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Why a VAT? Give Me a Better Way to Raise Revenue.

April 21st, 2010 . by economistmom

Lori Montgomery’s story in today’s Washington Post highlights the tax-side version of how unreasonable the discussion over fiscal responsibility has become in this town:

As Washington braces for the first serious conversation in more than a decade about deficit reduction, some economists and independent budget experts fear that the hyperpartisan political atmosphere is narrowing the options for dealing with the chronic budget shortfall.

The latest sign: the emphatic rejection by both parties in recent days of a value-added tax, a sales tax imposed by nearly every other developed nation. After a White House economic adviser [former Federal Reserve Chairman Paul Volcker] was reported speaking semi-favorably about a VAT, the White House this week vigorously denied that President Obama is looking to include the tax in his deficit-cutting arsenal.

“This is not something the president has proposed, nor is it under consideration,” White House press secretary Robert Gibbs told reporters.

In Lori’s story, Len Burman expresses his frustration with perhaps a little exaggeration of President Obama’s position on taxing (only) the rich:

“We’re taking all the feasible, non-disastrous ways of dealing with our budget problems off the table,” said Leonard Burman, former director of the nonpartisan Tax Policy Center, who now teaches at Syracuse University. “We can’t cut Medicare. We can’t enact a VAT. We can’t raise any income taxes ever, except possibly on the 17 people who make over $1 billion a year.

“Behind closed doors, almost everyone serious in Washington understands there’s a big problem,” Burman said. “But in public, basically if you say anything intelligent, you’re killed.”

But Bruce Bartlett nails it when he explains that conservatives are so obsessed with the economic merits of low tax rates that they forget that revenue has its economic benefits as well, because deficits matter:

Historian Bruce Bartlett, a domestic policy adviser in the Reagan administration who has written extensively in support of a VAT, castigated McCain online for his “irresponsible attack,” arguing that a VAT would be far more efficient and less damaging to the economy than many of the alternatives, including higher income taxes.

“I think we have to remember that low taxes or tax rates are not an end in themselves; they are the means to an end, which is higher growth and greater prosperity,” Bartlett wrote on the blog Capital Gains and Games. “In this sense, I think right wingers pay far too much attention to the negative economic consequences of taxation while essentially ignoring the negative economic consequences of extremely large deficits.”

Oh yeah.  Why do we have taxes?  You mean they’re supposed to actually raise revenue to buy public goods and services, and to pay for subsidies–via tax breaks or direct spending–on certain (ideally socially-beneficial) activities?

If you don’t like the idea of an add-on VAT, then give us some better tax policy ideas to actually raise revenue–not just more ideas on how to lose revenue.  “Better tax policy” does not always mean “lower taxes.”  That’s what Bruce is explaining the conservatives often don’t understand.

31 Responses to “Why a VAT? Give Me a Better Way to Raise Revenue.”

  1. comment number 1 by: SteveinCH

    Sure, repeal the Bush and Obama tax cuts and require a minimum payment of $50 net for Federal income tax.

    Balance the rest on spending through.

    Means testing SS and Medicare

    Cutting defense by $100 billion.

    Nominal freeze on the rest (total, not program by program).

    Problem solved in 5 years and no need for a VAT.

    Try is this way, test the proposition of whether people want to pay a VAT so that the military can remain at its current size and seniors with an average (mean) net worth of $1 million can get payments from the government.

    Let’s see how that polls.

  2. comment number 2 by: Jim Glass

    The implicit argument for a VAT that we are hearing ever more of is: VAT = more revenue = smaller deficits = greater fiscal responsibility.

    But hmmm…

    The PIGS all have VATs: Greece 21%, Portugal 20%, Italy 20%, Spain 16%. How’s their fiscal situation?

    Germany, France and the UK have VATS, what do their projected credit ratings look like? Why, just as bad or worse than the US’s!

    Really, it is not self-evident from this data at all that VAT = greater fiscal responsibility. Is it?

