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April 06, 2005

Bartlett Speaks, or How I Stopped Worrying and Learned to Love the VAT

Movement conservative Bruce Bartlett has penned one of those responsible Republican op-eds Democrats are coming to know and love; and he's written a real one, not a Brooksian poison pill. He argues that Republicans have neither the will nor the desire to seriously shrink government spending, in fact, they've proved themselves as bad as Democrats. With that known, he says, the idea of starving the beast is dead, the gig up, the game over; now we need to figure out how to deal with the coming health care crunch, mindful that politicians haven't the courage to slash health care. To that end, he recommends the Value Added Tax.

A bit of background: The VAT is used by every industrialized nation save America. It's essentially a sales tax levied on manufacturers during each step of the production process. As an example (stolen from Taxing Ourselves), assume this simplified life cycle of bread: A farmer grows and grinds wheat, then sells the resulting flour to a baker for $1. The baker makes dough and sells the bread for $2. And let's assume the VAT is 10%. The farmer, when he sells to the baker, pays 10 cents to the government, because he added one dollar to the product. The baker, when he sells to the consumer, pays 10 cents to the government, because he added one dollar to the product. Had he sold the bread for $3, he would have paid 20 cents, because he added two dollars to the product (.1*2=.2). The tax is paid on the value each added to the product.

Next assume we're baking a rare and expensive bread that takes 15 steps to make. The VAT, of course, is tacked on by the company paying it at each step down the chain. So if each company adds a dollar of value to the bread, by the fifth company, 40 cents have been added to the price (four dollars of value added and taxed at 10%). Every company down the line can deduct what they pay of the VAT off their tax returns, so the fifth company could deduct that 40 cents, the eighth company could take off 70 cents, etc. This'll matter in a moment.

So the VAT, basically, is a sales tax that sounds a bit more complicated because it's collected in stages rather than all at once. So why has virtually every nation that's ever had a serious sales tax converted to a VAT?

In a word, enforceability. Running a sales tax is, for a variety of reasons, ridiculously tough to do. As a product moves through the production process, it's still taxed at most every step, including when sold to the consumer. When the sales tax is high, this can distort the price upward very, very heavily, particularly on products with lots of manufacturing steps. The VAT simply taxes the added value on each step in production (and it taxes only the businesses, never the consumer directly, though the added cost is generally passed on to the consumer), it doesn't tax both the production chain and the customer, and so no products are penalized more heavily than others, eliminating a major source of discontent.

Beyond that, tax evasion is easier to control, both because companies doing it only cheat the government out of a small proportion of the tax (remember: they only pay the tax on the value they themselves added to the product, so they're welching on a fraction of the total tax rather than the whole thing, as would be the case if a store withheld a sales tax), but other companies have an incentive to make sure the tax is paid down the line so they can claim it on their returns. Remember the rare bread? Companies get to deduct the tax added on at each step of the process, so if they forego their own portion they can't deduct any of the others -- if you're a company far down the production line, that leaves you paying more than if you had just ponied up the tax. So if producers up the line try to weasel out of paying it, you're going to make sure they put up the tax so they don't screw up your tax returns and cost you money down the line. It becomes, to some extent, self-policed.

Now, why am I spending so much time on this? Readers who remember my health policy wonk-out from a few weeks back might also recall that the CAP health plan I was obsessing over wanted to pay for itself with a 3-4% VAT. And here we have Bruce Bartlett proposing a VAT to pay for health care spending. Stodgy Republican warhorse Bill Thomas (the one who judged Bush's privatization plan a "dead horse") also wants one. This, I think, is about as good as it gets for liberals. An emerging consensus on a new, dedicated revenue source to guarantee the financial solvency of health care. And if, while we're moving this through, we can't create a hybrid universal plan along the lines of CAP's proposal, we're completely useless as a political party -- this is the best, and maybe only chance we've had since 1994. So go forth and spread the word -- there should be bipartisan Brookings events on using a VAT to pay for health care spending, op-eds authored with allies across the aisle, educational initiatives aimed at converting legislators, and on and on. Bartlett's op-ed might mark a powerful opportunity for passing a progressive priority -- it's up to us to capitalize on the moment.

Any questions?

