How To Starve The Beast With A VAT
France’s technocratic state has created many monsters but one of the great things it did for the world was when a polytechnicien and inspecteur des finances (one of the worst technocratic beasts one might imagine) invented the VAT in the 1950s. Perhaps it is by chauvinism that I like the idea of the VAT.
Uniquely among industrialized economies, the US doesn’t have a VAT. Part of the opposition comes from conservatives, but some conservative wonks frequently make the argument for a VAT, now recently with the esteemable Josh Barro.
In a characteristically clever post, Will Wilkinson responds with the usual conservative argument that a VAT is a “money machine” that would make it hard to “starve the beast.”
(There’s a DC joke that goes something like: “We can’t get a VAT because conservatives think it raises lots of revenue and liberals think it’s regressive; we’ll get a VAT once conservatives realize it’s regressive and liberals realize it raises tons of revenue.”)
I should say at the outset that I do have sympathy for conservative objections to the VAT. I have a soft spot for American exceptionalism (and national exceptionalism in general); generally, to me, the idea that a US policy stands out is a presumption for that policy, not against it. I also strongly agree with the conservative insight that taxes need to, to put it frankly, hurt. It needs to sting to send your money to the taxman, that way (conservative version) you’ll want lower taxes (kindlier, good-government version) you’ll want more accountability out of your dollars.
But this idea that taxes need to hurt, or at least be felt, is connected to another conservative meme which has recently resurfaced: the idea that there is some kind of injustice to the fact that a large number of Americans pay no income tax. If most people aren’t hurt by taxes, they’ll demand ever more taxes on Other People to pay for ever more services that they don’t pay for directly. I have a lot of sympathy for that idea. It’s also one reason why I am such a staunch opponent of payroll taxes (the other being that it’s a tax on jobs).
I remember when I was a teenager and a student, I would argue to family members that taxes are great because they pay for public services and so on. (I think taxes should be low; still, they’re awesome.) The inevitable patronizing response would come: “You’ll see, you’ll feel differently when you have to pay taxes.” This would send me into fits of boiling anger. First of all, was the presumption that I couldn’t—that no one should—differentiate between my own particular situation/interest and the general interest. But most of all, I would scream (inwardly, in most cases), I DO pay taxes! Every day! Twenty cents out of every franc/euro I spend goes to the government in VAT!
And indeed, when Republican politicians opine that lots of people “don’t pay tax”, a lot of wonks would note that most who don’t pay income tax do pay various other taxes, and those that don’t are so poor that it would be cruel (and impractical) to force them to.
What does this all have to do with VAT?
Well, if you want to achieve the conservative policy goal of making most people “feel” taxes and even have them hurt a little bit, you should have a VAT. But you should do it right: along with the VAT, you should mandate that all prices be shown pre-tax (as it already is in most US states for sales tax, I believe), and forbid the showing of post-tax prices.
Whenever someone buys something, they would have to do some basic arithmetic (and forcing all Americans to jog their brains by doing basic arithmetic on a daily basis would certainly be a judicious policy achievement in itself) and think about how much of their money goes to the tax man. It would ingrain in everyone that things have a “real” price, plus money that goes to Uncle Sam that they have to pay on top of it. And that daily reminder would be associated with the minute, but real pain of having to do math in your head, which is unpleasant for the vast majority of people. (Heck, it is for me, and I have a job that requires non-trivial numeracy and involves lots of playing with numbers.)
It’s obviously impossible to be 100% sure (Jim Manzi would have to design an experiment), but I’m inclined to think that in such a context, citizens would be highly attuned to proposed raises in the VAT, since they’d have to compute new numbers several times a day, and more inclined to demand accountability for the newly-raised dollars.
You would also achieve the conservative/good-government goal of making everyone, not just a few, feel/realize that they and everyone else are paying into the Treasury for common goods, instead of a nebulous Other paying for their services.
Bleah! Federal taxes should be progressive. Let the states do the regressive taxation, since the rich dodge state taxes more easily than federal. Then get the federal government out of the business of local education, local policing, roads, and welfare(other than a prebate/citizen dividend). We return to federalism and answer the objection Progressives had to federalism a century ago.
This conservative meme that federal taxes need to hit everyone is resulting in less federalism and more federal government control of everything.