    Milton Friedman use to say that politiicans consume all the taxes they can raise through the political system, then as much as possible more — working out to defiits of about 3% of GDP annually, because that is the long-term sustainable amount as it corresponds to the average growth rate for developed economies. Governments that start running PIGS-like deficts get whacked back by reality, others that find themselves running smaller ones run ‘em up. Looking at deficit data for all the OECD countries since 1970, that’s sure what the pattern looks like to me — VAT, no VAT, for all cultural/social differences, etc. Does it look very different to anyone else?

    So if a VAT does *not* mean greater fiscal responsibility, but as per all this data the same deficits (or worse!) at a higher spending level, what’s the point of it?

    Here’s a thought: Perhaps the real key to improving fiscal responsibility is actually increasing … fiscal responsibility … rather than acting like these Eurpoeans and running up more taxes to over-spend, just as they have.

    Forgive me for asking a naive question, but do any of these VAT proposals for the US have *any* mechanism for preventing the over-spending of VAT revenue, as all these European nations have done?

    Note well: all these European nations now are in a *worse* fiscal position than the US, if only because they are heading into the same fiscal crisis as we are, and they can’t create a VAT to close it — because they already have, and have already wasted that revenue stream. So what new tax are they going to impose to get out of their hole now?

    Is our logic supposed to be: “All these European countries have put themselves in a worse fiscal situation than us by creating a VAT, squandering its revenue, and being left heading into a fiscal crisis without options. Let us do it too!” ?

    A VAT may well be in our future. But if so, let us pray we don’t go “jump in the lake” with one the same way all our European friends have, just because they all have — creating a VAT too soon and blowing all the revenue from it before the circa 2030 crisis arrives.

    The real issue is *not* raising revenue — the issue is attaining fiscal responsibility as political behavior.

    Alas, I don’t have any magic formula for inculcating reasoned long-term fiscal responsibility in our politicians. Which means the next best option is the “1983 Social Security ‘crisis’ model” — which resulted in SS’s future funding gap being closed near exactly 50% with tax increases and 50% in benefit cuts, as part of a political deal.

    That means not a penny of VAT revenue agreed to until the “spenders” agree to apply some rationality to the spending side of things, such as by getting the rich off the receiving end of transfer payments, etc. — penny for penny, as part of a political deal. It worked for SS and it can work again.

    Waiting until the crisis to deal with this problem isn’t very attractive, but this is politics, it’s how things work.

    Increasing revenue without resolving the coming fiscal crisis and imposing fiscal responisibility can only be worse — how is Greece doing these days?

  3. comment number 3 by: BillSmith

    Hey, the number is up to a million? Sounds much more resonable.

    “seniors with an average (mean) net worth of $1 million can get payments from the government

  4. comment number 4 by: SteveinCH

    Bill, the difference is between the mean and the minimum, at least as I see it. If you want to see a million as the cutoff, the mean would be much higher

  5. comment number 5 by: Brooks

    As much as I sympathize with the lament in Montgomery’s article and Diane’s post, both miss a big part of the challenge of getting to fiscal responsibility by missing a big obstacle to achieving higher taxation. Although both discuss resistance/rejection of higher taxation either as a lack of willingness of people and politicians generally to take our fiscal medicine or as an unrealistic ideological insistence on solving the problem all on the spending side — both of which are indeed huge obstacles — the obstacle that is being overlooked is the belief many have that most/all incremental revenues would go to incremental spending — not just to higher spending vs. today, but to spending above and beyond what we’d spend without those incremental revenues — rather than going mostly/completely to deficit reduction. It’s not clear from that Redstate quote if they which they were referring to (simply funding increases in spending vs. today or causing incremental spending), but incremental spending may have been their implication.

    That obstacle is very important to address, along with the general lack of willingness to accept sacrifice and the unrealistic ideological obstinacy and unwillingness to compromise on the set of sacrifices. And it will take concrete steps, not just rhetoric, to overcome that obstacle. We need credible, effective budget process reforms coupled with targets for spending, deficits and debt-to-GDP that are are at least “enforceable” in the sense that deviation from the targets would require actions that are likely to reveal the actors as fiscally irresponsible and thus hopefully serve as a deterrent by bringing enough political cost to offset the political gain of giving out lollipops instead.

