A carbon tax would achieve the same revenue goals and just maybe save the planet in the process. The only reason that politicians favor cap-and-trade over a carbon tax is that the former creates a speculative market for their friends on Wall Street to manipulate and exploit.

Ted, I'm curious your thoughts on this recent article in the NY Times about the VAT. http://www.nytimes.com/2010/03/22/us/22iht-letter.html

The author suggests a 14% VAT with a small business exemption, a reduction in corporate taxes from 35% to 20% and the elimination of income tax on individuals with income under $100,000.

The proposal is intriguing, if nothing else.

Yes, you could design a VAT with all kinds of exemptions---in fact, many countries' VATs have them. Problem is, when we are under such deficit/debt pressure, the emphasis would be wholly on revenue-raising.
Hard to see a comprehensive package, of the kind discussed in the NY Times,
being passed.

General tax reform has a sorry history. We know how difficult it has been in our state. The most recent federal reforms, in 1986 (sponsored principally by Sen. Bill Bradley), removed loopholes and reduced brackets and rates. Since then, however, the code has become even more complicated and riddled with special-interest favors than before 1986. Hard to see general top-to-bottom reform, possibly including a VAT, being enacted in the present environment.

To clarify re the VAT. I mentioned that a VAT is applied at each stage of the economic supply chain. In practical terms, this is what it would mean.
Presume that you are a manufacturer of bicycles. When you sold bikes to
a wholesaler or distributor, the wholesaler or distributor would pay the tax. When the wholesaler sold the bikes to a retail outlet, the retailer would pay the tax. When the retailer sold the bikes to customers, the customers would pay the tax. Hence the "cascade tax" description.
Needless to say, businesses at each stage of the supply chain would raise their prices to cover their VAT tax obligations. The guy carrying the heaviest burden would be the poor stiff at the end of the chain---the one buying his bicycle.

There is a reason, by the way, that a VAT is in use in many countries but not in the U.S. As I mentioned, Michigan had a variant which got thrown out early in 2009, after a voter/taxpayer revolt. A VAT simply does not
fit with our traditional American economic thinking. We are not statist.
We see the private economy as generating investment, growth and jobs and the public sector as important but not central. The idea of levying a huge new sales tax---a fundamentally regressive tax---on all parts of the economy, down to the average citizen, would meet huge resistance here.
Speaker Pelosi, for instance, sees a VAT as helping get us out of the debt/deficit hole. But I assure you that, even in her San Francisco district, she quickly would encounter angry town halls and Tea Parties
if a VAT became a serious legislative proposal.

Better reconsider this post, TVD, as we're in absolute agreement, especially the final clause. But one quibble, this country has had a debt since the inception, and somehow, unlike many other countries in the meantime we've managed our operational affairs without complete breakdown. Debts, properly managed, are nothing to fear.

The writer is always quick to knock down proposed solutions to problems like the budget deficit and health care costs and access, but I don't see him proposing his own realistic solutions. He constantly bemoans the deficit (thanks to NickBob for pointing out that properly managed deficits are not bad) but he needs to lay out some solutions that are viable both policywise and politically. And if he proposes to cut Social Security and Medicare and raise the eligibility age to cut the deficit, I want to hear exactly how he would mitigate the impact on vulnerable seniors who have no other pension or health care.

"A carbon tax would achieve the same revenue goals and just maybe save the planet in the process."

Or, if not save the planet, at least employee a few thousand more bureaucrats!

The purpose of this piece was to explore a VAT, which has been talked about
recently by many people who do not truly know what it is---except that it raises big chunks of revenue in other countries.

I've written often previously about the taxing/spending changes which could close our entitlement-spending gaps. They mainly involve raising eligibility ages, adjusting annual cost-of-living formulae, lifting the lid on payroll-tax income withheld for these programs, and/or reducing some benefits (as the Obama health plan, for example, will cut Medicare payments to providers and phase out Medicare Advantage policies held by seniors). They are doable, if leaders with guts get behind them.

