AEI: The VAT is back (but don’t use the V word)

[randomname]

AEI: The VAT is back (but don’t use the V word)

Alan D. Virard

In a Wall Street Journal op-ed today, Senator Rand Paul (R-KY) unveiled his plan to “blow up the tax code and start over.” His plan makes him the most recent public figure to propose a value added tax (VAT).

Senator Paul’s plan would repeal the Social Security and Medicare payroll and self-employment taxes, the corporate income tax, the estate and gift tax, tariffs, and some excise taxes. And, it would dramatically reduce individual income taxes, slashing rates to a flat 14.5% and offering a $50,000 exemption for a family of four while maintaining the earned income tax credit and the child tax credit.

Of course, repealing and reducing those taxes would cause a large revenue loss. The plan would make up a little of the revenue loss by eliminating income tax deductions, other than for charitable contributions and mortgage interest. It would look to unspecified spending cuts to make up part of the revenue loss. But, the plan’s biggest revenue offset is a new 14.5% VAT.

If enough spending cuts come through to reach budget neutrality, the plan would significantly accelerate economic growth by dramatically reducing the tax code’s worst distortion, its penalty on saving and investment. But, this advantage would disappear if, as is likely, the unspecified spending cuts failed to materialize. In that case, the resulting deficits would crowd out investment, undoing the gains from the improved tax incentives.

If the plan includes enough spending cuts to make it budget-neutral, it would shift the fiscal burden downward. Those at the top of the income distribution would receive large tax cuts. Households lower in the distribution would make up the difference, bearing fiscal burdens from the spending cuts and the VAT that would outweigh their payroll tax relief.

By proposing a VAT, Senator Paul is following in the footsteps of Herman Cain, who proposed a 9% VAT (accompanied by a 9% retail sales tax) in the 2012 presidential campaign. Unfortunately, he’s following Mr. Cain’s footsteps in another respect, by steering clear of the V word and calling his VAT a “business activity tax.” Four years ago, I commented, “The biggest issue is one of truth in labeling. Mr. Cain should level with the voters by explaining that he’s proposing a VAT and allow them to weigh the advantages and disadvantages of this approach.” Today, I offer that same advice to Senator Paul.

https://ww w.aei.org/publication/the-vat-is-back-but-dont-use-the-v-word/

 

[GunnyFreedom]

Doesn't a VAT require a tax on sales and purchases to you know, actually be a VAT?

 

[luctor-et-emergo]

Doesn't a VAT require a tax on sales and purchases to you know, actually be a VAT?

VAT and Sales Tax are essentially the same yes. Taxation at point of sale. I am as amazed as you are, either Rand forgot to mention a VAT or the person who wrote this article has no idea what he's talking about.

 

[randomname]

Redstate http://www.redstate.com/diary/alanjoelny/2015/06/18/rand-paul-daniel-mitchell-vat/

Daniel Mitchell, a libertarian economist and Senior Fellow at the CATO Institute, offered an overall positive review of Sen. Rand Paul (R-KY) 83%'s tax plan that was released today. He had three minor quibbles and one major concern with the proposal. It his his evaluation of Sen. Rand Paul (R-KY) 83%'s 14.5% business activity tax that is the interesting point for discussion -- Mitchell asserts is a Value-Added Tax (VAT) for all intents and purposes.

Paul's argues that he "would also apply this uniform 14.5% business-activity tax on all companies…. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules."

As Mitchell points out, the high corporate tax rate (35%) would be reduced down to 14.5% which is obviously a great thing. His bone of contention is the “business-activity tax doesn’t allow a deduction for wages and salaries" and therefore, "he is turning the corporate income tax into a value-added tax (VAT)." In theory, he argues, a VAT would not be a terrible thing because "is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax."

However, the VAT's place in other economies have proven to be, as Mitchell suggests, "a money machine for big government", and therefore Mitchell cautions against its implementation in the United States.

Mitchell contends,

"The VAT helped finance the giant expansion of the welfare state in Europe. And the VAT is now being used to enable ever-bigger government in Japan. Heck, even the IMF has provided evidence (albeit inadvertently) that the VAT is a money machine. All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.