    Forgive the repetition, but just to summarize: Through actions and words we must gain the confidence of those who think incremental revenues would just translate in to incremental spending. If that obstacle is not overcome, all those people will see the choice as simply between intolerably large deficits with one level of spending vs. the same size deficits with a higher level of spending and taxation.

  6. comment number 6 by: AMTbuff

    Is our logic supposed to be: “All these European countries have put themselves in a worse fiscal situation than us by creating a VAT, squandering its revenue, and being left heading into a fiscal crisis without options. Let us do it too!” ?
    That’s brilliant, Jim.

    The public has not been fooled by the sequencing of massive expansion of health care spending before the push for a VAT. Everyone realizes that the VAT is a bailout of government overspending, a large portion of which was just added in the most partisan process in living memory.

    Republicans will not be the tax collectors for ObamaCare. Spending cuts, really huge ones, will have to come first, probably including repeal of ObamaCare as the first step. No more tax increases in exchange for promises of spending cuts later.

    Neither is the public oblivious to the difference between a federal government that spends 20% of GDP and one that spends 30% of GDP. Voters oppose the latter, and they will continue to do so even when informed of the necessary reductions in benefits for government workers, retirees, and welfare recipients. Today’s economy makes it painfully clear that cutbacks are the only solution when the money runs out.

  7. comment number 7 by: Underwriterguy

    Brooks comments yesterday capture my views exactly, and, as he says those of many others as well. How can we get this level of discourse to the forefront. Makes me want to march somewhere.

  8. comment number 8 by: John Bailey

    Diane, Good job for talking about solutions, raising the issueof the VAT.

    However, I think it is way to late to be pecking around at the edges. The only way that I see for the U.S. will finance its deficit over the next six months to a year is for the Federal Reserve to resume “quantitative easing.” Effectively that is default.

    Somebody needs to say that our first cut at guaranteeing retirement, health care, financial security, housing and employment have created far more promises than can be delivered. Similarly governments, at all levels, have outspent and outpromised the ability of the tax-producing sector to create.

    The result is the ultimate backstop for all of these problems, the U.S. government, is tapped out at the same time that Social Security, Federal civilian and military retirement, state and local pension funds, the Pension Benefit Guaranty Corporation, Medicare, Medicaid, state and Federal retiree health benefits, private health insurance, Federal, state and local spending, U.S. Postal Service, unemployment, underwater mortgages, Fannie, Freddie, et.al., bank failures, the FDIC, and the Federal debt, all need bailed out.

    We need answers and we need them now!

    I think that the first step is to agree that the people who have to bear the burdens make the choices. Tax, spending, and debt levels should be set directly by the citizens/taxpayers (Click on link below). They should also make the decisions on major policy questions. Everyone will lose something. Everyone also needs to have the opportunity to participate in the decisions that impact their lives.

    John Bailey

    http://newbargain.us/p2765d1.jpg

  9. comment number 9 by: rjs

    my own not very strong feeling is that a VAT is regressive…& 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… some kind of adjustment could be made in the tax code to assure 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…

  10. comment number 10 by: VAT Brat

    Bravo, Jim. That post was spot on.

    There’s only one way out of this mess. Stop blaming the politicians, and start holding the voters accountable for this mess. Require that Congress submit any request to increase the debt ceiling to the voters in a referendum (see http://www.thepeoplesdebt.com ).

    If the voters really care about restraints upon deficit spending, then it will be up to them to stop it. Once they do that, Republicans and Democrats will have no choice but to make the painful and difficult choices of increasing taxes and cutting entitlement spending and other federal programs. Until this is in place, all the work of the Concord Coalition, Bruce Bartlett, and all the other deficit hawks are purely academic and a complete waste of time.

    If the EU states had this requirement in place, their budget systems would not have gotten so out of control. I’d say absolutely no to a VAT until a Debt Limit Referendum is put in place. Then it wouldn’t be much of a negotiation between Democrats or Republicans. Both sides would be forced to violate their most basic beliefs in order to do the voters’ bidding — reduce deficit spending. That is of course, assuming that the voters actually refuse to automatically grant increases in the debt ceiling to accomodate the massive deficits currently projected. In the end, the voters will be held accountable.

