Tag: taxation

The Value-Added Tax Must Be Stopped - Unless We Want America to Become Greece

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

Deconstructing the Revenue Side of Obama’s Budget

I looked yesterday at the spending side of Obama’s budget and found some good news and bad news. The good news was the absence of any big new initiative to expand the burden of government. That’s a welcome relief since the past couple of years have featured budget busting proposals such as the so-called stimulus scheme and a government-run healthcare plan.

The bad news is that the budget does nothing to undo any of the damage of the past two years. Nor does it undo any of the damage of the previous eight years. And because the President’s budget refuses to address entitlement spending, it certainly doesn’t do anything to avert the damage of rapidly expanding budgets over the next several decades.

Now let’s look at the tax side of the fiscal equation. In large part, the White House is recycling class warfare ideas from last year’s budget. The President wants higher tax rates, including higher taxes on investors, entrepreneurs, and small business owners. He also wants to increase the tax burden of American companies that are competing for market share in global markets.

These are remarkably misguided proposals. But what’s especially disappointing is that the Administration stuck with these bad ideas when the President’s own fiscal commission proposed lower tax rates and base broadening. Those proposals would have increased the overall tax burden, so they definitely were not pure supply-side economics. And the Commission also proposed an increase in the double taxation of saving and investment, which also would be unfortunate.

But at least the Commission proposed to do the wrong thing in a good way. Yes, taxes would have increased, but the damage would have been ameliorated by a better tax structure. Obama’s budget, by contrast, does the wrong thing in the worst way - increasing the tax burden while also making the tax system more unfair.

It’s also worth noting that the President decided to punt on the issue of corporate tax reform. This is remarkable since even he acknowledged during his State-of-the-Union address that America’s corporate tax rate is far too high in a competitive global economy.

Last but not least, it’s worth noting that Obama’s budget shows that tax revenues will rise above their long-run average of 18 percent of GDP - even if taxes are not increased by one penny.

America’s budget problem is too much spending, period.

To Fix the Budget, Bring Back Reagan…or Even Clinton

President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

Obama the Born-again Budget Cutter?!?

Chalk up another victory – at least on the rhetorical level – for the Tea Party.

President Obama will release his fiscal year 2012 budget tomorrow and he’s apparently become a born-again fiscal conservative. Here are some excerpts from a Washington Post story:

President Obama will respond to a Republican push for a drastic reduction in government spending by proposing sharp cuts of his own in a fiscal 2012 budget blueprint that aims to trim record federal deficits by $1.1 trillion over the next decade. …two-thirds of the savings would come from spending cuts that are draconian by Democratic standards… When it lands Monday on Capitol Hill, Obama’s plan will launch a bidding war with Republicans over how deeply and swiftly to cut, as the two parties seek a path to fiscal stability for a nation awash in red ink.

I’m skeptical of battlefield conversions, particularly when politicians utilize the dishonest Washington definition of a budget cutincreasing spending by less than previously planned. So the first thing I’ll do when the budget is released is to visit the Historical Tables of the Budget website and see what spending is projected to be in 2011 and what Obama is asking for in 2012.

Those numbers probably won’t be accurate since the Obama administration (like previous ones) will use best-case assumptions, but at least we’ll get a sense of whether:

a) spending actually is being cut (I’m not holding my breath for this miracle), or

b) spending is frozen at current levels (this approach would balance the budget by 2017, but it’s almost as unlikely at the first option), or

c) spending is being restrained (perhaps 2 percent growth, enough to keep pace with inflation), or

d) spending is growing far too fast (say 4 percent growth, pushing America quickly in the wrong direction), or

e) spending is continuing to explode (5 percent growth, 6 percent growth, or even more, meaning we’ll be Greece sooner than we think).

My guess, for what it’s worth, is that the Obama administration will claim (d) but will actually be proposing (e) if more realistic assumptions are used.

Needless to say, I hope I’m wrong. But other parts of the Washington Post story give me little reason for hope. The White House apparently is ignoring entitlements. Heck, the administration apparently isn’t even planning on meeting the President’s own deficit goal.

The blueprint ducks the harder task of tackling the biggest drivers of future deficits: Social Security, Medicare and Medicaid… Obama’s blueprint does not even hit the short-term goal he set for his commission - reducing deficits to 3 percent of the economy by 2015.