As to debt: Of course some public debt is both necessary and desirable,
such as in wartime, to finance needed public infrastructure, and/or to generate economic stimulus in serious downturns. But U.S. public debt levels are at a level where they soon will threaten our future growth and wellbeing. So are those of several other countries. Got to address them. But not with a VAT.

Holy cow, Ted, your ignorance of how a VAT works is breathtaking! It is NOT a "cascade tax" - see the Wikipedia article about it: "Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production." Your example of the bicycles is completely wrong! Here is how it works: the manufacturer buys raw materials, and that transaction is taxed. The manufacturer makes the bikes and sells them to a wholesaler. That transaction is taxed, but the original cost of the raw materials is deducted before the tax is supplied. The tax is only on gross margin, or the "value added" by the manufacturer - hence the name, right? The distributor sells the bikes to the retailer, again deducting the wholesale cost of the bike, and pays tax on the value added only. Finally the consumer buys the bike, paying tax on the difference between the retailer's cost and the final selling price. Totally contrary to your explanation, the tax is NOT compounded through the production chain - nothing is double-taxed.

As for the rest, Social Security and Medicare have their own trust funds, which are solvent or can remain so far into the future with minor changes. The only problem is that the rest of the government has been borrowing from them to avoid paying for the rest of the government: Medicaid, interest on the rest of the debt, military spending, and the comparatively small portion which is everything else the federal government does.

No tax is free, it's kind of in the definition. If a VAT will discourage consumption, well, a higher corporate income tax will discourage investment and economic growth. But in general I would say our nation and its economy would benefit from a higher level of public goods (not including military), and I'm willing to pay for them with higher taxes. Like woofer, my choice would be a serious carbon tax. We want less carbon and need more tax to sustain the current level of spending - a tax on carbon would be simple to administer, have good environmental effects, improve the balance of trade, create terrific incentives for green alternatives and new investment in conservation and renewables. And what's more, it would be economically efficient: it would match the cost of the item to its price - the price of maintaining a vast "defense" establishment to "defend" our access to foreign oil, and the price of global warming to all of us. But I'm not knee-jerk opposed to a VAT either, particularly if dedicated to a pressing public need (like universal single-payer health care!).

I should add, Ted, that you have that very peculiar form of American exceptionalism that absolutely prohibits you from learning from the experience of other countries. If VAT is so "dreadful," why has it become so widely used? Why is it "under study in many other places"? It was quite the same with healthcare, where you dismissed the successes of universal health coverage and single payer systems in favor of doing the least that could be done. Who here feels oppressed when they visit Vancouver, which has both a VAT and single payer universal coverage?

Thanks, Vince. I have known about a VAT since the early 1960s, when I worked as an American for the then European Communities (now the European Union). It was known in Europe then as "a cascade tax" and some still refer to it as such now. As I noted, above, a VAT is widely used because it generates huge amounts of tax revenue. Vancouver does have a
VAT and single-payer health coverage. So do other cities in other places. We have neither here. Not because of American exceptionalism but because neither has seemed to fit within our particular needs and values. Perhaps that will change. You might make it a project.

I'm pretty sure that I agree with Mr Van Dyk that the US ought not adopt a VAT tax. I definitely agree that we ought not adopt any such tax before reforming the structural problems of social security, Medicare, etc.

I disagree, though, with his apparent support for progressivity in the tax system. Why is a progressive tax system better than a regressive system? Why should the most economically productive citizens be penalized for their productivity by paying higher tax rates? It seems to me that a better economic result would be lower tax rates at higher income levels, thus incenting individuals to earn more.