  11. comment number 11 by: AMTbuff

    I doubt that a Debt Limit Referendum would change anything. In California, voters have routinely approved new bond issues, regarding them as free money.

    Even if the public figures out that bonds are not free, voters will always choose a future tax over a present one. Only a collapse of the bond market can end deficit spending, with a currency collapse likely also required before spending is finally cut.

  12. comment number 12 by: BillSmith

    The Debt Limit Referendum would need to account for unfunded public pension liablities too. In many states that number is bigger than the sum of all the outstanding bond issues the voters approved.

  13. comment number 13 by: dave.s.

    Well, we could get half a trillion a year by ending the mortgage interest tax deduction. Similar amount by taxing the money for employer-provided health plans.
    I think a VAT is a decent idea, in part because it is regressive - we are in a situation now where a big fraction of the population pays no taxes at all, they tend to regard federal spending as all gift, they’re not wrong.
    If I ran the zoo, there’d be a tax credit for, say, 40% of the first $15000 of mortgage interest. I’m happy to encourage an iron worker in Chillocothe to buy a house. The podiatrist in Great Falls? S/he should get the same 40% off his taxes for the first $15000 of interest, and the rest of his mortgage interest s/he should pay.

    $3 a gallon gas tax - yes, I remember John Anderson, but this is fantasy here - and adding Social Security income in with alll the other income in determining income level for taxation, and then look around and see where we are. This would discourage frivolous driving, and frivolous granite counters, and would be more or less equivalent to means testing Social Security.

  14. comment number 14 by: Brooks

    dave.s.,

    Your ideas sound good to me. I don’t like the government spending on subsidies far beyond what is justified by positive externalities (and in the case of health insurance probably negative externalities), and subsidy spending in the form of tax expenditures is spending every bit as much as if it were explicit spending.

    And a carbon tax is smart, and also something on which many/most economists from left to right agree (e.g., Greg Mankiw’s “Pigou Club” http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html which seems to have ideologically diverse “members”). Only reason a substantial carbon tax isn’t already in place is because if politicians say the word “tax” they lose votes.

    And I (and I think most regulars on this blog) would like phasing in means testing of SS as well, along with raising the retirement age.

  15. comment number 15 by: SteveinCH

    Dave S.

    Another all tax solution. Not something I’ll sign up for but at least the numbers would probably work.

  16. comment number 16 by: Brooks

    No Steve, it’s a spending solution ;)

    If the government sent people vouchers to used toward their health insurance or toward their mortgage payments, you’d call ending it “cut in spending” and you’d favor it, but just because the same exact thing is done through the tax code, you call it a “tax increase” and you oppose it. Obviously it doesn’t make sense to oppose one thing and favor another if the two are exactly the same thing in every way other than name and completely insignificant differences in cash flow (like you giving me $2 while I give you $1 vs. you just giving me $1).

    Either way, government is subsidizing particular types of consumption, and tax rates have to be higher to make up the difference. Cut the subsidies (in either form) and that money can go to either lowering tax rates, lowering deficits, or some combination of the two, and that applies regardless of which form the subsidies take, explicit spending (e.g., vouchers) or tax expenditures.

    I assume you don’t want to revisit that topic, but I had to point out the fundamental conceptual error in the position you expressed in response to Dave S.

  17. comment number 17 by: SteveinCH

    Brooks,

    I’ll repeat what I’ve said. As a result of Dave’s solution, the people have less money and the government has more. That’s a tax solution, whatever definitional magic you may want to work.

    All that happens in his solution is the government takes more money (in aggregate) from the people. Nothing else changes. To call that a spending solution is to call white black.

    Before his changes, the government collects less in aggregate and pays out the same. I’m sorry but your argument is exactly why I object to the tax expenditure label. I recognize you’ll never agree and I’m not debating, just explaining why I see it differently.