Indeed, this is why I was critical of Herman Cain’s 9-9-9 plan four years ago. It’s why I’ve been leery of Congressman Rep. Paul Ryan (R-WI) 59%’s otherwise very admirable Roadmap plan. And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.

These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control. Particularly when there are safer ways of achieving the same objectives."
Mitchell gives an alternative suggestion for reforming the corporate part of the tax code. He calls for "an incremental reform", consisting of the following:

--Lower the corporate tax rate
--Replace depreciation with expensing
--Replace worldwide taxation with territorial taxation

His suggestion is that if there is enough support within Congress to potentially reform the corporate income tax (and replace it with a VAT), there should also be support for an alternative reform done incrementally, which would be far better in the long run than introducing a VAT for good.

So are Mitchell's concerns about Paul's "business activity tax" valid? Is it essentially a VAT? Pretty much. The VAT gets added to products along the way in the process of production and distribution, and is ultimately passed on to the consumer in the form of the final price.

One could certainly argue that the VAT is not a positive solution for reasons such as the fact that European economies which have the VAT are also in shambles. Also, though many of the VATs started out small, most VATs average nearly 20%. That would likely happen here too -- while we still continue to collect an income tax. What's more, it also tends to disproportionately affect small businesses because they often can't pass along the cost increases associated with the VAT, and compliance will be burdensome and expensive.

Overall, though, Mitchell was pleased with Sen. Rand Paul (R-KY) 83%'s plan, which is to be expected from a fellow libertarian economist. His points about the business activity tax are fair, but Paul's roadmap is overall a decent one.

 

[Occam's Banana]

Redstate http://www.redstate.com/diary/alanjoelny/2015/06/18/rand-paul-daniel-mitchell-vat/

"Overall, this is a nice box of chocolates - even though one of the chocolates is nasty and poisonous ..."

*sigh*

 

[Suzanimal]

From what I've heard, I'm not crazy about Rand's tax plan. I'd like to see taxes a lot flatter and I loathe the idea of a VAT or “business activity tax”. I would like to hear more details from the Rand camp on this before I make a final judgement.

Lew Rockwell touched on this in Political Theatre last week, there are a lot of links in his post that are worth looking over.

The Rand Tax
By Llewellyn H. Rockwell, Jr.
June 19, 2015

A flat tax is even worse than the present system, as Murray Rothbard and Laurence Vance have pointed out. As Laurence also points, beware of anything called a fair tax. Taxation is the taking, with the threat of violence (and imposition of violence), other people’a money. It’s why Murray called the state a “gang of thieves writ large,” Beware also of claims to abolish the IRS, since the regime must still take people’s money by force. And since Rand’s tax plan is also a VAT, see here and here–as long advocated by big-government Heritage Foundation types–there will have to be an even larger and much more intrusive theft bureauracy.

Unfortunately, Rand’s chief advisor on this is Art Laffer. When I first went to work for Ron Paul, he was kind enough to take me to a congressional talk by Art. He assured the assembled vultures that he had no interest in cutting taxes per se. “I’m a liberal Democrat; I want more welfare spending,” he said. The point of the Laffer Curve was to set tax rates so the government would get the maximum revenue, and raising tax rates above that point would cut government revenue, and that would be bad. For more on VAT and other burglarizing devices, see Rothbard here and here.

https://www.lewrockwell.com/political-theatre/the-rand-tax/

 

[GunnyFreedom]

VAT and Sales Tax are essentially the same yes. Taxation at point of sale. I am as amazed as you are, either Rand forgot to mention a VAT or the person who wrote this article has no idea what he's talking about.

We may be the only two people in this whole thread who know what a VAT is. Even Lew Rockwell is trying to take a revenue-minus-expense tax and call it a VAT. I guess at some point when I wasn't looking I got on the train to crazy-town?

 

[puppetmaster]

All corporate taxes turn into a VAT.

 

[cindy25]

VAT and Sales Tax are essentially the same yes. Taxation at point of sale. I am as amazed as you are, either Rand forgot to mention a VAT or the person who wrote this article has no idea what he's talking about.

not really. a sales tax is paid once, by the final consumer. the VAT is paid all the way up the line from importer to wholesaler to retailer to consumer.

