Paul L. Caron

Thursday, April 8, 2010

Bill Turnier, Paul Volcker on the VAT

(Hat Tip: Patrick Oglesby.)

Wall Street Journal editorial, Volcker on the VAT:  The Middle Class Is Where the Money Is:

Kudos for candor to Paul Volcker, the former Federal Reserve Chairman and current White House economic adviser, for admitting what other Democrats also know but don't want to admit until after the November election: The political class is preparing to pass a European-style value-added tax.

Answering a question at the New York Historical Society on Tuesday, Mr. Volcker said that a VAT—a consumption tax levied along stages of production—"was not as toxic an idea" as it has been, and that both a VAT and some kind of tax on energy need to be on the table. "If at the end of the day we need to raise taxes, we should raise taxes," he said.

We've long predicted that this would be the White House fiscal strategy, and its new deficit commission is bound to propose something along these lines. In Europe, a VAT rate that reaches 20% in some countries applies to countless products and services, so the middle class would be hit especially hard.

Though Mr. Volcker didn't say this, he is acknowledging that taxes on the rich can't begin to finance the levels of new spending that the current government has unleashed. Even the expiration of the Bush tax rates next January and the new taxes in the health-care bill won't be enough.

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Posted by: Steve Karpa | Apr 9, 2010 6:46:54 AM

No, its not true anymore that significant tax increases have to come from the middle class. That was the way it was up through the 1970's, when the great turn in wealth inequality began. The reason why the WSJ has turned on a dime and is now booming for the VAT is to head off taxes for the more well-to-do. Letting all but the AMT fix expire from the Bush tax cuts, for example, would raise $2.5 trillion over ten years according to previous entries on this blog.

VAT would have the advantage of putting our multi-nationals on a similar tax regime world-wide, so there is that benefit, I suppose.

Posted by: jim harper | Apr 8, 2010 3:11:21 PM

Re the video, I wish VAT advocates wouldn't argue that it is a subsidy to exports because it is rebated. It's not. Exchange rate changes would offset any gain from the rebate. The positive economic effects come principally from three sources: (1) it would reduce the budget deficit, which indirectly translates into higher trade deficits, (2) it is neutral among different forms of production,and (3) it would reduce the tax bias against savings. Another economic gain is that it is effectively a lump-suym tax on old saving, which is nondistortionary in theory. (If people think the VAT rate will increase over time, that will discourage saving since future consumption is taxed at a higher rate than current consumption.) And if the VAT allow cuts in income tax rates (now and in the future), that would also produce economic gains.

Posted by: Len Burman | Apr 8, 2010 1:17:27 PM