.

The taxation trend line over the past century could not be more clear.

The real 'stealth' tax is Federal inflation... debasement of the Dollar.

I don't see a VAT from the Obama administration -- it's too transparent. His form broad-based taxes will be stealth taxes. In particular, the revenues from the auction of carbon credits will be used to pay for bigger government (but it will be presented...probably successfully...not as a broad-based tax, but will be spun as 'punishing' big polluters). Still, there is a limit to what can be done with stealth taxes.

I also don't see enough broad-based support in the U.S. for anything like the high European levels of government services that Kenworthy wants a VAT to support. Not only wouldn't Americans accept the VAT, I think, but they wouldn't accept, for example, large numbers of able-bodied people subsisting on long term 'disability' payments.

Obama has made a pretty big deal about taxing the rich only. He may be able to redefine 'rich' a bit (from top 5 percent to top 10 perhaps), but I think a large, middle-class tax increase would be political suicide. His emphasis on taxing the rich is comforting, in a way--the money's just not there to pay for greatly expanded government. And it's especially not there now--I believe we will soon learn that the stock and financial market meltdowns will have sharply reduced the incomes of the top 1%.

Obama has already committed political suicide. He has raised spending so much that it cant possibly be paid for by the rich. He will have to raise taxes on the middle class. Of course, he can try to put that off until after his reelection, but the reality will probably set in before. In fact, we are only in April of his inaugural year, and there are already protests around the country. Does anybody expect these things to go away?

Hmm, after reading http://www.economicmobility.org/assets/pdfs/PEW_EMP_FEDERAL_SPENDING.pdf, I am becoming convinced that US tax data is presented in a deliberately misleading way with respect to the top 20%. The breakdown always seem to go like this (e.g. preference rates on cap gains by quintile:)

Q1: 0
Q2: 0.1
Q3: 0.4
Q4: 2.0
Q5: 97.6

Nicely sums to 100% or so, and makes you feel pretty good if you're in the top 20% (and most people able to interpret the data are probably in the top 20%.)

Then comes the usual sleight of hand: the top quintile breakdown:

top 10%: 95.0
5%: 91.8
1%: 80.1
.5%: 76.0
.1%: 58.2

Oooh, those numbers don't sum to anything reasonable. So we try looking at the bands:

20%: 2.6
10%: 3.2
5%: 11.7
1%: 4.1
.5%: 17.8
.1%: 58.2

Nearly 60% of that tax benefit is going to 1/1000 households. 50/1000 households get the bulk of what is left, and everyone else gets practically nothing.

If you are in the top quintile, but not in the top few percent, you might as well use the fourth quintile data, it will be far more reflective of your actually situation.

Larry,

Here's the comment from the paper of Table (Share of Select Federal Tax Expenditures by Cash Income Percentile, 2006):

"As shown in Table 1, nearly 98 percent of the tax benefits from the capital gains and dividend exclusion flow to top quintile households, while the bottom quintile receives zero. What is more, these tax benefits subsidize deposits and not actual accumulations, allowing particularly higher-income households to shift savings out of non-tax-advantaged accounts to the tax-advantaged ones simply to reap the tax benefit."

It seems pretty clear that the paper is talking about a tax benefit that largely goes to the top .1% households.

And, yes, the table says 97.6% of that tax benefit goes to the top 20%. Which makes sense if you think about, say, a change in dividend taxation rates: a median household with $50K taxable stock paying a 2% dividend = $1K/year, a 15% dividend tax vs marginal 20% income tax means $50/year. Contract that with $50M stock and a marginal income tax rate of 35%.

Valuethinker,

That's not entirely true, the Australian Prime Minister who brought in a VAT (after previously saying he would never do such a thing) went on to lead the country for a further nine years!

"The one thing about a VAT is that, while it would bring in money from the middle income groups, they already think that they are heavily taxed, which is of course not true."

If you're struggling to pay your mortgage, your bills, to put food on the table, pay for education for your children, save money for future education, save money for home repairs, save money for vehicle repairs, save money for retirement, and you see a very substantial part of your annual income go to the goverment in the form of taxes, then yes, it's perfectly reasonable to feel you are "heavily" taxed. That you may not be as heavily taxed as are individuals in other nations - who do not need to save or spend when their government provides off-setting services with their taxes - does not mean you are not "heavily taxed."

(Nor does the fact that you

Why do people think the end user does not see the VAT in Europe? This is separately listed on any invoices one receives.

VAT in the second term will almost certainly be proposed, if not passed, for reasons Bartlett has laid out several times: Voters have no taste for significant limits on Medicare or other entitlements. The only question is how to pay for them. The VAT is an obvious solution. Larry Summers has my favorite saying on this (to paraphrase): Liberals hate the VAT because its regressive, conservatives because its a money machine, and we will get it the moment liberals realize its a money machine, and conservatives realize that its regressive.

Somebody has to pay for the deficit or is the Obama administration counting on a boost to future GDP growth to pay of the deficit?

I live in the US but come from Sweden. Sweden has a VAT of 25 %, the European Union mean is about 15 %.

Sweden had an unprecedented GDP growth, unbroken for 100 years between 1870-1970. Swedish politicians, Social Democrats comparable to US left liberals, created and entitlement program on the assumption that the GDP growth would continue at levels above 4 % growth. Surprise, surprise the entitlement system collapsed, Sweden had to privatize and fully fund social security and cut pensions by 10-35 %, mine 20 years of social security payments overnight became was suddenly worth 65 cents on the dollar.

The old European Union, EU, countries are now looking at 1-2 % GDP growth, if the US gets it wrong it will become like EU. So from what I can see and compared to Sweden, yes you will have a VAT starting at 15 %, and drastic tax increases for the middle class unless Obama changes course.

(
Facts about Sweden:

1. Marginal tax rate at 74 %, starting at incomes above USD 65,000, family members are taxed individually.

2. Sweden has the fewest small and medium sized business per capita in the developed world. Small business owners has special penalizing taxes compared to employees as well as less benefits per social security tax dollar.

3. Not a single new job has been created in the private sector for the last 50 years. All new jobs have been created in the Public Sector or been workfare jobs.

Well, they could introduce the two-tiered system of property tax, in which land is taxed higher than buildings. That would be progressive, but it would clash with reflating the bubble, which for some strange reason, the govt. wants to do.

It would take political genius even beyond what Obama has to figure out a way to convince republicans (and centrist Dems) that a VAT would be a good idea without eliminating or sharply curtailing the income tax. Sure, R's may support a VAT, but *instead of*, not in addition to, an income tax.

The only way to get the camel's nose under the tent I suspect is to tie it to some specific program, as with social security and medicaid, such that the VAT pays for universal health care in some way. I'm not sure that would work, but it's got a better chance than pitching it as a way to pay off the debt.

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