Monday, April 19, 2010

O.K., so the Senate rebukes the VAT for what exactly?

I don't normally do politics - and Congress should be worrying about the fragile recovery rather than the public deficit - but this is just ludicrous. Senator McCain drafted bill H.R.4851 that was actually voted on - in favor of, no less - to do the following:
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.
Call me crazy, but by rebuking the Value-Added Tax, isn't the Senate effectively confirming support of higher personal income or corporate income taxes? I'm not a professional bill-sifter; but since taxes will (eventually) rise - the merits of which will not be discussed here - this is the only conclusion I draw. The mix of taxes does matter, something about which Stephen Gordon has written many times, so I will cite him directly:
So a stated preference for a small(er) government sector can only be justified on ideological grounds. A political party may campaign for a larger or smaller public sector, but the justification cannot be that this choice will have a material effect on national income or on economic growth rates.

What does matter is how those government revenues are generated. The subject of the optimal 'tax mix' of taxes on labour income, capital income and consumption has been the subject of an enormous amount of theoretical and empirical inquiry. The theoretical literature has reached certain broad conclusions:

1. Taxes on capital income generate the most distortions. In a small open economy, the elasticity of supply is very large (in principle, infinite), so small changes in the rate of return on capital can have large effects on investment.
2. Taxes on consumption generate the least distortions. Since they don't affect post-tax rates of return, they don't affect savings and investment decisions.

Interestingly, I completely disagree with the first part of the citation, as the size of the government can be too small and affects the level of aggregate activity. Bill Mitchell argued this quite eloquently just last week.

I digress; back to taxes. Stephen Gordon focuses on Canada, a small-open economy; but in glancing through the literature (two papers here and here, for example), these results seem to hold for larger economies as well. Furthermore, this literature looks a little "old" - I suspect that it will get renewed interest now.

As such, here is the case for McCain's bill against the VAT tax.

The chart illustrates the VAT tax rates across the OECD - of which the U.S. is the only member country without a VAT, so it is not included in this graph - plotted against economic growth. I know that there are just two variables estimated here, but the scatter is quite clear: there is no correlation. (The data are 2005-2007 averages, and you can download the data from the OECD Tax Database.)

Now here's an illustration in support of higher corporate income taxes?


The chart illustrates the Corporate income tax rates across the OECD plotted against economic growth. (The data here are from the same OECD database.) There is a very clear and negative correlation amongst the two variables. This supports a recent OECD study, of which I'll again cite Stephen Gordon:
An interesting recent OECD study on the optimal tax mix finds that a strategy of shifting away from income taxes - and especially corporate income taxes - in favour of consumption and property taxes has a positive effect on national income. (Shifting away from consumption taxes to income taxes has the opposite effect.)
Eventually, economic growth will warrant a transfer of excess private saving back to the government via rising taxes. But wouldn't you (McCain) want to at least consider the tax that doesn't adversely affect economic growth? Like a consumption tax?

Politics.

Update: this discussion is going to move in the direction of the regressive nature of a VAT and income inequality in the U.S. I should note that Canada also has an interesting model. The government transfers benefits in the form of GST tax credits to low- and middle- income households to address the regressive GST. The credits totaled roughly 12% of all GST revenues in the 2008-2009 fiscal year.

Rebecca Wilder

32 comments:

  1. my own not very strong feeling is that a VAT is regressive, so i seem to be in agreement with mccain there...& i have a sense that it would add another unproductive bureaucracy, but again thats something i havent really thought out either…i would lean towards targeted consumption taxes, luxury taxes if you will, and taxes designed to change behavior in the national interest…for instance, i’d like to see a tax on gasoline high enough to discourage even my own infrequent unnecessary driving…

    & im in the soak the rich camp on income taxes...

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  2. This is one of those instances where growth isn't as important as maintaining a reasonable Gini coefficient. See http://equalitytrust.org for the reasons why.  We have so much income inequality already that a regressive VAT is likely to cause social problems limiting growth.  The U.S. is in a percarious position because the extreme statistics shown in http://en.wikipedia.org/wiki/United_States_incarceration_rate are likely tied through conservation of scarce resources to the effect shown in http://lanekenworthy.files.wordpress.com/2008/02/bestinequalitygraph-figure1-version3.png

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  3. This is a reply to both rjs and James.

    First, a consumption tax would NOT replace an income tax by any means, just increase as a share of the mix. And yes, the consumption tax is regressive - of course. However, Canada does a very interesting thing: they apply GST tax credits to low-income households to address the issue of a regressive tax.