 

[GunnyFreedom]

All corporate taxes turn into a VAT.

That's not even vaguely similar to something that might be mistaken as truth. A VAT is a very specific thing that levies a sales tax on the raw petroleum which is formed into plastic; then a sales tax on the raw plastic which is molded into parts. Then a sales tax on the parts that are put inside of a device. Then a sales tax on a device that is put inside a car. Then a sales tax on the car which you buy. So that one little plastic doo-hickey was essentially taxed 5 times.

You can argue whether a corporate income tax is good, bad, or indifferent, but it is not a VAT. A VAT is a very specific thing, and the idea that 'all taxes become a VAT' is absurd. Only a VAT becomes a VAT.

 

[Brian4Liberty]

This criticism came up as soon as Rand made the proposal. From the unbiased [/sarc] sources at the New York Times:

And over at the New York Times, they are already screaming that they need more deductions:

http://www.nytimes.com/2015/06/19/upshot/rand-paul-and-the-vat-that-dare-not-speak-its-name.html

And now we have a story from the neoconservative AEI.

http://www.rightweb.irc-online.org/profile/american_enterprise_institute

The agenda of these sources is clear.

I haven't had time to research any of this, but as a general rule, there are comparisons and contrasts to be made on different taxing schemes. What is more important is how those comparisons or contrasts are used to spin the story.

 

[randomname]

Stephen Moore on this:

Opponents are saying this is a European-style value added tax. Wrong. In Europe, Vats were imposed in top of corrupt and high rate income tax structures. This plan is not an add-on tax, but a replacement consumption tax that will reduce, not add to the size of the welfare state.

Would this hike the deficit? The Tax Foundation says 2 million jobs would be added and the GDP would be 10 percent larger after a decade under this plan. This means in a decade the United States would have about $2.5 trillion a year more output, and the added jobs and income will add to tax collections. This is right out of the JFK and Ronald Reagan play book: grow the economy to increase revenues.

Some skeptics at The New York Times and elsewhere are complaining that the Flat and Fair Tax can’t work in practice. Consider the Hong Kong experiment. More than half a century ago Hong Kong adopted a 15 percent flat tax and has been a glittering model of prosperity and tax efficiency ever since. Hong Kong is now one of the wealthiest places on the globe thanks in part to low tax rates and tax simplicity.

Read more: http://www.washingtontimes.com/news/2015/jun/21/stephen-moore-rand-pauls-fair-and-flat-cuts-taxes-/

 

[ClydeCoulter]

VAT is Tax on Tax on Tax on Tax....

 

[Krugminator2]

LEW ROCKWELL
A flat tax is even worse than the present system, as Murray Rothbard and Laurence Vancehave pointed out. As Laurence also points, beware of anything called a fair tax. Taxation is the taking, with the threat of violence (and imposition of violence), other people’a money. It’s why Murray called the state a “gang of thieves writ large,” Beware also of claims to abolish the IRS, since the regime must still take people’s money by force. And since Rand’s tax plan is also a VAT, see here and here–as long advocated by big-government Heritage Foundation types–there will have to be an even larger and much more intrusive theft bureauracy.

Unfortunately, Rand’s chief advisor on this is Art Laffer. When I first went to work for Ron Paul, he was kind enough to take me to a congressional talk by Art. He assured the assembled vultures that he had no interest in cutting taxes per se. “I’m a liberal Democrat; I want more welfare spending,” he said. The point of the Laffer Curve was to set tax rates so the government would get the maximum revenue, and raising tax rates above that point would cut government revenue, and that would be bad. For more on VAT and other burglarizing devices, see Rothbard here and here.

We have a tax. We have a government. Wishing there were no tax or a government to fund will not make it so. A flat tax creates the fewest distortions. The goal of a tax is to raise revenue for the government with as little damage to economic activity as possible. Nothing Murray Rothbard said remotely refutes a flat tax. His argument, pealing back the layers, is government is bad and any way to limit government access to tax dollars is good. His argument has nothing to do with economics or how spending works. fil

This nostalgia for tax loopholes is ridiculous. A loophole doesn't mean government spends and taxes less. It means everyone else picks up the tab for someone getting a special favor from government. Government is going to spend no matter how much revenue it brings in. Spending and taxes are different issues. And Rand's plan has nothing to do with the Laffer Curve or maximizing tax revenue. He plan brings in less revenue. And consumption taxes are not evil. A VAT in and of itself is not bad.