  18. comment number 18 by: Brooks

    Steve,

    I hate to break it to ya’, but you’re still not getting it. And it’s not a matter of opinion or perspective, or something about which people can just “disagree”. With sincere respect, I must tell you that you are just not making sense.

    You write:
    As a result of Dave’s solution, the people have less money and the government has more. That’s a tax solution, whatever definitional magic you may want to work.

    As a result of Dave’s solution, the people who now get the subsidy would have less money, and everyone else would either have about that much more money now (if that money were used to lower tax rates) or would have more money later (because deficits will be lower, resulting in less debt to be repaid by taxpayers later).

    And you know what? That’s the same exact thing that would happen if they were explicit “spending” subsidies, like vouchers, rather than taking the form of tax expenditure subsidies, and if we reduced/eliminated those “spending” subsidies. We could use the savings either to lower tax rates or to lower deficits.

    Frankly, I don’t care what they are called — “spending” subsidies or “tax expenditure” subsidies or anything else — as long as (1) people see both for what they are: subsidies that either increase deficits (assuming insufficient dynamic effects to pay for themselves) or require tax rates to be higher than they would be otherwise, and (2) people see that if there is no substantive difference between them due simply to which form they take — i.e., if every party is affected exactly the same way to the same degree on the same basis; all incentives and results and effects exactly the same — and the only difference between them is the label and a completely inconsequential difference in cash flow (again, like the difference between you giving me $1 vs. you giving me $2 while I give you $1), then there is no sensible reason to view one more favorable (or less unfavorably) than the other.

    You write:
    Before his changes, the government collects less in aggregate and pays out the same.

    Take the example of (1) If you had not bought Product X, your tax liability would have been $10, but you did buy Product X, and because of that you only have to give pay $9 in taxes vs. (2) you have to pay $10, but because you bought Product X, the government simultaneously gives you $1. That $1 would be called a “spending” subsidy, and I suppose you would therefore see #2 less favorably (or more unfavorably) than you would see #1, even though they are substantively the same exact thing. Either way, you have $1 more than you otherwise would, and other taxpayers have to either pay more now via higher tax rates or later via repayment of more debt. Yet if the subsidy were in form #2 and Dave suggested eliminating that spending, you’d be much more likely to favor doing so. Your position is the equivalent of saying, “For people who purchase Product X and who would have a tax liability of $10 per the tax tables:
    “I don’t want government taking $10 while simultaneously giving them $1 because they purchased product X,
    but
    I do want government telling them that their tax liability is now $9 rather than $10 because they purchased Product X.”

    Steve, it just makes no sense. Again, it’s like you saying you oppose giving me $2 while I simultaneously give you $1 but you favor just giving me $1, because you see some substantive difference (ideological, practical, whatever) between the two. I hate to sound like I’m being snarky because that’s not my intent and I respect your views, but this one is pretty clear and you’re just not seeing it.

  19. comment number 19 by: SteveinCH

    Brooks,

    I’m not arguing any more with you. I look at the line called revenues and the line called expenditures. You ike to make up examples. I’m not interested in them.

    In Dave’s solution, nobody has more money now because he didn’t argue that tax rates would be lower and your argument that some people will have more money later depends on two assumptions. The first is that spending will not increase as a result of the increase in government revenues. As you pointed out in an earlier thread, there is no reason to believe this would be true.

    Second, your argument assumes that deficit debt in the long run will be created by higher taxes on someone at some point in the future as opposed to inflation or default. I don’t believe this is likely given our political process.

    Thus, as a matter of practice, here’s what I know. Dave’s solution increases taxes and government revenues now. It does nothing to spending or to tax rates (by the way he defined it). Your arguments about future equivalence depend on assumptions with which I disagree. Without those assumptions, your argument is not necessarily true. This in a nutshell is why the two approaches are different.

    Your “every party is affected the same argument” is simply wrong in this case. Let’s assume we make the changes described and I own a home. Tomorrow I pay more taxes and nothing else changes for me. If spending does not go up as a consequence of the increased revenue (uncertain) and if balance is achieved by future tax increases or spending reductions (uncertain) and if I’m alive at this to be determined future point (uncertain) and if I earn a zero or negative real return on the money the government takes from me this year (uncertain), only then would the equivalence you describe hold.

