In an article today, the Washington Post contends that a national sales tax is a real possibility. Republicans have long fought for such a tax, which they deem as fairer than a progressive income tax. Now, however, several prominent Democrats are supporting -- or at least considering -- the idea to pay for the ludicrous amount of spending they've been doing. Could a national sales tax actually happen? I wouldn't bet on it.
Here's the Post's explanation of how a national sales tax, also called a "Value Added Tax" ("VAT") would work:
A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.
I find it impossible to believe that Democrats, who currently rule Washington, would ever go for this. The above explains that it's hugely regressive, but let me explain just how huge.
Imagine a VAT of 5% on all goods and services:
Oliver's relatively low gross income provides him with $10,000 in disposable income. That isn't a lot, so he doesn't save. Instead, he needs to spend all of this for his living expenses. That means he pays $500 due to the tax. That's 5% of Oliver's discretionary income.
Todd's relatively high gross income provides him with $100,000 in disposable income. That's enough that he's able to save $50,000 per year. He spends the rest. That means he pays $2,500 due to the tax. That's 2.5% of Todd's discretionary income.
The example is obviously a simplification, but hopefully the point is clear: Oliver, who makes a great deal less money than Todd actually pays a larger percentage of his disposable income based on the VAT. Progressives everywhere just had a heart attack.
The Post offers a rather ridiculous argument that liberals will be okay with this, because the VAT could be used to pay for free healthcare. But even then, you still have a situation where the poor pay a greater portion of their income for that healthcare than the rich. Does anyone really believe that Democrats will be comfortable with that outcome?
Of course, a VAT would have other negative repercussions. The most notable is that it would penalize spending. That's particularly problematic at a time when Americans are already ramping up their saving, during a deep recession when more spending might help. As a long-term proposition, encouraging saving in the U.S. might be a good idea. But is the government really prepared to create another market shock in our current recession to debilitate spending further?
Don't get me wrong: a VAT has benefits as well -- particularly if you aren't bothered by the poor paying a greater share of their income to taxes. I just find it highly unlikely a congress with strong Democrat majorities and a very progressive president would ever allow it. After all, they could instead rely on a plethora of other options, such as further increasing taxes on the rich or imposing high luxury good taxes, as more liberal-minded alternatives.
But can they? "High luxury good taxes" are tricky. Luxury goods, by their very definition, are things people don't have to buy. Tax them too much, and people just buy something else instead. The luxury yacht tax destroyed the luxury yacht industry in the US, and actually cost the Treasury money in one of the few cases where the Laffer Curve is actually relevant. Rich people just bought yachts elsewhere or bought something else with their money.
The whole point of that linked article is that there isn't enough money to get it just from "the rich," or at least the rich as identified during the campaign. According to CBO estimates, letting the Bush tax cuts on the higher income levels, capital gains, dividend tax, and estate and gift taxes expire will raise from $150 to $250 billion each year. Even taking that into account, there will still be a deficit of $650 to $1,189 billion from 2012 to 2019, increasing each year. That means that Obama needs to not just let the Bush tax cuts expire, but in addition raise taxes by four times that amount on income, capital gains, dividends, estates, and gift taxes in order to balance the budget. That's technically possible, but it would mean, for example, raising the top rate not just from 35% to 39.6%, but to around 60%.
Of course, he may not try to actually fully close the deficit. But I think that most economists agree that a top rate exceeding 50% would actually start to have an effect. For one thing, Canada would start to be a tax haven for Americans as well.
The deficit may not be closed. But it seems unlikely that taxes on the rich and luxury goods alone could close it.
John,
Your points are well taken. Perhaps I exaggerated in saying “a plethora,” but I do think there are several alternatives that liberals would prefer to an extremely regressive VAT. For example, you could raise rates across the income spectrum in a progressive manner.
The U.S. is certainly going to face an uphill battle in trying to come anywhere close to closing the deficit unless significant action is taken. I just find it unlikely that those in power in Washington will allow that action to place a greater burden on the poor. Of course, the middle class is probably not off the table in their minds.
I agree with all of this. The deficit cannot even be shrunk back to Bushian levels without tax rises on the middle class, and President Obama abrogating his promise to only raise taxes on the wealthy. (Some may consider it already broken, with the tax increase on cigarettes.)
