Bruce Bartlett
It's hard to know where to begin to dissect McCain's guerrilla attack on the VAT. There's certainly no serious effort to impose one in the Obama administration or anywhere else that I know of. I just know of a pathetically small number of serious budget analysts who have looked at the budgetary trends and concluded that Congress is never going to cut spending enough to forestall a fiscal crisis and that a significant tax increase is inevitable. That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented.
No economist I know of denies this. The problem is that right wing economists have talked themselves into believing that it is better for us to raise taxes in the most economically distorting way possible, better to hold down the tax burden and prevent tax increases. Casey Mulligan of the University of Chicago business school made such an argument on Wednesday.
Personally, I think this is nuts. Perhaps if there were any evidence that economically debilitating taxes are harder to raise than those with a low deadweight cost (the output that is discouraged over and above the tax itself) I might be willing to at least think about it, but I am not aware of any. My observation is that when faced with a fiscal crisis politicians are more likely to raise the taxes they already have than impose new ones even when they know that the new ones will be less burdensome, which means that we will raise income tax rates when the time comes unless there is some other form of taxation already in place.
Furthermore, I think we have to remember that low taxes or tax rates are not an end in themselves; they are the means to an end, which is higher growth and greater prosperity. In this sense, I think right wingers pay far too much attention to the negative economic consequences of taxation while essentially ignoring the negative economic consequences of extremely large deficits. The only reason we haven't seen such effects already is because investment has collapsed, saving is unusually high, deflation is the dominant economic problem, unemployment is high, and, most importantly, current deficits are assumed to be temporary. When the day comes that markets come to believe that they are semi-permanent--perhaps because markets believe that Republicans will block any budget deal that involves higher taxes and may even be stupid enough to block a debt limit increase--then all hell will break loose; inflation and interest rates will skyrocket and voters will demand action on the deficit.
Sadly, when that day comes many senators may conclude that a foolish consistency--the hobgoblin of small minds--may require them to oppose a VAT because they were blindsided by McCain's amendment and voted for it without thinking. In the final vote, 85 senators supported McCain, not one spoke against it.
Under the circumstances, any senator voting against McCain's demagogic resolution deserves credit. Here are the names of 13 senators with honor and guts: Akaka, Bingaman, Brown of Ohio, Byrd, Cardin, Dorgan, Kaufman, Levin, Reed, Udall of New Mexico, Voinovich, Webb, and Whitehouse (Nelson of Florida and Warner did not vote).
I applaud all of them.
Finally, I wish someone would ask those voting for this resolution how they feel about the 47 percent of tax filers who pay no federal income taxes. No doubt, they will all proclaim that it is shameful and a scandal. Then ask them what we should do about it. If they oppose a VAT, then the only other way of getting millions of Americans to pay something to support the general operations of the federal government is to eliminate the tax credits that are mainly responsible for them having a negative or zero tax liability. If they are also opposed to that, then it is reasonable to assume that they are either cowardly, stupid or lying.
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