    You continue to assume a simultaneous transfer of funds with nothing else changing in your theoretical examples. This is not the case in Dave’s example.

    Having debated things you are passionate about with you before, I know you disagree and nothing I say will convince you. I hope you spare yourself the time or reposting the same response you have made the last 10 times we’ve had this discussion.

  20. comment number 20 by: Brooks

    Steve,

    First, re: Having debated things you are passionate about with you before, I know you disagree and nothing I say will convince you.

    That’s really not necessary. You seem to be implying that if I am passionate about something, I am so closed minded that nothing anyone says can possibly change my mind. That is both untrue and irrelevant, the latter because passion has nothing to do with this. Logic does. Making sense does. I realize it’s annoying for someone to tell you you’re not making sense, so perhaps you took offense. But what can I say? You’re just not making sense on this one. On just about everything else you make great points, but you’re simply not getting it on this one. And if you don’t see the relevance and usefulness of my illustrations, it’s a mental block on your part, not any fault or inadequacy or irrelevance of the illustrations.

    And in addition to not addressing my points, including my illustrations, your responses are either invalid or missing the point. For example…

    Re: In Dave’s solution, nobody has more money now because he didn’t argue that tax rates would be lower and your argument that some people will have more money later depends on two assumptions. The first is that spending will not increase as a result of the increase in government revenues. As you pointed out in an earlier thread, there is no reason to believe this would be true.

    Completely irrelevant and missing the point. Nothing in that statement of yours has any bearing on the validity of my point that there is no substantive difference due to the form the subsidy takes, and therefore no reason to favor the subsidy if it takes one form over the other (other than because of the political implications borne of the same confusion you are showing, and that difference should lead someone to oppose the tax expenditure form even more because it is on autopilot and because it is politically more likely to be created/maintained/expanded). What you’re still not getting is that everything would be the same whether we are talking about eliminating a subsidy that is in tax expenditure form or in explicit “spending” form. If a spending subsidy is reduced/eliminated, we know that the immediate effect (assuming no enormous dynamic effect) is more money in the Treasury, but as far as what happens subsequently, that money couldl go toward reduction of tax rates, toward deficit-reduction, or toward more spending elsewhere. And guess what? The same applies to reduction/elimination of a subsidy in tax expenditure form. But I guess you’re just not seeing this.

    Re: Second, your argument assumes that deficit debt in the long run will be created by higher taxes on someone at some point in the future as opposed to inflation or default. I don’t believe this is likely given our political process.

    Completely irrelevant to my point that there is no substantive difference in a subsidy simply due to which form it takes, explicit “spending” or tax expenditure. Again, if all incentives and effects on all parties is exactly the same and on the same basis, there is no substantive difference. The subsidy — in either form — means more money in the hands of those who purchased Product X and less money in the Treasury, and in turn either higher deficits (and higher taxes later and/or higher risk of ultimate default or monetization), higher tax rates now, or less spending on other things.

    Re: here’s what I know. Dave’s solution increases taxes and government revenues now.

    That’s equivalent to saying: “Here’s what I know. With Dave’s elimination of the subsidy, there will be more money in the Treasury because those who would have received the subsidy will now pay $10 each in taxes rather than $9. I oppose that. But if the subsidy were in the form of explicit “spending” in which those same purchasers of Product X were now paying $10 but getting vouchers of $1 to purchase Product X, I would favor eliminating that subsidy. I can’t identify any substantive difference of any sort to any party between those two scenarios (because there is none), but I’m saying there is anyway because I just have a visceral, though irrational, reaction to the insignificant difference in cash flow.”

    And the rest of your comment essentially repeats the same/similar errors.

    I’m perfectly willing to drop it, but I can’t guarantee I won’t reply if you reply with more of the same invalid and/or irrelevant arguments.

  21. comment number 21 by: Brooks

    Steve,

    Just one (hopefully) last way of making this point:

    Results of elimination of tax expenditure subsidy:
    People who buy Product X have $1 less
    Treasury has $1 more.
    Next step can be lower deficit and/or lower tax rates and/or more spending on something else.