    According to the OECD, 30% of all tax revenue across the OECD is now in the form of conumption taxes, of which the US federal government is clearly behind the curve. (I didn't buy this publication, but a few stats are included for free). In the CBO forecast just over 3% of all tax revenue expected for 2010 will come via "excise" taxes. There's a model here that the US is clearly not willing to adopt.

    Rebecca

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  4. Agreed on the gas tax; but that's regressive, too. Although it has the added incentive of changing consumer behavior (possibly), one still must contend with the impacts on lower and middle income households.

    Like I say above - we're not talking about replacing the income tax (one can increase the share paid by the top X%) just adding to the mix.

    Rebecca

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  5. Agreed on the gas tax; but that's regressive, too. Although it has the added incentive of changing consumer behavior (possibly), one still must contend with the impacts on lower and middle income households.

    Like I say above - we're not talking about replacing the income tax (one can increase the share paid by the top X%) just adding to the mix.

    Rebecca

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  6. Agreed on the gas tax; but that's regressive, too. Although it has the added incentive of changing consumer behavior (possibly), one still must contend with the impacts on lower and middle income households.

    Like I say above - we're not talking about replacing the income tax (one can increase the share paid by the top X%) just adding to the mix.

    Rebecca

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  7. What concerns me about any VAT is the inefficiency of the US government in its application and collection of same. As I've stated before, it would be very wise to revisit the income tax structure with emphasis on simplification in order to eliminate the waste in the system. That, in itself, would probably help lower/middle income taxpayers and free up quite a bit of $$ for other spending. Maybe we don't need another tax, just clean up the ones we already have?  aj

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  8. Rebecca, you make the grave mistake that politicians and bureaucrats have the moral right to demand money from persons they deem citizens and at any amount they want. 

    Of all kinds of taxes, VAT are championed by the dumbest or the most corrupt. VAT create horrific distortion as it allows those in better politically connected industries to fully write off their tax burden while those who lack political power must absorb the tax.

    VAT taxation attacks capital formation more than any other kind of taxation, limiting its growth to the politically connected, killing off entrepreneurial entrants.

    Increasing tax rates, increasing the kinds of taxes, increasing the ways of taxation -- none of these are foregone conclusion. 

    The correct action is to reduce spending and the size of government thus obviating the need for excessive tax revenue growth.

    Spending is the problem. Not tax collection.

    Taxation amounts to theft. Claiming one kind theft is better than another kind of theft, when aware of this amounts to rhetoric and when unaware amounts to self-deceit. 

    Income taxation amounts to slavery since each human has a limited time on earth and since taxing income amounts to taxing time, doing so steals time away from someone and hence steals a part of his life.

    Since VAT distorts capital formation and rewards the politically connected and since income taxation amounts to slavery, at most, a sales tax on final goods ONLY at least has some merit as persons need not buy cell phones, cars, hair cuts, ski vacations. Yet, a final tax on food and other energy, shelter and clothing seems punitive. 

    The only legitimate form of taxation are tolls upon roads, bridges and ports. 

    In the United States of America, politicians and bureaucrats engage in activity far exceeding the U.S. Constitution and thus have overspent, often overpaying, for things which they had no authority. The list of the spending spree is endless, nearly -- from Medicare to undeclared wars.

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  9. "<span>Spending is the problem. Not tax collection. "</span>

    So what do your propose to cut?  The 19% share of the budget that the military consumes?  The 20% consumed by Social Security?  The 13% that goes to Medicare?  The 8% to Medicaid and Children's Medical care?  That's already 60% of the budget.  Now tell me how you'll garner the political; support to implement your cuts.

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  10. Do I wield power to get what I would propose enacted?

    You offer up a ridiculous argument. And the ploy of "but, but the children" amuses.

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  11. Most need to get schooled on exactly what capital is. Most mistakenly believe that capital means money. The belief that capital is money is not quite right.


    The word capital derives from the Latin 'caput' meaning head, source of a spring, fountain head.

    Thus, capital is the source from which increase, profit, revenue flows
    and renders profit. Thus, whatever gives profit is capital. Capital is any an economic quantity put to use to gain profit.
     
    Capital are those things traded away for profit, that is, used productively by a proprietor. Moreover, capital is any economic quantity -- material things, personal qualities, rights -- used for the purpose of profit.

    Money becomes capital when put to use doing these: (1) cash rented at interest, (2) buying dividend paying shares, (3) buying inventory for resale, (4) buying seed for crops for sale, (5) paying wages for laborers, (6) paying for rented land, (7) paying for rented buildings and equipment.

