Tag: Value-added tax

Taxpayers Alliance Video Explains Tax Freedom Day in the U.K.

The Taxpayers Alliance has a brief but compelling video, entitled “How long do you work for the tax man?,” which shows how an ordinary worker in the United Kingdom spends more than one-half his day laboring for government. “What will they tax next?” is still the best policy video to come out of the U.K., in my humble opinion, but this one is very much worth watching – especially since America is becoming more like Europe with each passing day.

What makes the video particularly depressing is that it only considers the tax burden. Regulations and government spending also are a burden on average workers, largely because of foregone economic growth.

England Is the New France

The chart below shows everything you need to know about why the United Kingdom is a fiscal disaster. Over the past 10 years, the burden of government spending has skyrocketed from 36.6 percent of GDP to more than 53 percent of GDP. Taxes, meanwhile, have remained largely unchanged, averaging about 40 percent of GDP.

Since the OECD numbers show that the fiscal crisis in the U.K. is solely the result of a bloated public sector, the obvious solution is … you guessed it, higher taxes.

David Cameron’s new coalition government has announced support for a higher capital gains tax and is signalling that this will be followed by an increase in the value-added tax.

There are some proposals to curtail the growth of spending, including some pay cuts for Prime Minster Cameron and other political figures, but I will be very surprised if those amount to more than window dressing. The United Kingdom, I fear, has gone past the point of no return in the journey toward becoming indistinguishable from the decrepit welfare states so common in the rest of Europe.

Don’t Give Up on the American People…at Least not Yet

Gloominess and despair are not uncommon traits among supporters of limited government – and with good reason. Government has grown rapidly in recent years and it is expected to get much bigger in the future. To make matters worse, it seems that the deck is stacked against reforms to restrain government. One problem is that 47 percent of Americans are exempt from paying income taxes, which presumably means they no longer have any incentive to resist big government. Mark Steyn recently wrote a very depressing column for National Review Online about this phenomenon, noting that, “By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury.” Walter Williams, meanwhile, has a new column speculating on whether this cripples the battle for freedom:

According to the Tax Policy Center, a Washington, D.C., research organization, nearly half of U.S. households will pay no federal income taxes for 2009…because their incomes are too low or they have higher income but credits, deductions and exemptions that relieve them of tax liability. This lack of income tax liability stands in stark contrast to the top 10 percent of earners, those households earning an average of $366,400 in 2006, who paid about 73 percent of federal income taxes. …Let’s not dwell on the fairness of such an arrangement for financing the activities of the federal government. Instead, let’s ask what kind of incentives and results such an arrangement produces and ask ourselves whether these results are good for our country. …Having 121 million Americans completely outside the federal income tax system, it’s like throwing chum to political sharks. These Americans become a natural spending constituency for big-spending politicians. After all, if you have no income tax liability, how much do you care about deficits, how much Congress spends and the level of taxation?

Steyn and Williams are right to worry, but the situation is not as grim as it seems for the simple reason that a good portion of the American people know the difference between right and wrong. Consider some of the recent polling data from Rasmussen, which found that “Sixty-six percent (66%) believe that America is overtaxed. Only 25% disagree. Lower income voters are more likely than others to believe the nation is overtaxed” and “75% of voters nationwide say the average American should pay no more than 20% of their income in taxes.” These numbers contradict the hypothesis that 47 percent of Americans (those that don’t pay income tax) are automatic supporters of class-warfare policy.

So why are the supposed free-riders not signing on to the Obama-Reid-Pelosi agenda? There are probably several reasons, including the fact that many Americans believe in upward mobility, so even if their incomes currently are too low to pay income tax, they aspire to earn more in the future and don’t want higher tax rates on the rich to serve as a barrier. I’m not a polling expert, but I also suspect there’s a moral component to these numbers. There’s no way to prove this assertion, but I am quite sure that the vast majority of hard-working Americans with modest incomes would never even contemplate breaking into a rich neighbor’s house and stealing the family jewelry. So it is perfectly logical that they wouldn’t support using the IRS as a middleman to do the same thing.

A few final tax observations:

The hostility to taxation also represents opposition to big government (at least in theory). Rasumssen also recently found that, “Just 23% of U.S. voters say they prefer a more active government with more services and higher taxes over one with fewer services and lower taxes. …Two-thirds (66%) of voters prefer a government with fewer services and lower taxes.”

There is a giant divide between the political elite and ordinary Americans. Rasmussen’s polling revealed that, “Eighty-one percent (81%) of Mainstream American voters believe the nation is overtaxed, while 74% of those in the Political Class disagree.”

Voters do not want a value-added tax or any other form of national sales tax. They are not against the idea as a theoretical concept, but they wisely recognize the politicians are greedy and untrustworthy. Rasumussen found that “just 26% of all voters think that it is even somewhat likely the government would cut income taxes after implementing a sales tax. Sixty-six percent (66%) believe it’s unlikely to happen.”

Fiscal restraint is a necessary precondition for any pro-growth tax reform. If given a choice between a flat tax, national sales tax, value-added tax, or the current system, many Americans want reform, but it is very difficult to have a good tax system if the burden of government spending is rising. Likewise, it would be very easy to have a good tax system if we had a federal government that was limited to the duties outlined in Article I, Section VIII, of the Constitution.