I must say, Ted, that to repeat your error and boast of its long tenure does not resolve it. Cascade taxes and VAT are different, and in some quick research, you seem to be the only authority who confuses them. In your bicycle example, you described a cascade tax, which does not seem to be operating anywhere in the world at present. The reader is invited to consult Wikipedia for both "value added tax" and "cascade tax," which are separate entries and do not share TVD's confusion. For a more technical but thorough analysis, go to books.google.com, search for "cascade tax," and check out Tax Policy: Theory and Practice in OECD Countries by Messere et.al. You will find that cascade taxes, which are one form of consumption tax along side manufacturer sales tax, wholesale sales tax, retail sales tax, and VAT, were tried in several European countries in the 1960s but universally replaced by VATs by the early 1970s. Also it points out that regressivity is lessened by exempting some items, as is also the case with retail sales taxes.

So I object to presenting a caricature of a VAT as a straw man, just to knock it down. The rest of the world has not concluded, as TVD does, that this pillar of public finance is "dreadful." But it's not really about the details of VAT administration, is it? When I read between the lines, what I think I'm seeing is the following: Americans won't accept a higher level of taxation so it's pointless to try. The US should deal with its current and future budget problems by decreasing spending on Medicaid, Medicare, and Social Security, even to the point of reneging on the public debt held by the Social Security and Medicare trust funds and backtracking on the weeks-old promise of universal health coverage. Why the $3 trillion in US debt held by Social Security should be singled out for this treatment, rather than the debt held by banks, individuals, or foreign governments, is a mystery to me; perhaps only "because we can." Do I miss the mark? If not, what taxes would you raise or what spending would you cut to move toward a full-employment balanced budget?

And to answer that question myself, I would start with a carbon tax to raise several hundred billion dollars. The US uses about 20 million barrels of oil per day; a $10 tax per barrel would raise $73 billion. I haven't done the math for coal and natural gas, but including them in the same proportion would raise hundreds of billions of dollars, change the economics of energy, foster technological substitution and economic growth. I would eliminate itemized deductions - Canada's housing market does fine without deductions for mortgage interest and property taxes, which are subsidies weighted toward the top end of the income scale. I believe our income tax deductions for these items are in the $70 billion + range per year. I would eliminate loopholes like the notorious hedge fund managers' taxation at capital gains rates. I would impose a financial instruments transaction tax, which would decrease the churn of the markets and the hair-trigger trading strategies that destabilize them. And I would reduce the insane level of military spending and bring our occupying armies home from Germany, Japan, and Korea, not to mention Iraq and Afghanistan. World War II has been over for a while. There is the VinceInSeattle plan for fiscal rectitude.

Thanks for hounding Ted on the proper definition of the VAT, Vince. I kept thinking the same thing as I read through, and I'm delighted at your thorough responses.

That's really Ted's big problem; when he gets his mind made up, it's really made up and nothing he reads or hears can change it. First noticed this in his rants about Sound Transit and light rail.

When I read your description of the VAT, I think that it sounds more like the present Washington B&O; tax. As outlined in the Gates report you mentioned, the current B&O; has the problem of "pyramiding", or components taxed at every stage of the production chain. Under a VAT, since the tax is on "value added" (that is, selling price of the goods minus price of inputs), the product is taxed once at a certain rate, albeit in several stages. The B&O; tax is screwy, both because of the pyramiding issue and that it is especially harsh on low profit margin businesses. The oddities in the B&O; necessitate many of the exemptions in the tax code, which are rightly the subject of much hand-wringing.

If the VAT replaces the B&O;, many of these problems are reduced. One drawback of the VAT which you didn't mention in your piece is that it would be more complicated to administer, especially on a state level. A corporate income tax (again, replacing the B&O;, not augmenting it) might make more sense, mainly because I think that it would be friendlier to new and small businesses, which do the most to create jobs.

Your point about how the VAT would be used politically is well taken, since an idea cannot be considered in isolation, but rather in the context of the political and economic climate. Both Washington state and Washington DC need top-to-bottom reviews of the tax code, including a serious re-evaluation of spending priorities, and I think that a VAT should at least be among the ideas considered. I agree that a VAT should not be added, either in Washington state or DC, in isolation.