    Results of elimination of explicit “spending” subsidy:
    People who buy Product X have $1 less.
    Treasury has $1 more.
    Next step can be lower deficit and/or lower tax rates and/or more spending on something else

    See? Same thing.

  22. comment number 22 by: SteveinCH

    Brooks,

    In your last comment you assume that the next step will be identical regardless of whether a tax expenditure or an actual expenditure is eliminated. We have two fundamental areas of disagreement. That statement is one. I believe the elimination of tax expenditures will nearly always lead to more actual expenditures while the elimination of actual expenditure may not do so.

    Said differently, I believe if tax expenditures are reduced by $500 billion spending will increase from what it would have been. Probably not by $500 billion but by some level that will render the equivalence incorrect. You yourself made this point in another post talking about the difficulty of raising a VAT. It is the same thing in reducing tax expenditures. My evidence for this is the quite tight correlation between spending and receipts as a percentage of GDP and the government’s inability to sustain anything that resembles a balanced budget when taxes are increased to do so.

    The second area of disagreement concerns what I consider the fallacy or focusing solely on the deficit number. Let’s say that country A and country B both have debt to GDP ratios of 100% and are both running 5% deficits. Country A is spending 50% of GDP and collecting 45%. Country B is spending 25% of GDP and collecting 20%. Would you rather invest in the bonds of country A or country B assuming they were paying equivalent interest rates. According to your theory, I should be indifferent (based solely on the information provided). I am not. I would always invest in B because B has a greater ability to address the problem by raising revenues. A’s ability is constrained because of the very high level of revenues it is already raising.

    So, let me summarize. The differences between a reduction in tax expenditures and a reduction in real expenditures are two. One, the reduction in tax expenditures will produce an increase in real expenditures and thus the net reduction will be lower. Two, the government is worse off running the same deficit and debt at higher levels of taxation (or lower level of tax expenditure). Or, said differently, if we currently have spending of 25% and receipts of 20% (or will have that in the back half of the decade), it is better to get to our 3% target at 23,20 than it is at 25,22.

    You may not agree with either point but they are neither irrelevant or invalid regardless of your choice of characterization.

    As to your response to my characterization of your response, you’ll not through the entire 100 plus posts we have had on this topic, I’ve never called you misinformed or your arguments irrelevant or invalid and you have repeated this same line repeatedly. This leads me to believe that you are not open to engaging or to having your mind changed but simply wish to convert me to your point of view by repeating the same line of logic over and over again. Suffice it to say I find it unconvincing.

  23. comment number 23 by: DStoerzinger

    VAT seems to be an incredibly complicated system where the final purchaser pays the tax, but everyone in the supply chain has to handle the money. It’s like a giant bucket brigade. Being self employed, I would be looking at a nightmare of paperwork. I don’t think this system is much better than the (insane) Fair Tax proposals that we’ve heard about.

    I have a small greenhouse. I tried to calculate how to account for the VAT using my production process and found it to be impossible. There are too many variables Plus, it would add a huge expense to shrinkage. If I grow a plant that for some reason doesn’t sell, I’ve paid tax on value that doesn’t exist (the plant is in the compost pile). Since plants and flowers are perishable and have a limited shelf life, there can be a lot of shrinkage. Essentially, I get taxed on my losses.

    There has to be a better way.

  24. comment number 24 by: Brooks

    Steve,

    I just have a minute right now so let me just express a bit of frustration that you have yet again brought up a straw man that I have repeatedly explained to you is a complete misrepresentation of my point.

    You write:
    The second area of disagreement concerns what I consider the fallacy or focusing solely on the deficit number.

