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April 18, 2010 [LINK / comment]

What kind of taxes to hike?

Anyone who pays attention to the latest budget deficit figures knows that, even under the most optimistic scenario in which spending might get trimmed under a Republican Congress next year (!?), there will still be a huge fiscal gap to fill. The real question is not whether to increase taxes, but rather what kind of taxes should be raised? In the Republican Party these days, of course, the mere suggestion of tax hikes is outright heresy. That is why Republicans have not done well as a governing party in recent years -- their leaders simply refuse to face the bleak reality of our woeful fiscal predicament, part of which can be attributed to George W. Bush.

In today's Washington Post, George Will responds to the oft-heard suggestions that the country needs a Value-Added Tax in order to bring the crisis-bound Federal budget deficit back toward a semblance of balance. Unless the Federal income tax is terminated, Will writes, "a VAT would be just a gargantuan instrument for further subjugating Americans to government." He's probably right, but one gets the sense that the implicit grand bargain he is offering (we'll give you VAT in exchange for repealing the 16th Amendment) is not fully serious. (See below.) But he does at least acknowledge one big potential advantage:

VAT would ameliorate a real problem: Americans consume too much and save too little. Furthermore, today's baroque tax code drives economic distortions and enables corruptions.

Indeed. Will is nevertheless skeptical of the VAT, both in terms of necessity and efficacy. (I think he is right that Obama is inclined to create a false sense of "crisis" in order to push such a measure through, as has been done with the President's stimulus package and the health care bill.) He sees as a menace what others see as a virtue: the fact that it does not show up in workers' paycheck stubs gives it a quality of "stealthiness [which] delights the political class." He rightly observes that "Corporations do not pay taxes," which is why I have long argued that the corporate income tax should be abolished. But the basic problem is that the putative advantages of VAT in terms of simplicity and fairness would be frittered away in the political process: "Because a VAT potentially taxes everything, it would be riddled with exemptions."

At his blog Capital Gains and Games, Bruce Bartlett depicts Will's call for repealing the 16th Amendment as a "frivolous argument," minimizing the historical importance of that constitutional revision. Bruce didn't really address the main point of Will's column, however. My response on Facebook:

... But back to Bruce's article, he's too harsh on Will. Anyone who really cares about fiscal integrity knows that VAT or something like it is almost inevitable. So should Republicans just jump on board and swallow it, or try to get something in exchange for it? Maybe the 16th Amendment itself isn't such a big deal, but there ought to be some iron-clad restraint on the ability of the Federal government to hike taxes at Will -- and at the rest of us. ;-)

One alternative to the Value-Added Tax is the FAIR Tax, which Gov. Mike Huckabee advocated while he was campaigning for president two years ago. It's worth considering at least as an abstract possibility, but it would take a miraculous convergence of political minds for it to come about.

Posted (or last updated or commented upon): 19 Apr 2010, 12: 50 AM

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