Republicans should never acquiesce to higher taxes. All these good numbers and optimistic findings are dependent on voters facing a clear choice between higher taxes and bigger government vs lower taxes and limited government. If Republicans inside the beltway get seduced into a “budget summit” where taxes are “on the table,” that creates a very unhealthy dynamic where voters instinctively try to protect themselves by supporting taxes on somebody else – and the so-called rich are the easiest target.

Last but not least, I can’t resist pointing out that I am part of a debate for U.S. News & World Report on the flat tax vs. the current system. For those of you who have an opinion on this matter, don’t hesitate to cast a vote.

Lessons from the Greek Budget Debacle

Fiscal crises have a predictable pattern.

Step 1 occurs when the economy is prospering and tax revenues are growing faster than forecast.

Step 2 is when politicians use the additional money to increase government spending.

Step 3 is that politicians do not treat the extra tax revenue like a temporary windfall and budget accordingly.Instead, they adopt policies - more entitlements, more bureaucrats - that permanently expand the burden of the public sector.

Step 4 occurs when the economy stumbles (in part because more resources are being diverted from the productive sector to the government) and tax revenues stagnate. If the resulting fiscal gap is large enough, as it is in places such as Greece and California, a crisis atmosphere is created.

Step 5 takes place when politicians solemnly proclaim that “tough measures” are necessary, but very rarely does that mean a reversal of the policies that caused the mess. Instead, the result in higher taxes.

Greece is now at this stage. I’ve already argued that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has a too-much-spending crisis rather than a too-little-revenue crisis. I’ve also commented elsewhere about the feckless behavior of Greek politicians. Sadly, it looks like things are getting even worse. The government has announced a huge increase in the value-added tax, pushing this European version of a national sales tax up to 21 percent. On the spending side of the ledger, though, the government is only proposing to reduce bonuses that are automatically given to bureaucrats three times per year. Here’s an excerpt from the Associated Press report, including a typically hysterical responses from a Greek interest group:

Government officials said the measures would include cuts in civil servant’s annual pay through reducing their Easter, Christmas and vacation bonuses by 30 percent each, and a 2 percentage point increase in sales tax to bring it to 21 percent from the current 19 percent. …One government official, speaking on condition of anonymity ahead of the official announcement, said…that “we have exhausted our limits.” …”It is a very difficult day for us … These cuts will take us to the brink,” said Panayiotis Vavouyious, the head of the retired civil servants’ association.

Now, time for some predictions. It is unlikely that higher taxes and cosmetic spending restraint will solve Greece’s fiscal problem. Strong global growth would make a difference, but that also seems doubtful. So Greece will probably move to Step 6, which is a bailout, though it is unclear whether the money will come from other European nations, the European Commission, and/or the European Central Bank.

Step 7 is when politicians in nations such as Spain and Italy decide that financing spending (i.e., buying votes) with money from German and Dutch taxpayers is a swell idea, so they continue their profligate fiscal policies in order to become eligible for bailouts. Step 8 is when there is no more bailout money in Europe and the IMF (i.e., American taxpayers) ride to the rescue. Step 9 occurs when the United States faces a fiscal criss because of too much spending.

For Step 10, read Atlas Shrugged.

Tax Hike Commission

The Senate Homeland Security and Government Affairs Committee is holding hearings today focused on Senator Kent Conrad (D-ND) and Judd Gregg’s (R-NH) idea to set up a special Task Force to draft a deficit-reduction plan. The plan would get fast-tracked through Congress for a vote and “everything would be on the table.”

For taxpayers, this idea creates the threat of large tax increases on top of all the other tax increases being discussed in Congress. While the senators supporting a Task Force express valid concerns about the government’s exploding debt, the plan could launch a drive to impose a European-style value-added tax in America.

In theory, such a Task Force could come up with some meaty and long-overdue cuts to the federal budget. But nine of the senators co-sponsoring the Conrad-Gregg Task Force, including Conrad, voted in favor of the massive spending bill passed by the Senate on Sunday, which increased appropriations by 10 percent in a single year.

In calling for deficit reduction, Senator Conrad says that “it is no longer enough for Congress to simply talk about reform; it is time for action and leadership.” But Senator Conrad certainly hasn’t shown reform leadership on farm subsidies. So until he and his colleagues start restraining their own spending appetites, it’s safe to assume that ”everything on the table” really just means a sneaky, under-the-table tax increase.

A Tax That Would Finance the Road to Serfdom

Michael Tanner and Michael Cannon are working nonstop to derail government-run health care, but they better figure out how to work more than 24 hours per day, because if they fail, it is very likely that politicians will then look for a new revenue source to finance all the new spending that inevitably will follow. Unfortunately, that means a value-added tax (VAT) will be high on the list. Indeed, the VAT recently has been discussed by powerful political figures and key Obama allies such as the Co-Chairman of his transition team and the Speaker of the House.

The VAT would be great news for the political insiders and beltway elite. A  brand new source of revenue would mean more money for them to spend and a new set of  loopholes to swap for campaign cash and lobbying fees.  But as I explain in this new video from the Center for Freedom and Prosperity, the evidence from Europe unambiguously suggests that a VAT will dramatically increase the burden of government.  That’s good for Washington, but bad for America.

Even if the politicians are unsuccessful in their campaign to take over the health care system, there will be a VAT fight at some point in the next few years. This will be a Armageddon moment for proponents of limited government. Defeating a VAT is not a sufficient condition for controlling the size of government, but it surely is a necessary condition.