Paul L. Caron

Monday, February 28, 2011

The VAT Reader: What a Federal Consumption Tax Would Mean for America

VATReader Tax Analysts today published The VAT Reader: What a Federal Consumption Tax Would Mean for America. The 352-page book is free, avaialable in both pdf and hard copy. The contributors are:

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Too important points from Martin Sullivan's Introduction.

"To consumers, a VAT can look identical to a retail sales tax if the amount of tax is separately stated from prices. The VAT, however, can put the tax out of view if retailers are allowed to bury it in the price with no separate mention of the tax."

Hence the appeal, the tax is invisible. However, getting it in place is another story. If nothing else, the fact that Europe has adopted it will doom acceptance in this country.

Here is another part of Martin's Introduction.

"One of the surest methods of promoting competitiveness and long-term economic growth is to increase savings. Savings provides funds for capital formation. More capital leads to higher productivity and wages."

And here we have the core of the erroneous analysis by many people who are proposing policy changes. Martin is correct in his statement that savings creates capital which when it is invested creates jobs, productivity and economic growth. However his analysis is correct that a consumption tax is needed to create savings only when there is a shortage of capital. Today the situation is not a shortage of capital, world wide there is a capital glut, and capital inflows into the U. S. are legally unimpeded.

The problem is lack of aggregate demand. Capital is invested only when there is demand for the goods and services produced by that capital investment. It does not matter how great the supply of capital, or how low the taxes on investment and production, no aggregate demand, no investment. No one will invest in capacity to produces goods and services that will not be purchased. There are few statements more incorrect than when we hear politicians say "we need to reduce consumption and increase investment". Consumption drives investment.

Taxing consumption will have the opposite effect that Martin proposes, it will reduce aggregate demand, reducing capital investment, reducing productivity and economic growth. Great tax professors are not necessarily good economists.

Posted by: Sid (real one) | Feb 28, 2011 4:52:52 PM

Why are some people so obsessed with the value-added tax? We're not going to go to that, and even Obama's deficit commission didn't go there. And, Sid is right, not only about the economic impact, but that we are not going to be following the model of European countries. I think the last election expressed how Americans feel about new taxes. Is the discussion being advanced just so that some professors have a new topic for publishing?

Posted by: Woody | Mar 1, 2011 7:20:14 AM

The answer to Woody's last question is, I think, an unqualified "yes".

Posted by: Sid (real one) | Mar 1, 2011 5:12:57 PM