However, while the middle class is probably not off the table, I also find it unlikely that President Obama and the Democrats want to breathe new life into the tax issue, particularly when as a candidate Obama spent so much time assuring people that Republican claims of tax increases were false. Heck, even some polls showed that more voters believed that John McCain would raise taxes. (Perhaps because he has been such a deficit hawk.)
Trapped between so many unlikely scenarios, though, something's got to give. Perhaps they'll just kick the deficit can down the road until at least after the 2012 elections. They can probably get away with blaming Bush and the recession until then.
Actually, I should have linked to this document. The $150 to $250 billion number is the amount of lost revenue compared to the baseline if Obama extends the portion of the Bush tax cuts that affect the lower tax brackets, but does not extend the lower tax rates on the rich. The second document gives the cost of other, non-Presidential policy alternatives.
The second document assumes that extending the Bush tax cuts, EGTRRA and JGTRRA fully would cost betwen $217 and $307 billion each year from 2012 and 2019. As noted, the first document claims that the cost of the Bush tax cuts for the non-rich from EGTRRA and JGTRRA that Obama wants to extend would cost between $185 and $263 billion each year between 2012 and 2019, if tax cuts for the rich that Obama wants to exclude are excluded.
Therefore, if I'm reading this correctly, repealing only the tax cuts for the rich will save a mere $50 billion a year or so. In order to eliminate a deficit of $650 to $1,189 billion, that means that the highest tax bracket (assuming no Laffer Curve-type effects) would have to rise by well over 15 times the 4.6% that it will rise from 35% to 39.6%. That means that we would need an effective top tax rate of over 100% in order to eliminate the deficit only from "the rich," and the second highest bracket, after rising from 33% to 36%, would have to go up at least another 45% to 81% under this scenario. This is without assuming that money gets hidden in tax shelters or otherwise from such rates.
Note that the top tax rate of over 100% on the rich would only cut the deficit roughly in half to two-thirds in 2019, bringing it down to Bush levels, rather than eliminating it. So in other words, in order to bring the deficit down to Bush levels only via taxes on the rich, the top tax brackets would have to rise to 81% and 100%. I do not believe that this would happen.
The obvious solution, which is used by Washington (state), is to exempt necessities like food from the VAT. Or, since obviously the income tax will never go away, just put it as a line item on the income tax return and then refund whatever VAT you paid if you have little or no income.
The original analysis of the taxes paid by Oliver and Todd is misleading, in that it only covers a single year. Presumably Oliver is saving in order to consume more later, at which point he will pay the tax. If we ignore estates/inheritance (that is, assume that over their lifetimes, both Oliver and Todd each spend every dime they ever earned) then the tax is not regressive -- each is taxed 5% of their total earnings. Even incorporating inheritance only changes the time horizon (even without a "death tax," somebody will spend the money somewhere down the line). To the extent that saving is simply deferred consumption, eventually the money will be spent, and the tax paid. FWIW, I understand that this analysis omits many factors which may tend to make a VAT regressive -- my point is only that by limiting the analysis to a single year, the VAT is made to seem more regressive than it actually is.
If the tax is applied to EVERY good or service then, unless the high earning individual is keeping his savings in cash (which he is unlikely to do for long - see Doug's comment above), it's not so regressive. If he buys shares in a money market account that should be taxable, ditto for stocks, homes, any conceivable form of investment.
Not to say that this would make it any more palatable to the left, but I think the point the Post may have been trying to wrap it's head around is the assumption that the rich will be paying for their own health care (assuming no single payer system is set up), so in fact they would be paying for a health care system they wouldn't be using. Then it makes a little more sense. I still have no idea how Universal Health Care would work in this country (is the government going to pay for everyone's health care, how much, specifics, etc.), so this is only a limited guess on what the Post is thinking.
Also, your last paragraph seems to have a minor contradiction to your above point: the poorer don't save as much as the wealthier. Thus a higher tax on the rich or luxury goods would increase the saving of the class that has a higher ability to actually save, the wealthier, something I agree with you is a bad idea in the second to last paragraph. Like I said, minor discrepancy, but one I think is a problem.