Almost there
This proposal is pretty close to what I’ve previously advocated:
WASHINGTON “” Here’s some holiday cheer: 120 million American families no longer have to file income tax returns; the top individual rate is lowered 20 percent; the top corporate rate is cut by more than half; the government gets the same amount of revenue; and the tax system is slightly more progressive.
O.K., it’s not a free lunch. It would be accompanied by a 12.9 percent value-added levy, which critics like to call a national sales tax.
. . .
He provides a payroll tax cut and expanded child care credits focused on low- and moderate-income workers. Families making less than $100,000 would be exempt from any income tax that is progressive, with a top rate of 31 percent on incomes more than $600,000. (The top corporate rate would be 15 percent.)
It was developed by a former Bush adviser, and the plan was endorsed by liberal Al Hunt in the NYT. The article is entitled:
A Tax Plan to Please Both Sides
Git er done.
Even better, completely abolish the income tax and replace it with a capital income tax on capital income exceeding $100,000/year, and make up the lost revenue with a revenue neutral/progressivity neutral payroll tax on incomes above $100,000.
Once 99.9% of Americans get used to NOT filing 1040 forms, they’ll never want to go back. It will be one of the most popular reforms ever done, right up there with Swedish education vouchers.
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5. December 2013 at 08:52
You forgot to add a link to the article itself: http://www.nytimes.com/2013/12/02/us/a-tax-plan-to-please-both-sides.html?_r=0
One thing I noticed in it:
“The professor argues that his VAT would make business more competitive and create jobs; it would be levied on imports, not exports.”
Is that something the WTO would get annoyed about?
5. December 2013 at 08:58
I discovered recently that almost nobody in the UK has to file a tax return.
5. December 2013 at 09:54
“One thing I noticed in it:
“The professor argues that his VAT would make business more competitive and create jobs; it would be levied on imports, not exports.”
Is that something the WTO would get annoyed about?”
If this were something for the WTO to be worried about, they would have acted long ago on VAT regimes, particularly those in Europe. It is clear they don’t violate trade agreements.
Besides, Alan Viard (via Mankiw) argues that VAT regimes do not benefit exports.
http://gregmankiw.blogspot.com.es/2010/05/is-vat-good-for-exports.html
That may be true in the very limited sense argued by Viard and Mankiw—VAT is export/import neutral; however, I think they miss an essential point: The revenue raised by VAT regimes allows one to lower other taxes such as corporate income tax and payroll taxes (as this proposal demonstrates). Those lower “other” taxes should make domestic production cheaper, and therefore exports more competitive.
5. December 2013 at 10:29
I think you’ll end up with our current income tax plus the VAT. To prove that you should be exempt from the payroll tax you’ll need to fill out all the same forms you fill out today. And as long as people are reporting all their income already, it will be easy to increase the payroll tax rate and lower the exemption thresholds.
5. December 2013 at 10:53
It’s been a while since I’ve read that Viard piece (three and one-half years); but, I’ve now taken the opportunity to read it again more carefully. What Viard seems to be arguing is that nothing a country does can ultimately improve its trade situation *in the long run* (Mankiw says “over a nation’s history’!). The books must *eventually* balance via the exchange rate mechanism.
Well, that truly is taking a long view of things—too long in my opinion. Besides, Viard does not seem to understand the essence of VAT border adjustments. VAT is ultimately borne by the consumer and the purpose of the “border adjustment” on exports is to refund the domestic “input VAT” that an exporter has incurred with respect to his domestically produced product. This is a point Viard and Mankiw seem to overlook—without a domestic VAT system to begin with, there is no need for a “border adjustment” on exports. Under VAT systems, domestically produced goods and imported goods are subject to the same VAT charge to local consumers and hence VAT is itself “import/export neutral”.
Viard makes the same mistake with respect to imports. He wrote:
“Now, let’s imagine that we institute a 25 percent border adjustment. The cost of the chocolate to the importer would increase to €1.33 (25 percent of 1.33 is 0.33). At the same time, the dollar would appreciate to €1.33; conversely, one euro would be worth 75 cents. At the new exchange rate, the €1.33 chocolate would still cost the importer one dollar, so there would be no net increase in cost.”
Under VAT regimes, imports are technically subject to VAT on importation. However, that VAT is also refundable as “input VAT” to the importer/re-seller and an importer who is the final consumer (who cannot get a refund) suffers the same charge as he would on domestically produced goods.