    Personal qualities become capital when rented as labor. Indeed, labor is the "poor man's capital" since it is akin to material chattel. 

    Personal qualities become capital when used as credit to buy inventory or the labor of others, which gets embodied in some product for resale.

    Rights become capital when embodied in copyright, which gets sold off to a publisher. 

    Thus once knowing what capital is, it should be clear to any right-thinking man or woman how wicked are the effects of VAT taxes upon capital formation and to what great lengths men and women go, politically, to rig the rules of markets and taxation to their benefit.

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  12. Rebecca:
    I initially took note of this latest posting of yours due to McCain. I thoroughly like(d) the man, but he appears to be contradicting his own history. He's losing it....but my stating that puts me into discussing US Politics, something you avoid yourself. It does muddle the already unfocused economic argument.

    On VAT, besides the noble comparison you make to Canada, and the fact that not only the Feds (GST) and the Provinces (PST) offer rebates to the poor (the means test, outsied of Quebec, is done on Federal ledgers on behalf of the Provinces, Alberta being an odd case), but it is the *immediacy* of the tax collection, plus the difficulty in evasion, that also appeals to coffer medicines.

    I note some excellent posts from your readers, save for the one glaring exception, un-named. I shall endeavour to further substantiate your gist later. I wonder also if there aren't US State and Municipal (NYC) examples that can be citd as precedents for the Feds

    --------------------------
    Are other readers able to do spell-check within these posting windows? I'm using FF running on Ubuntu, and I haven't the time to check throughly for spelling mistakes, and spell-checker doesn't work for me on this forum.

    Anyone have a quick fix? (Besides going back to school)?

    Any other forum I contribute to does not display this characterisitic. I suspect it is a Java code missing.

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  13. Oh man, since reloading my OS, this site is not recognizing my Google log-in, even as Google does! (I have G-Mail).

    I posted the previous reply:
    Stephen Saines

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  14. I was trying to avoid it, but here goes:
    <span>[Rebecca, you make the grave mistake that politicians and bureaucrats have the moral right to demand money from persons they deem citizens and at any amount they want. ]</span>
    One of the joys of VAT is that *non-citizens* including Martians and those from other planets, also pay tax. Fat Bankers and illegal aliens alike.

    You might wish to think about that, but then again....

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  15. Government is too big & taxes are too high. 

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  16. certainly, some kind of adjustment could be made in the tax code to address that regressiveness, perhaps via the EITC, so that those who have to drive to work could get a tax rebate, so they would not be hurt too badly by a gas tax…the gas tax would be a four-fer beneficial – reduce oil consumption, reduce the trade deficit, reduce emissions, and increase revenues, nearly to the tune of 150B per $1 tax per gal of gas applied...

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  17. Politicians like taxes that you cannot see. They can raise them without political risk. I like taxes that everyone has to see and pay up front. That way, most people get angry with the unfair tax burden. Which is the very reason that a flat tax will never be, because to raise taxes you would have to tick-off everyone at once. Now it's done round-robin, pick on one group this time, another the next. Divide and conquer. VAT makes it easier to hide taxes. I will always oppose new or additional taxes, because I know that the more they take, the more they want.

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  18. As per "visibility":.

    To continue Rebecca's analgoy to the Cdn experrience, Brian Mulroney was the most 'right wing' PM that Canada had experienced, and his legacy is still extant in the present Neo-con admin: [...][
    Although the government argued that the tax was not a tax increase, but a tax shift, the highly visible nature of the tax was extremely unpopular, and many resented Mulroney's use of an "emergency" clause in the constitution.
    [...]
    Mulroney's second term would be marked by an economic recession. He proposed the introduction of a national sales tax, the Goods and Services Tax (GST), in 1989. When it was introduced in 1991, it replaced the Manufacturers' Sales Tax (MST) that had previously been applied at the wholesale level on goods manufactured in Canada. A bitter Senate battle ensued, and many polls showed that as many as 80% of Canadians were opposed to the tax. Mulroney would have to use Section 26 (the Deadlock Clause), a little known Constitutional provision, allowing him in an emergency situation to ask the Queen to appoint 8 new Senators. Although the government argued that the tax was not a tax increase, but a tax shift, the highly visible nature of the tax was extremely unpopular, and many resented Mulroney's use of an "emergency" clause in the constitution.][...]
    http://en.wikipedia.org/wiki/Brian_Mulroney

    [...][Mulroney's supporters argue that the GST helped the subsequent government eliminate the deficit, and that the visible nature of the tax kept politicians more accountable.][...]
    http://www.answers.com/topic/brian-mulroney

    You may dislike new taxes, or the shift of collection, but "visibility" can certainly be addressed.