April 6, 2005 in Health Care | Permalink

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» Higher Taxes? from Political Animal
HIGHER TAXES?....Conservative economist Bruce Bartlett has been inching toward support for tax increases for a while, and today in the New York Times he finally drinks the Kool-Aid:In the 1980's and 1990's, I thought it was possible to restrain the... [Read More]

Tracked on Apr 6, 2005 1:58:58 AM

» Now I Know My VATs, Won't You Come and Play With Me. from The Node - Where Blogs Come Together (Beta Version)
Ezra Klein uses a New York Timeseditorial by conservative economist Bruce Bartlett to explain what a Value Added Tax is and why it is better than a sales tax. [Read More]

Tracked on Apr 6, 2005 9:13:07 AM

» Taxing value from coffee grounds
Ezra Klein and others discuss the idea of a Value Added Tax (VAT) and dedicating its revenue to health care. I don't understand the liberal opposition, in principle, to a VAT (also known as GST for goods and services tax... [Read More]

Tracked on Apr 6, 2005 1:56:55 PM

» Ezra Klein's Transformation Continues from Brad DeLong's Website
With any luck, in a year he'll be learnedly discoursing on alternative PAYGO proposals. But now he is merely entranced by the Bruce-Bartlett recommended Value Added Tax: Ezra Klein: Now, why am I spending so much time on this? Readers who remember my h... [Read More]

Tracked on Apr 7, 2005 3:27:16 PM

» BARTLETT'S
FAMILIAR QUOTATIONS
from MaxSpeak, You Listen!
Bruce Bartlett's analysis of spending is right on point. He doesn't illuminate much the causes of health care and other spending growth, so the impression might linger that it is all some kind of profligate, extravagant exercise. But his case... [Read More]

Tracked on Apr 7, 2005 3:38:33 PM

Comments

This is better than repealing Bush's tax cuts for the wealthy why? I'm being serious. If the Republicans control Congress and raise taxes, why have any Democratic fingerprints on it at all? Especially when there's an obvious solution that isn't as regressive - go back to how it was before Bush's tax cuts, and if necessary tack on another percentage point or two on the top 10% of wage earners.

Posted by: Uh.... | Apr 6, 2005 1:50:47 AM

Ezra, isn't the inability to discriminate between goods actually decrease the progressiveness (if there is any) of this tax? If clothing, medicine, and unprepared foods are all taxed under this scheme, you're increasing taxes on low income. Now, I'm not highly familiar with the CAP plan, but I am suspicious of the VAT.

That said, America needs to take a serious look at consumption taxes as one possibility to help spur higher savings rates, but there are progressive ways to do that.

Posted by: Matt Singer | Apr 6, 2005 2:22:26 AM

Well, you can create exemptions in the VAT if you want -- the European nations have tons of them. That said, I think a 3-4% flat VAT -- even though it is a little regressive -- is a bargain worth making for solid, universal (of some sort) health care. The increase in cost is not that prohibitive, and those whom it actually hurt will be comparatively far better off with the health care it provides. Further, we're just not going to get everything we want. Now, maybe we should fight for a progressive VAT and comprehensive health care knowing where we can back down and bargain, but assuming our minority status (I have a feeling, actually, that now is groundwork time, this wouldn't be actionable until we have the presidency), that's real pie-in-the-sky and we should know so internally.

I'm not a fan, also, of using a variety of other taxes to make up the difference. Over at his site, Kevin suggests that approach -- higher gas, inheritance, etc. I want those instituted, but I think they're insecure as revenue sources. When you can find a single tax and chip away at it, it's easier to destabilize the whole operation. You can take down the Estate Tax, or the Gasoline tax, and people think they're just eliminating a tiny, objectionable revenue source. Using the income tax is also tougher -- since it goes towards so many different programs, Republicans can use a few unpopular ones to force tax cuts that end up hitting the whole government. But if you look at the experience of Social Security, the payroll tax has been remarkably secure, even though it's right in the face of everyone receiving a paycheck and would, theoretically, thus be first on the chopping block. Thus, I think a dedicated, single source providing revenue for health care would enjoy a similar stability. And considering the surprising support the VAT is garnering, I think that's the one to look at.

I'll have more to say on this tomorrow. For now, does that help?

Posted by: Ezra | Apr 6, 2005 2:42:55 AM

I think you have some facts wrong on the sales tax:

Ezra: Running a sales tax is, for a variety of reasons, ridiculously tough to do. As a product moves through the production process, it's still taxed at most every step, including when sold to the consumer.

I believe (based on personal experience in CA) that when goods are sold between intermediate buyers/sellers in the chain that sales tax is NOT assessed. Each of these parties signs a standard form thaat says the product is not being sold to the ultimate consumer and therefore tax exempt. The forms are signed one-time as for each buyer/seller pair, so each transaction doesn't require new paperwork.

So in your example only the consumer buying the finished bread pays sales tax now.

I'm also doubtful that the VAT is the cure-all you see it to be;

- The Repub. MAJORITY will exempt all their friends

- The Repubs WILL NOT DEDICATE the VAT to health care

- The Repubs will enact a regressive structure.