Viard and Mankiw would likely argue that lower corporate/payroll taxes would also be export neutral *in the long run* due to the exchange rate mechansim; however, I still think here “the long run” is a bit too long. I’m pretty sure Keynes would agree.
5. December 2013 at 11:05
Chris, Thanks for the link. VATs are trade neutral as it’s a consumption tax, there is general agreement on that point. In any case, government policy should not be aimed at boosting trade, just removing distortions.
Carl, The GOP should never agree to a VAT unless the income tax is abolished. Once it is the Dems will never be able to get it back–too unpopular.
Vivian, see my reply to Chris.
5. December 2013 at 11:10
VATs are generally regressive because the tax applies across the supply chain without respect to the end user.
VATs also create another painful regulatory thicket for small businesses.
5. December 2013 at 11:23
“VATs are generally regressive because the tax applies across the supply chain without respect to the end user.”
Please explain.
Under a VAT system, the only person who incurs VAT *is* the end user, although everyone in the supply chain does experience the “regulatory thicket”. The system might be “regulatorally regressive” throughout the supply chain, but how is it tax regressive, except to the end user?
5. December 2013 at 12:10
Vivian — yes that’s right, my point is that moving from income tax to VAT is tax-regressive to the end users, because the supply chain generally doesn’t have any idea what the income of the end user looks like.
5. December 2013 at 13:24
How about tying a VAT to inflation. Low price inflation, low VAT. If inflation ticks up increase the VAT until price inflation slows down. Politically you will need an income tax, which too could adjust with inflation or unemployment.
5. December 2013 at 13:51
“…the supply chain generally doesn’t have any idea what the income of the end user looks like.”
The “supply chain” really doesn’t care and they don’t set the value added tax rate. Other than the regulatory burden, I don’t see what the “supply chain” has to do with it. One benefit is that as suppliers in the chain collect VAT from the next entity in the chain and ultimately the consumer, companies in the chain enjoy a certain degree of tax float (the difference between the VAT they collect and the VAT they are charged is a form of free financing).
As far as the regulatory burden on small business owners, I wonder whether VAT is really that much more burdensome than sales tax. One of the challenges of introducing a VAT in the US is that I think it would be complicated or at least inefficient to layer it over state sales taxes. Some sort of federal override or voluntary adherence to a uniform act would be necessary, but if the federal government would introduce one, I think the only rational option would be for states would be to piggy back onto it.
In this respect, the EU seems, ironically, to have a more “national” system. The European Directives on VAT impose a more or less uniform consumption tax system (aside from rates) within the EU. I wonder how feasible it would be for the US to achieve that level of uniformity given the Constitutional restraints? Achieving that level of uniformity requires voluntary adherence among 50 autonomous taxing authorities (not counting sub-state levels). This is a very practical issue that I’ve never seen proponents of VAT in the US confront. Introducing health care exchanges to the US under the ACA is likely much less complicated that introducing a nation wide VAT.
5. December 2013 at 18:05
We don’t have to file a tax return in the UK as a regular PAYE but we do get taxed to death!
5. December 2013 at 20:30
Good ideas…might want to add a heavier national gasoline tax….
6. December 2013 at 03:38
“The GOP should never agree to a VAT unless the income tax is abolished. Once it is the Dems will never be able to get it back-too unpopular.”
Let me play devil’s advocate here, if I may:
“We’re talking about a tiny levy of [insert small percent here] on the richest Americans in the country – people making more than [insert obscenely high salary here] a year! And this money is going to be used to pay for [insert buzzword here – education, health care, food for the poor, etc]. What kind of extremist could oppose that?”
Politically, that’s a very powerful argument to make. Obama made it for the top tier of the Bush tax cuts, and he didn’t even have to resort to “food for the poor” or anything, he simply made the fiscal responsibility argument. The public was highly supportive of letting the top-tier BTC tax cuts lapse, and that’s precisely what happened.
6. December 2013 at 05:53
Jon, They’ll put higher payroll taxes on the wealthy, in that case.
6. December 2013 at 09:00
It seems better and simpler to me to let everyone to put all their money into a tax sheltered account like an IRA and tax them progressively on annual withdrawals.
6. December 2013 at 18:43
Vouchers are much easier to implement in a monocultural society. The more parents see choosing which student sits next/does not fit next to their child as the important thing, the more resistant to vouchers they are likely to be.
7. December 2013 at 07:21
Floccina, But then we’d still have to fill out 1040 forms.
Lorenzo, Good point.