The disaster that were to be state budgets in the (then) coming recession / housing bust - was one of my main themes in 2007 forward [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] [Apr 25, 2008: Shoes Beginning to Fall in the States] [July 25, 2008: WSJ: States Slammed by Tax Shortfalls]  The federal deficits [Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making] and the kicking of cans on our entitlements is another can of worms we've devoted countless posts to.  [Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears] Former US Comptroller David Walker has been talking about it for a decade, so it's not like it hasn't been talked about... but with no will in Washington D.C. to take away goodies already promised, I've been suggesting a European style VAT (Value Added) tax will be coming to the US within 1-2 election cycles (4-8 years).

We now see those in D.C. are floating such thoughts in some of our major news publications.  It's called greasing the skid.  Remember this circa 2016.  When you see everyone backslapping each other at all the free money from Washington [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] to buy homes, cars, generate massive bankster bonuses... just remember in America we don't do cost-benefit analysis.  [Aug 26, 2009: US Federal Budget in Pictures] We only know benefit-benefit analysis.  But eventually the bill has to be paid... the can has so many dents from all the kicking we have done, eventually there will no tin left to kick.  [Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]

Anyhow the important thing is we goose economic data today, by layering on countless liabilities on our future... that helps get the stock market up, and really that's the most important sign of success in an economy.  (source: Goldman Sachs)

As an aside, as we speak about the massive costs running through all our government agencies, I have some incredible new stories on the growth / wages of the public worker versus that of the private worker - something I've cited as one of the points that will cause serious social issues in the years to come.  It's growing worse by the year, and the disparity is now reaching the point of embarassment.  Even I was shocked by some of the data points in these news items, and I've been a champion of the cause for many years.  I will save that story for next week since it deserves its own post.

Until then, I introduce to you the Subsidization of Public Workers Wages / Benefits Act of 2016 errr... VAT tax.

  • Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.  Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.
  • The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.
  • Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries).
  • Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers.  (this is where you quietly laugh to yourself... our loudly if it makes you feel better)
  • Since then, federal spending has ballooned, while the government’s ability to raise taxes has become increasingly inefficient. Consider the page length of the tax code and tax regulations, which has expanded by more than 70 percent.
  • The tax system is now a compendium of lobbied-for ifs, ands and buts. As the tax code has been embellished and then Swiss-cheesed, the portion of Americans footing the nation’s income tax bill has shrunk. (key word = lobbied)
  • “The ideal tax system has a broad base — few deductions or exemptions — and low rates.”
  • Most of the rest of the industrialized world — including, most recently, Australia — has already taken this lesson to heart by imposing value-added taxes. Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly.  

Now in my vision of how the American political process works, we won't be simply or modernize the old tax system like the rest of the industrialized world.  Instead as each special interest puts up its own fight to retain its share of your money, the VAT will be overlaid on top of the current system with a few superficial tweaks so the politicos can chirp we are working for you!.  Because we are just better than any other country in the world... with politicians bought and paid for.

  • What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans. (And many Republicans have pledged not to raise taxes on the bottom 100 percent of Americans)

This leads to American exceptionalism... the ability to have all the goodies we deserve, with no need to pay for it.   More benefits! Less taxes!  Together! USA! USA! USA!

  •  The value-added tax is also the darling of many economists for its bounce-a-quarter-off-its-abs efficiency. Its administrative costs to the government are generally low. It is also considered less of a drag on the economy over the long run than raising income taxes, which discourage people from saving money and thereby making capital available to businesses.

 The New York Times that gives a very long winded example of how simple the tax is by using an example of how a dress is made and then taxed at each level of the supply chain.  I read it, saw how confusing it was, and my eyes rolled back into my head as I figured how this would be used and abused.  You can go to the story for the full details,

  • Although more complicated, value-added taxes are considered better than equivalent sales taxes — where the tax is levied only when the consumer buys a product — for two main reasons.   First, if a single business evades the value-added tax, the government does not lose a large portion of money, because it will collect taxes at other stages of production.   Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing.

So let's think how it would work in the US system where one party will be at the neck of the other...

  • Conservatives worry that it enables the government to raise money with such little effort that it will encourage Washington to spend even more.
  • On the other hand, liberals are wary of value-added taxes because they are regressive. Poor people spend a higher portion of their income buying things than the rich, meaning lower-income people would be disproportionately hurt.

Sounds like a field day for Congress.  Surely we will ignore any solutions by other countries (remember that American exceptionalism)  {USA chant goes here, readers}

  • That is why countries often make other major changes to their tax code at the same time.
  • But just as the income tax has been hollowed out by countless loopholes, so could a value-added tax. Many European countries, for example, have counteracted the regressive qualities of the tax by exempting broad categories of goods, like groceries and children’s clothing.  This always creates problems, economists say. Companies are tempted to mislabel their products so they can avoid the tax.

Can you imagine the lobbying on this one?  No, this chair is actually a food product!  The poor need this chair, I demand its excempt or you will never see another dollar to your political action committee.  You can extroplate from there.

  • “What really is the difference between prepared food versus nonprepared food?” said Alan J. Auerbach, an economics professor at the University of California, Berkeley. “You start having to split hairs, and that can become quite complicated.”

As each lobbying group takes their turn in writing the VAT legislation what will be left is some smoking hull that most likely will just punish those with household income of $40K-$250K.  To believe otherwise is to ignore almost every step of legislation the past 20 years.

[Dec 4, 2009: Public Workers Continue to Live the Good Life in New Jersey]

[Nov 23, 2009: NYT - Wave of Debt Repayments Facing US Government]

[Aug 11, 2009: LA Times - Amid Cost Cutting, Los Angeles City Pensions Continue to Soar]

[May 5, 2009: Federal Aid Surpasses Sales Tax as Top Revenue Generator for States]

[Feb 18, 2009: Bloomberg - New Jersey's Budget Shortfall Reaches $3.6 Billion]

[Feb 17, 2009: Kansas Joins California in Budget Woes]

[Dec 6, 2008: How Bad is Minnesota's Budget Deficit? Mega-Bad]

[Dec 4, 2008: Bloomberg - Hoboken New Jersey Increases Taxes 47%]

[Jul 2, 2008: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%]

[May 8, 2008: It Pays to be a Firefighter in Vallejo]

[May 7, 2008: Vallejo, California Votes for Bankruptcy]