"History is a wonderful thing, if only it was true"

Sunday, May 09, 2010

What's VAT?

I happen to like VAT's to shift taxes off of Capital - if they would do so.
Risk is that they would just serve to support continued government spending.

Why a VAT Won't Solve Our Deficit Problems - Newsweek.com:

"There is always an easy solution to every human problem...neat, plausible, and wrong.
—H. L. Mencken

The VAT (Value-Added Tax) has become the designated solution for massive federal budget deficits. It's touted by think tank economists and mentioned by congressional leaders. A VAT could raise stupendous amounts of money, which, Lord knows, are needed to cover projected deficits. A VAT is likened to a 'national sales tax,' so once it was in place, most Americans would barely notice it—just as they barely notice state and local sales taxes. How's that for friendly politics? A VAT would also discourage consumption and encourage saving and investment, making America richer in the future. What's not to like?"

Samuelson argues that consumers would notice a 16% hike in costs.
Maybe, but when gasoline can move 20-30% in a year, housing drop up to 40%
I'm not so sure

Higher consumer prices from the VAT could also slow the economy. The Federal Reserve would face policy dilemmas. If it tried to prevent businesses from passing the tax along to consumers, it would have to raise interest rates and risk a recession. If it tried to blunt the effect of higher prices on spending, its easy-credit policy might trigger a new wage-price spiral.

A VAT is no panacea; deficit reduction can't be painless. We'll need both spending cuts and tax increases. A VAT might be the least bad tax, though my preference is for energy taxes. But what's wrong with the simplistic VAT advocacy is that it deemphasizes spending cuts. The consequences would be unnecessarily high taxes that would weaken the economy and discriminate against the young. It would become harder for families to raise children. VAT enthusiasts need to answer two questions: What government spending would you cut first? And how high would your VAT rates go?

Robert Samuelson is also the author of The Great Inflation and Its Aftermath: The Past and Future of American Affluence and Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong."

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