StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Bruce Bartlett and the VAT

08 Apr 2010
Posted by Bruce Bartlett

Until 2003, I was strongly opposed to a VAT mainly because I saw it as a “money machine” that would raise too much revenue too easily, thus fueling an expansion of government. Following are some of my attacks on the VAT.

Bruce Bartlett, “Revenue-Raising Redux: It’s VAT Time Again,” Wall Street Journal (August 2, 1984).
 
Bruce Bartlett, “The Case Against a Value-Added Tax,” Heritage Foundation Backgrounder No. 468 (November 5, 1985). Online here.
 
Bruce Bartlett, “Not VAT Again!” Wall Street Journal (April 16, 1993).
 
Bruce Bartlett, “Why a VAT Won’t Help U.S. Trade,” Wall Street Journal (August 30, 1993).
 
Bruce Bartlett, “How VAT Taxes Can Creep Up on You,” Washington Times (August 21, 1995).
 
Bruce Bartlett, “A Texan Take on Taxation,” Financial Times (September 1, 2000).
 
Bruce Bartlett, “Is There a VAT in Our Future?” Weekly Standard (June 4, 2001).
 
Bruce Bartlett, “Be Wary of the VAT Option,” Washington Times (October 30, 2002).
 
I started to change my mind in 2003 when a Republican Congress and George W. Bush rammed the Medicare drug benefit into law. At this point, I realized that it was no longer possible to restrain the growth of entitlement programs before it was too late. This led me to conclude that a massive tax increase was inevitable. I expressed my views on this topic in the following forums.
 
Bruce Bartlett, “Deficit Pressure Points,” Washington Times (October 20, 2003): “It is simply unrealistic to think a large deficit reduction plan can rely solely on budget cuts. Revenues will be on the table.”
 
David Wessel, “View from the Right: Tax Increases Ahead,” Wall Street Journal (February 19, 2004). I am quoted as saying, “These tax increases, when they come, are the result of conscious, deliberate decisions this administration has made.”
 
David R. Francis, “With Bush in Charge, Taxes May Still Rise,” Christian Science Monitor (March 19, 2004).
 
Bruce Bartlett, “When Push Comes to Taxes,” Washington Times (June 28, 2004).
 
Bruce Bartlett, “When Tax Cuts Lose to Spending,” Washington Times (July 25, 2004).
 
Bruce Bartlett, “The $250 Billion Tax Trap,” Fortune (August 9, 2004).
 
In August of 2004, I concluded that the magnitude of the tax increase that ultimately would be necessary to stabilize our national finances was too great to be achieved through higher income taxes. Tax rates would have to rise to levels that would have seriously negative effects on the economy. Therefore, we had to seriously consider the VAT because it has a long record of being able to raise substantial revenues at relatively low deadweight cost (the lost output over and above the tax take). In other words, we now needed a “money machine.” Following are a few of the places I have explained my new thinking about the VAT.
 
Bruce Bartlett, “A New Money Machine for the U.S.” Los Angeles Times (August 29, 2004). Online here.
 
Bruce Bartlett, “Tax Advice for Mr. Bush: Consider the VAT,” Fortune (December 13, 2004). Online here.
 
Bruce Bartlett, “Agenda for Tax Reform,” Tax Notes (December 13, 2004). Online here. This is a paper that was commissioned by the Ripon Society that I cannot now find on its web site.
 
Bruce Bartlett, “Want Reform? Talk to Bill,” Fortune (February 21, 2005).
 
Bruce Bartlett, “VAT Isn’t ‘Money Machine’ That Many Critics Maintain,” Investor’s Business Daily (March 11, 2005). Looking more carefully at the data, I concluded that the “money machine” problem mainly resulted from the inflation of the 1970s, which made it too easy for governments to raise VAT rates without much notice. During periods of low inflation, there was no evidence of rising VAT rates.
 
Bruce Bartlett, “Feed the Beast,” New York Times (April 6, 2005). Online here.
 
Bruce Bartlett, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (New York: Doubleday, 2006): chapter 9.
 
Bruce Bartlett, “VAT Time?” Forbes (June 5, 2009). Online here.
 
Bruce Bartlett, “Support the VAT,” Forbes (October 23, 2009). Online here.
 
I would like to strongly emphasize that I have not flip-flopped; I changed my mind in light of changed circumstances and further thought.

VAT change of heart

Are you trying to dog-whistle to Keynesians? ("When circumstances change, I change my opinion. What do you do?")


Raising the cost of most

Raising the cost of most things via a VAT would reduce consumption and lower the US standard of living. Both will be inevitable as this crisis plays itself out.


VATs in action

PIGS all have VATs: Portugal 20%, Italy 20%, Greece 21%, Spain 16%. The projected credit ratings of Germany, France and the UK don't look better than the US's because of their VATs either. So it doesn't appear that having a VAT secures fiscal soundness in any way at all.

Perhaps rather more like Friedman's dictum that politicians will spend all the money they can generate through taxes, then as much as possible more via deficits. (Typically 2% to 3% of GDP, the sustainable amount since GDP usually grows at about that rate annually. Looking at the deficit data for all the OECD countries since 1970, it is remarkable how consistently they average out to that level in the long run.) That's until the retirement tsunami hits, and then, being that they are already at their maximums...

Certainly nobody concerned about fiscal policy, left or right, should want to impose a VAT too soon, when politicians still have the freedom to spend it on things other than closing the long-term fiscal gap.