The White House also plans to play a shell game with certain parts of the budget. Supposed spending cuts in health care won’t generate taxpayer savings. Instead, they’ll be used to finance more spending on Medicare, enabling the President to cancel savings that were promised as part of Obamacare. The interest groups win and the taxpayers lose.

The Obama blueprint also seeks to eliminate two budget gimmicks that Congress has long used to mask the true depth of the red ink: His proposal would offset higher Medicare payments to doctors by cutting $62 billion from other areas of federal health spending. And it would adjust the alternative minimum tax through 2014 to prevent it from hitting middle-class taxpayers, covering the cost by limiting the value of itemized deductions such as charitable contributions and mortgage interest for wealthy households.

The same shell game takes place on the tax side of the fiscal ledger. The White House plans to cancel one future tax increase and “pay” for that change by imposing another future tax increase. Once again, taxpayers get the short end of the stick.

Unless the Washington Post story is completely inaccurate, the Obama administration is not changing course. There may not be any major initiatives to expand the burden of government, like the failed stimulus or the budget busting government-run healthcare scheme, but it certainly does not seem like there are any plans to reverse direction and shrink the burden of government.

The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s

Proponents of higher taxes are fond of claiming that Bill Clinton’s 1993 tax increase was a big success because of budget surpluses that began in 1998.

That’s certainly a plausible hypothesis, and I’m already on record arguing that Clinton’s economic record was much better than Bush’s performance.

But this specific assertion it is not supported by the data. In February of 1995, 18 months after the tax increase was signed into law, President Clinton’s Office of Management and Budget issued projections of deficits for the next five years if existing policy was maintained (a “baseline” forecast). As the chart illustrates, OMB estimated that future deficits would be about $200 billion and would slightly increase over the five-year period.

In other words, even the Clinton Administration, which presumably had a big incentive to claim that the tax increase would be successful, admitted 18 months after the law was approved that there was no expectation of a budget surplus. For what it’s worth, the Congressional Budget Office forecast, issued about the same time, showed very similar numbers.

Since the Clinton Administration’s own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.

Fortunately, there’s no need for an exhaustive investigation. The Historical Tables on OMB’s website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses.

Republicans say the credit belongs to the GOP Congress that took charge in early 1995. Democrats say it was because of Bill Clinton. But all that really matters is that the burden of federal spending grew very slowly. Not only was there spending restraint, but Congress and the White House agreed on a fairly substantial tax cut in 1997.

To sum things up, it turns out that spending restraint and lower taxes are a recipe for good fiscal policy. This second chart modifies the first chart, showing actual deficits under this small-government approach compared to the OMB and CBO forecasts of what would have happened under Clinton’s tax-and-spend baseline.

Four Reasons Why Big Government Is Bad Government

A new video from the Center for Freedom and Prosperity gives four reasons why big government is bad fiscal policy.

I particularly like the explanation of how government spending undermines growth by diverting labor and capital from the productive sector of the economy.

Some cynics, though, say that it is futile to make arguments for good policy. They claim that politicians make bad fiscal decisions because of short-term considerations such as vote buying and raising campaign cash and that they don’t care about the consequences. There’s a lot of truth to this “public choice” analysis, but I don’t think it explains everything. Maybe I’m an optimist, but I think we would have better fiscal policy if more lawmakers, journalists, academics, and others grasped the common-sense arguments presented in this video.

And even if the cynics are right, we are more likely to have good policy if the American people more fully understand the damaging impact of excessive government. This is because politicians almost always will do what is necessary to stay in office. So if they think the American people are upset about wasteful spending and paying close attention, the politicians will be less likely to upset voters by funneling money to special interests.

For those who want additional information on the economics of government spending, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government. And this video explains that America’s fiscal problem is too much spending rather than too much debt (in other words, deficits are merely a symptom of an underlying problem of excessive spending).

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays.

Comparing Reaganomics and Obamanomics

Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).

The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.

The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.

The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.

None of this should be interpreted to mean Reagan is ready for sainthood. He made plenty of compromises during his eight years in office, and some of them were detours in the wrong direction. But the general direction was positive, which is why he’s the best President of my lifetime.*

*Though he may not be the best President of the 20th Century.