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  19. <span>"llowing him in an emergency situation to ask the Queen to appoint 8 new Senators"</span>

    This is misleading to Americans and others. The Queen is not involved. It is the action of the Governor-General, and not an appointment of choice, but by recomendation of the Governing Party. The colloquial expression is: "Padding the Senate".

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  20. "When Denmark introduced the VAT in 1967, it was at a rate of 10%. That rate has steadily risen to 25% today...Germany has gone from 10% to 19%. Italy from 12% to 20%"

    http://www.foxnews.com/opinion/2010/04/20/oliver-garrett-vat-tax-democrat-california-indiana-ipod/

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  21. <span>"targeted consumption taxes" - Cap and Tax Energy Tax is due out Monday</span>

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  22. When Canada introduced the GST, it was 7%. It is now 5%. Does Fox report that too?

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  23. I have real problems with the data on corporate taxes.

    It uses the statutory rate when the effective rate for most countries is very different.

    For example, the statutory rate for the US is 39% but the effective rate for the US is actually about 21%.  Moreover, it differs widely by industry in the US.

    I do not know of a source for the effective rate for the OECD countries, but the data on corporate taxes  as a share of GDP strongly implies that the effective rate and the statutory rate are quite different for other countries as well.  For example, US corporate taxes as a share of GDP are among the lowest in the OECD.

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  24. <span>"US corporate taxes as a share of GDP are among the lowest in the OECD"    I know that the EFFECTIVE RATE in 1984 was an average annual rate of under 15%.  But individual rates were all across the board (statutory maximum rates were 46%).  
     
    Supply siders actually thought investment & corporate incentives would enable the economy to grow out of the deficit without raising taxes.   
     
    In capitalism human consumption is the goal.  Keynes, Say's Law, output gaps, etc. are mis-directed.   
     
    In the Keynesian System, S = I by definition.  In the national income accounting system, S = I + (G-T).   
     
    The Keynesian's ignore that the "utilization of bank credit to finance real investment or government deficits does not constitute a utilization of savings, since bank financing is accomplished throught thr creation of new money...never are the commercial banks intermediaries in the savings-investment process".   
     
    Savings impounded within the commercial banking system are a leakage.  
     
    It is obvious that if full employment is the objective, then the US will have to nationalize the commercial banking system, and get these banks out of the savings business.</span>

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  25. the number of new stock highs peaked at 601 on March 17 this year

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  26. <span>"The capital gains tax rate has wandered all over the place in the past generation. Private savings have not shifted significantly in response. Moreover, any increase in private savings must be balanced against the increased government borrowing due to the tax cut. Unfortunately, research shows that each dollar of tax cuts increase private savings by less than a dollar; the net effect is to lower national savings. Continued belief that lowering tax rates will boost American savings is the triumph of faith over experience."</span>
    <span> </span>
    <span>-- Brad DeLong and David Levine, at: </span>
    <span> </span>
    <span>http://www.j-bradford-delong.net/oped/acapitalgainstaxcutoped.html</span>
    <span> </span>
    <span>Also, please re-read the Stephen Gorden post you cite. He doesn't mean to say government spending doesn't matter at all, only that higher and lower transfer payments within a conventional reasonable range don't seem to make a difference. Certainly if education, infrastructure, and basic science spending is cut by 95% we shouldn't expect there to be little difference in long run growth compared to if spending on those things were doubled. Look at this quote from the Gordon post, "Obviously, it is a very bad idea to let Robert Mugabe allocate a significant share of GDP. But governments in the Nordic countries offer an important counter-example..."</span>

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  27. Please note also that Gordon writes in point 1, "In a small open economy..." Canada may be a small economy, maybe, but the U.S. certainly isn't.

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  28. the scatter is rather wide for both graphics, seeing a correlation in any seems to be "made up".

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  29. Rodger Malcolm MitchellMay 6, 2010 at 8:30 PM

    You said, "Eventually, economic growth will warrant a transfer of excess private saving back to the government via rising taxes."

    How does that sync with the following facts:
    1) The federal government has the unlimited power to create money, thus does not need tax money
    2) Not only does the government not need tax money, it doesn't use tax money.
    3) Federal spending is not in any way constrained by taxes received
    4) Taxes remove money from the economy, therefore all taxes hinder economic growth.
    For more on this, please see: SUMMARY OF FACTS

    Rodger Malcolm Mitchell
    rmmadvertising@yahoo.com

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