- Dems should be VERY reluctant to join into a NEW TAX (tax & spend = liberal Democrats). Dems will be blamed for enormous amount of paperwork imposed on everyone in the production chain, as well as the new tax.

- If the Dems promote the VAT, the Repub will use this to solve the financing problems of Social Security (which can be more easily solved with tweaks of existing variables - the AARP is all over this issue with reasonable proposals), and not use the VAT to provide universal health care.

- I'd like to see empirical data that cheating on the VAT is not a problem in Europe before I'd get more enthusiastic. The record keeping at each stage of production seems open to manipulation (I didn't sell 1000 units of flour to Joe yesterday, just 500).

Posted by: JimPortlandOR | Apr 6, 2005 4:30:21 AM

What Uh said. Don't most of the countries that use a VAT also couple it with a fairly progressive income tax?

Single payer combined with a restoration of pre-Bush tax rates on the upper margins and investments - that's an idea that liberals and progressives can get behind. But under our current tax structure VAT is just a mushy screw the consumer move that only the DLC could love.

Posted by: Bruce Webb | Apr 6, 2005 9:02:24 AM

Well, on the sales tax thing, most every country that has ever had a serious sales tax has converted to the VAT. Of the 10 that have had them over 10%, 5 are now on VAT and the sixth is moving over.

Bruce: On the income tax issue, I just put up a separate post explaining why I prefer the VAT. Maybe it'll help clarify that.

Posted by: Ezra | Apr 6, 2005 11:36:26 AM

Thanks for the explanation, but I'm suspicious.

Posted by: praktike | Apr 6, 2005 11:57:40 AM

Here comes a long rant about the VAT so I apologize in advance:

One of the reasons the US economy is so resilient and flexible compared to other nations is the fact that we DON'T have a VAT. I wish I knew where I could find empirical data on this because I don't like shooting from the hip, but implementing a VAT has two huge negatives, (1) that it has an inflationary effect on the entire economy (businesses pass on the costs of the VAT to the consumer) and (2)it works like a handbreak on any kind of economic transaction because you are adding a cost to EVERY transaction.

What people are missing, from the whole Social Security boondoggle, the proposals of implicating a VAT or a National Sales Tax, the abolishment of the Estate and Gift Tax, are all part of a larger goal, which the Republican party has been striving for since Herbert Hoover, any taxation must be as regressive as possible. The starve the beast motto is something of later vintage and doesn't match reality. The GOP is power hungry and money talks and bullshit walks; the last 5 years has proven that neither the House nor the Senate Republicans can really restrain themselves when it comes to spending.

Remember the last time Social Security was "in crisis" That was in 1982 right after the first set of Reagan tax cuts. The fix was an extremely regressive one, i.e. the rate for everyone who made under $87,000 went up. It was hailed by the media at that time and is to this day described as being "fair for all."

Going forward to 2005, we have had the same raid on the Treasury through tax cuts which mostly benefit the top 10 percent. The other shoe has to drop as the US Treasury cannot maintain its ongoing deficit.

Any kind of acquiesence by the Democrats to any kind of regressive measures should be avoided at all costs. I saw this the other day somewhere and I have always wondered this: Where is the proof that tax cuts actually have a net benefit for the overall economy? Where is the proof that people have an disincentive for working harder if they are taxed more? Have those top ten percent, who have gotten all the breaks tax wise, actually used that money to invest in their business and hire people, as Republican economic theory goes.

Once again, I am shooting from the hip without empirical data, but in my town I have noticed an exponential increase in luxury automobiles. Why are Neiman Marcus and Nordstrom, for example, doing so well at Christmas time while Wal Mart and Target's sales are flat? It says to me that all those tax breaks are going to personal consumption, not to the benefit of the overall economy.

Any economic proposal that comes from a conservative or a Republican should be taken for what it is. Digby had a post about when David Brooks is giving advice to the Democrats, we should do exactly the opposite. As far as any kind of economic proposals are concerned, we should do the same, or at least come up with our own proposals and with our own language.

Posted by: DBaker | Apr 6, 2005 1:03:36 PM

What got me was his statement early on that a VAT disproportionately hurts the elderly, followed by saying that the cost of healthcare for an aging population were going up, so we should have a VAT to pay for Medicare. Making food cost more while healthcare (including Medicare premiums) costs more sounds like a sure recipe for destitute grandmothers (and a whole lot of others) to me. I'm happy Bartlett is considering taxes; I'll be happier when he and his friends start talking about taxing people who can afford it.

Posted by: Jade | Apr 7, 2005 1:23:19 AM

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Posted by: peter.w | Sep 15, 2007 8:35:56 AM

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