— Carl · May 4, 12:01 PM · #
And what do you do after you’ve destroyed the economy? Shrinking government sure is doing wonders for Europe!
— Freddie · May 4, 05:18 PM · #
Freddie,
I read your blog on a regular basis (I’m a bit of masochist) and I know one of your recurring themes is that bloggers need to be aware of basic facts before they start dropping rhetorical bombs on their readers. So, when you say “shrinking government sure is doing wonders for Europe” in a sarcastic manner, I assume you must be thinking of real world examples of European governments who have recently dramatically shrunk the size of their governments and as a result ‘damaged’ (or even worse, ‘destroyed’) their economies. If you can provide a few examples I’d be delighted, because otherwise, I suspect you’ve read a couple of Krugman columns (you can’t trust that Nobel-prize winning hack) and believe that European “austerity” today means dramatically shrinking government. If only. Unfortunately, it mostly means raising taxes and slowing down the rate of expenditure on government. The economic literature suggests that real austerity (focused spending cuts on government) will in fact improve economic growth. Shame on you Freddie.
— Fake Herzog · May 6, 02:55 AM · #
So, as is often the case, Freddie and Fake Herzog, you appear to both be nuts. PEG doesn’t seem to be calling for “austerity” — potentially the opposite, at least in the short-term: he wants to give the government more money, and I suppose you could push it out the door on something (probably would have to, to pass the thing). It might or might not be contractionary and would surely discourage consumer spending (but not necessarily spending on net), but it’s not government austerity. He seems to be hoping that a regime under which people “feel” the bite of taxes might encourage a long-term questioning of the value of government services. I don’t think Paul Krugman or anyone else has a particular problem with that kind of long-term “austerity” — presumably we’re always fine-tuning what we want the government to do for us. Objecting to that as “austerity” seems to be a comical validation of a conservative trope about liberalism (granted, doing this kind of thing is the Freddie mode) — it’s saying, we must never ever encourage people to want government to shrink anywhere because “austerity” is bad! On the other hand, saying, no it’s all dandy to shrink government in defense of a column where PEG is advocating a broad new tax, is blowing off any actual reading or thinking to pound an ideological drum, so, FH is pretty much in his zone too.
Man, I hope the idea that somehow a VAT will help people figure is satire. As a kid I sure had fun figuring the Massachusetts 5% sales tax. But that’s because everyone was surprised when I did it, and plunked down the right change: I seemed like almost everybody didn’t bother except in the rare case one was not sure one carried exactly the right cash. Living in Northern California, where every damn county and sometimes town had slightly different sales taxes — as they still would with a federal VAT! — I gave up the practice as impossible since who knew what the tax rate was, and just had a crude sense about how much more something would pay, like everyone else seems to have. That worked, and so through other years and other states — well, I haven’t calculated a sales tax in a decade or more, maybe. Moreover, PEG seems to be arguing for a more not less complicated federal income tax code — because, man, that would give learn kids some figgerin’!
And, if that’s how you reacted as a teenager when told you don’t pay taxes, it’s because like all teenagers you were an ass. You paid taxes out of what your parents give you as allowance or let you keep of your earnings. Surely you conservative types would, in other contexts, understand exactly who is paying the taxes.
— Kieselguhr Kid · May 6, 11:01 PM · #
KK,
For the record, I may be crazy, but I don’t think responding directly to a crazy comment by Freddie puts me in that category. Everything you say in response to PEG is smart and wise and I endorse your comments 100%. However, there are different, economic reasons to support a VAT (or consumption taxes) over income or investment taxes that might make me inclined to support switching our system; but that is a totally different argument and a post for another day.
— Fake Herzog · May 7, 01:45 AM · #
“Austerity can never fail; it can only be failed.”
I think I preferred the firehose of viagra spam to Kid and Herzog’s mutual admiration party.
— Chet · May 7, 11:35 AM · #
Ah, Chetwad, always illiterate. I’m admiring FH where, exactly? I think he’s doing what he always does — harping on his pet theme even when it’s irrelevant. I’m happy to say he seems better-read than you, but that’s not really praise.
— Kieselguhr Kid · May 8, 11:18 AM · #
Alright, that’s a fair cop. The boot-licking here is his tongue on your boots and not the reverse. Mutual admiration was clearly an inaccurate choice of words.
— Chet · May 8, 03:40 PM · #
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