FairerTax
Sane people everywhere have been pooping on the FairTax. But Brad DeLong raises a fair point:
From one perspective, you have to wish Huckabee, and the other FairTax backers in the Republican field, well. All of the GOP’s second-tier candidates — Alan Keyes, Duncan Hunter and Ron Paul — are FairTax proponents, as was the recently departed Tom Tancredo. The other major Republican candidates, including John McCain and Mitt Romney, are all singing the same old song. They are promising a) income tax cuts and b) expanded government services because c) they are willing to claim that cutting income tax rates will trigger so much extra economic growth that revenues will not suffer but will instead expand. One way or another, all the GOP front-runners except Huckabee are lying. They are either a) lying to their supporters who want tax cuts or b) lying to their supporters who want expanded government or c) lying to everybody, perhaps themselves included.
Actually, McCain has forcefully argued that we need to cut government spending, and that the lack of spending cuts is why he opposed the first round of Bush tax cuts, but let’s not split hairs. The basic point is right: the non-FairTax plans are in some respects worse than the FairTax.
So is there a better way? Yes, but it’s probably not a political winner. A few weeks ago I read Michael Graetz’s 100 Million Unnecessary Returns, in which Graetz renews his case for a comprehensive tax overhaul. At the risk of oversimplifying Graetz’s proposal, he calls for a 10-14 percent VAT that would fund an income tax exemption of $50,000 for single earners and $100,000 for married couples. Above that amount there would be a single rate of tax, 20-25 percent, for all income, including corporate income. The EITC and other measures designed to protect low-income families would be be replaced by refundable credits against payroll taxes.
The political danger is anti-VAT hysteria. Used in virtually all advanced industrial democracies, the VAT has been attacked as regressive and as a chillingly effective revenue-raising machine. Payroll tax credits and the elimination of income taxes for working families will keep the system progressive, and transparency will help keep the VAT from becoming an all-devouring tax monster. The relative efficiency of the VAT is often used as an argument against it, as though voters won’t resist VAT hikes.
The political promise is that the GraetzTax will deliver what the FairTax cannot: an income-tax-free existence for most Americans and a steady stream of revenue.
What’s that quote again? The VAT won’t pass because Republicans think it helps raise taxes and Democrats think it’s regressive; the VAT will pass when Republicans realize it’s regressive and Democrats realize it helps raise taxes.
I’ve never been an enthusiastic proponent of the VAT. I hate “stealth” taxes. The people aren’t going to rebel if you raise the VAT one point to pay for some new entitlements, the way they would if you had to raise the same amount from income taxes, and this is dangerous, because eternal popular vigilance is the price of low taxes.
Furthermore, most proponents of the VAT are in favor of it because they want to boost savings, boost savings, boost savings. I never understood this obsession with many people (most of them left of center op-ed writers), when the American (and therefore, for a little while still, global) economy is largely powered by the American people’s relentless drive to consume. This seems more of an ideological fixation on the bourgeois virtues of saving (of which I am not convinced) and on the ills of “consumer society” than anything rational.
All that being said, I have to recognize the evidence that the VAT is a fantastic instrument of fiscal policy, one of the most effective and least distortionary. Besides, I don’t think that even a Denmark style 25% VAT would reduce the American people’s drive to buy stuff (by the way, this is also why I’m also skeptical about socially engineering away the suburbs via fuel taxes: cars are so much part of the American culture, people are just going to buy fuel for their cars).
Most importantly, the VAT is a much more appealing alternative to that superbad, comic book villains of distortionary stealth taxes: payroll taxes.
So yeah, I support the VAT, but do not exactly share the enthusiasm of many proponents. And all that being said, I think the GraetzTax is a very interesting proposal.
— PEG · Jan 8, 08:05 AM · #
I am intrigued with the idea of levying a VAT. Pat Buchanan has pointed out that foreign nations rebate their manufacturers VAT payments for exports to the US while American exports to their nation have to pay the VAT. Would levying a VAT help US manufacturing?
— VanillaThunder · Jan 8, 08:22 AM · #
I’m one of those left of center(traditional conservative right of center?) nuts who thinks that America’s consumer culture is unsustainable, and also thinks that if things are more expensive, Americans will spend a smaller portion of their income. Restoring US savings (thus reducing the current account deficit) will also make it so that we don’t we don’t need to rely an unsustainably strong dollar. And it looks like Graetz does a good job of ensuring it is progressive through payroll-tax rebates, although I would wonder how he plans to funds entitlements. This is the kind of tax policy I dream about, when I have those exciting tax policy dreams.
— Zak · Jan 8, 06:01 PM · #