 

[r3volution 3.0]

There seems to be some confusion about what a VAT is.

Both corporate income tax and VAT are taxes on corporate profits (revenues minus costs). The differences are:

(1) A VAT can be collected much more efficiently (read: fewer bureaucrats, lower IRS budget), for slightly complicated reasons that I'll be happy to explain if anyone cares.

and (2) The VAT does not allow corporation's a deduction for labor costs, while corporate income taxes typically do.

A VAT is superior to a corporate income tax.

The usual conservative argument against VAT is "that'll just give the government another way to tax us!" Well, first, the government does need another way to tax you. It can just raise existing taxes. Creating a new kind of tax doesn't make it an easier for the government to increase the total level of taxation. Second, even if there were merit in that argument against creating a new kind of tax, Rand's proposal (assuming it is a VAT) don't just add a VAT, it replaces an existing tax with the VAT - in Rand's case, the payroll tax (poof, gone).

That said, I see no evidence that Rand is proposing a VAT.

Certainly this article didn't explain how it's a VAT the author the just asserted that it is).

It sounds to me like he's proposing a simplified, flat-rate corporate income tax (which is an improvement).

Regardless, this is much ado about nothing, and richly deserves to live here in Spin, Chafe, and Flak.

 

[r3volution 3.0]

VAT is Tax on Tax on Tax on Tax....

No, the idea that VAT means higher taxes because each step of the production process is taxed is based on a misunderstanding of how it works.

Aside from the mechanics of how the tax is collected (in which VAT is far superior - fewer employees needed at the IRS), it's basically like a sales tax. Under VAT, you tax each little bit of "value-added" (= profits of producer) at each step as a product works its way through the production process (e.g. mine, to factory, to distributor, to retail). While a sales tax effectively taxes all of those bits of added-value combined once, at the final point of sale.

In other words, it's a like having a bunch of little sales taxes throughout the production process, instead of one big sales tax at the end.

Makes no difference, except (as I said above) in terms of the efficiency of collection, where VAT is superior.

...BUT BUT BUT, then it's like a national sales tax, which is also evil, because it raises prices for consumers!

Any tax on producers (like corporate income tax) raises prices for consumers. The only difference is whether that added cost is already built into the price of the product (as with a corporate income tax) or whether it is added on separately at the register (as with a sales tax). People hate the latter most, since they can see it, but - I assure you - that tax is still there under other systems.

 

[erowe1]

We may be the only two people in this whole thread who know what a VAT is. Even Lew Rockwell is trying to take a revenue-minus-expense tax and call it a VAT. I guess at some point when I wasn't looking I got on the train to crazy-town?

It's not just revenue-minus-expenses, but revenue-minus-certain-expenses.

The likeness to a VAT depends on what those expenses include.

If raw materials are not included in the exempted expenses, then isn't at least part of the tax essentially a VAT on those raw materials?

 

[GunnyFreedom]

It's not just revenue-minus-expenses, but revenue-minus-certain-expenses.

The likeness to a VAT depends on what those expenses include.

If raw materials are not included in the exempted expenses, then isn't at least part of the tax essentially a VAT on those raw materials?

No, even if you exempted NONE of the expenses it would still just be a revenue tax, not a VAT. To be a VAT you have to tax the purchase/sale of such raw materials. That is not what is being proposed, so far as I know with the limited data we have been given.

The only thing that the exemption for expenses does, is lower the taxable revenue closer to the profit-only amount.

 

[erowe1]

And consumption taxes are not evil. A VAT in and of itself is not bad.

How can you possibly believe these statements?

 

[Krugminator2]

How can you possibly believe these statements?

Ultimately the consumer pays the entire VAT. Taxes on income as well as investment directly discourage production and innovation. A tax on consumption directly discourages spending. If I'm choosing one or the other I would rather consumption be directly disincentivized over production.