With their VAT revenue already consumed, what new, efficient tax do the PIGS have available to use to close their fiscal gaps today -- and what will Germany, France and the UK have in the 2020s?

At least the US will have a VAT available then, as long as we don't likewise waste it beforehand.

Small-government conservatives (if there are any left) should also put a hold on a VAT until they get equal value spending cuts from the other side, quid pro quo. Just as the 1983 closing of Social Security's insolvency gap was near exactly 50% benefit cuts and 50% tax increases.

There's nothing either "small-government conservative" or "fiscally secure" in simply enacting a VAT and hoping for the best. All these European examples prove both these facts.

None of them are escaping their retirement tsunami fiscal crisis by having a VAT -- and to the extent they've already consumed their VAT option to deal with it, they are all worse off than we are.

The implicit argument in the observation "All other OECD countries have VATs" is that they are in a better fiscal position than the US as a result. But that's not true. Most of those countries are in a worse position, especially in the long run. In good part because they have VATS and have already fully consumed them.


"When the facts change, I

"When the facts change, I change my mind. What do you do, Sir?" (John Maynard Keynes)


Taxes & Spending

The problem for conservatives is that they don't actually want to do anything to cut spending because that's politically unpopular. So they have talked themselves into believing that if they just keep taxes down and refuse to support new ones that spending will magically fall on its own. Until they leave this dream world and are willing to not only support really big spending cuts but work hard to get them enacted, I don't intend to pay much attention to them when they tell me how terrible the VAT is. Given the actions of Republicans over the last 10 years, they have zero--ZERO, ZERO, ZERO--credibility on the budget. Their record in power was to cut taxes willy nilly, enact every Republican sponsored pork barrel project no matter how worthless, create a massive new entitlement program to buy the votes of the elderly, start new wars without paying for a penny of the cost and then pull off a Big Lie worthy of Goebbels by claiming that they are the party of fiscal responsibility. Anyone who believes this is either stupid bordering on retardation, mind-numbingly ignorant of the facts, or a partisan whore who doesn't care anything about the truth as long as his side is winning.


Think Like an Economist instead of a Preacher

If it's so obvious that we are deficit spending our way into ruin, then (with the exception of Paul Ryan), why aren't Republicans and Democrats falling over themselves offering budget plans that eventually stop the flow of red ink?

When I read Mr. Bartlett, I get the feeling that I'm hearing the 1,000th sermon from a preacher who has been ignored 999 times before. We've got the Concord Coalition and several other think tanks illustrating the problem. You can heap blame on hypocritical Republicans or profligate Democrats, but what good does that do?

Here's the problem: Republicans and Democrats get more votes by ignoring the debt!

Nothing that Bruce writes about addresses why that happens. So he continues to moralize and act exasperated with dummies on the right. In short, he leaves his economics brain in a jar when he starts to write about politics and he replaces it with his preacher's brain.

Solution: change the incentives so that Democrats and Republicans get more votes by not ignoring the debt.

One way to change the incentives is to make voters accountable for the amount of public debt they're willing to tolerate. Force Congress to submit proposals to increase the debt ceiling to the voters for ratification in a referendum. If the voters really care about the public debt, then members of Congress will get the message. (See www.thepeoplesdebt.com for an example.)

Members will be forced to engage in the messy necessity of:

increasing Social Security retirement age
increasing age for Medicare eligibility
shifting federal programs in agriculture, education, housing, health, etc. to the states
making across the board increases in income tax rates, not just targeted at rich
institute a VAT

Provided that the voters truly care about the level of public debt, then Republicans and Democrats would be forced to actually propose what has heretofore been unthinkable policy options.

If the debt ceiling could not be automatically increased, then Republicans and Democrats would be forced to think mathematically instead of just politically. Pragmatism and the desire to win elections would drive out the ideologues and realism would have to come to the forefront.


Good in theory horrendous in practice

Your proposed constitutional amendment sounds great. One major problem - it would be a nightmare.

Everyone is opposed to the deficit in the abstract but when you break the spending into "buckets" a super majority is opposed to cutting spending on every "bucket" but foreign aid. Why? Because they recognize that doing so will harm them. Spending cuts mean social security checks, less education funding, less defense spending. No one wants that. So, they most likely would vote to continue the spending without increasing taxes. Sounds just like Congress, huh?

It also sets a dangerous precedent. If this one issue can be removed from Congress, what else can? Decisions on whether to wage war, whether to regulate or not regulate, social and civil rights, etc.


horrendous in practice?

Mike,
Opinions lose to mathematics every time. Congress will have to reconcile revenues with expenditures if they can't automatically raise the debt limit. If there is some other method of paying for expenditures when you have too few revenues and cannot issue debt, then we're all eager to learn how it could be done.

I've never hear someone complain that a balanced budget amendment was a dangerous precedent. However, when something more flexible and binding in effect like a Debt Limit Referendum is proposed, then the plebiscite and direct-democracy bogeymen are trotted out from Alexander Hamilton's closet. A Debt Limit Referendum is a CHECK upon Congressional power. It is not giving any authority to the voters to initiate legislation or spending. If you actually read the measure at www.thepeoplesdebt.com, then you'd see that was true.


I can't agree with you, Bruce.

I can't agree with you Bruce. I don't think extra income would help us lower deficits. I believe the problem isn't "not enough money" but rather consistently spending more than we make, regardless of what the income is.




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