    Who in the world is focusing solely on the deficit number? Certainly not me. We’ve been over this before, repeatedly. I’m not just saying that the deficit impact is the same regardless of which form the subsidy takes, I’m saying that everything substantive is the same — everyone’s incentives, financial effects on all parties (the people receiving the subsidy, the Treasury, other taxpayers, and any other party), the basis for those effects (purchasing Product X), and anything else you can think of because it’s just math. For whatever reason you aren’t getting this equivalence even after I laid it out in the very simple form of my 12:31am comment. Yet for some reason throughout our discussions of this topic you have periodically resurrected that straw man characterization of my point as saying that the two (a given subsidy in one form vs. the other) are equivalent simply because they have the same deficit impact.

    Lastly (at least for now), you should remember the point I made on that Hennessey thread a while back http://keithhennessey.com/2010/03/03/budget-bubble-graphs/#IDComment59653317 (if you wish, you can also review my comment at http://dmarron.com/2010/02/08/the-problem-with-tax-expenditures/#comment-1841 which is largely a summary of my point, although nothing new to you). Suppose (just to pick numbers) revenues are 18% and explicit expenditures are 20% of GDP. Now take Scenario #1: a subsidy that is 1% of GDP is provided as a voucher, and is thus part of that 20% of explicit expenditures. Eliminating it (leaving aside dynamic effects) will mean “spending” of 19% and revenues of 18%. Scenario #2 is the same subsidy provided as tax expenditure. Removing it will result in “spending” still at 20% and revenues now at 19%. You would say there is a substantive difference between these two scenarios. You would be wrong. There simply isn’t. You should try to get beyond labels and insignificant cash flows and think this through, but for some reason you don’t want to.

  25. comment number 25 by: Brooks

    Steve,

    Oh, I do want to add:

    Re: I’ve never called you misinformed or your arguments irrelevant or invalid and you have repeated this same line repeatedly. This leads me to believe that you are not open to engaging or to having your mind changed but simply wish to convert me to your point of view by repeating the same line of logic over and over again.

    That’s a non sequitur. Why would my calling your points irrelevant or invalid imply that I’m not open to engaging or having my mind changed, etc. Have you considered the possibility that all those points — most of them repetition of or reflective of the same couple of conceptual errors in various forms — really were invalid or irrelevant, and at some point I just started speaking frankly and telling you so clearly and directly? And it’s certainly not the case (and I don’t think you’re suggesting it is) that I only kept calling your points irrelevant or invalid rather than providing explanations in each case as to why they were invalid or irrelevant. But I guess because I spoke frankly and called your point here a “non sequitur” you will call that evidence that I’m not open to engaging or to having my mind changed, etc., which, as I’ve explained, would be a non sequitur (darn, I keep proving that I’m totally closed-minded).

  26. comment number 26 by: SteveinCH

    Brooks,

    Please don’t bother. We’d both be better served to let this drop.

  27. comment number 27 by: Brooks

    ok. No hard feelings I hope. No offense intended.

  28. comment number 28 by: SteveinCH

    No worries and no hard feelings on my end.

  29. comment number 29 by: VAT Brat

    ATM Brat,

    You appear to misunderstand how a Debt Limit Referendum would operate by making an analogy of California with the Federal Government. In California, voters get to vote to AUTHORIZE the issuance of bonds. The decision to actually issue the bonds to raise capital is left to the Legislature and the Treasurer. California currently does not have a Debt Limit Referendum.

    With a Debt Limit Referendum (see http://www.thepeoplesdebt.com ) voters in California could authorize trillions of dollars of bonds, but bonds could not be issued if the outstanding debt were to exceed the approved debt ceiling.

    It’s an important distinction.

  30. comment number 30 by: Bob Bogus

    Yer right, Eco Mom. We gotta have a VAT.

    Heck, we could NEVER cut spedning.

    After all the banksters need their bailouts and all the gummymint employees need to make twice as much as those in the private sector.

    And of course there’s millions more brown people for our gunverment to murder in the Middle East and Central Asia.

    The Empire barrels on…and will roll right over the taxpayers.

  31. comment number 31 by: Bob Bogus

    But seriously, Eco Mom…you’re an idiot.

    Allowing the criminals in DC to steal even more of our money will only encourage them to spend even more.

    No matter how much they take it’s never enough…it’s time for the taxpayers to stand up to these buggers and tell them to go straight to h e l l.