I’ve traveled all over the world, and those countries with high retail taxes or controlled exchange rates end up becoming cash societies to the extent possible. The Argentines and the Greeks and the Italians are lifetime grandmasters at surviving in such an economy. Call me cynical, but at 30%, I think a lot of my neighbors would quickly master the game, too.
A VAT, or any of its sisters, has the advantage of being taxed at the business level on the incremental value added to products at each stage of production. It is thus a great deal harder to avoid, so everybody pays. Or almost everybody. It would actually capture a lot of the current underground economy.
So why not make the VAT large enough to get rid of all the other taxes, as the Fair Tax folks suggest? For me, it’s is a purely political decision. The VAT is a regressive tax. That means it generally falls more heavily on those with lower incomes. And progressives and liberals will hate that. So we have to come up with a compromise. That means we’re still going to have to have an income tax, but we need it to be as low as possible. My suggestion is 20% on all income over $100,000. (See last week’s TFTF for details.)
To make the VAT less of a regressive tax, I propose that we make it large enough so that we can eliminate the Social Security tax. That immediately gives all lower-income earners a 6% pay raise. Plus, it lowers business costs 6%. That takes away a lot of the regressive nature of the VAT.
Not starting to pay income tax until you clear $100,000 and not being taxed for Social Security doesn’t mean that those who make between $50,000 and $100,000 don’t pay taxes. They pay taxes in the form of the VAT, plus their local taxes; so their tax burden should not be a lot different than it is now, and they might even see something of a tax cut.
Remember, the object here is not just to cut taxes but to figure out how to get more tax revenue with the least possible pain to the overall economy. If your family has ever been faced (as mine has on several occasions) with a significant increase in expenses or decrease in income, you know you had to make some tough choices. On the national level, too, somebody is going to have to pay more, and somebody is going to get less. I remember that when I was starting out in business in my 30s, there were days when I darkly joked, “I’ll pay what I have to, and everybody else will have to wait.” That included my wife and kids and what they wanted or even needed. Reality’s a bitch sometimes.
We have a reality to face up to now. And that is our national political process. We have to figure out where to get the money to pay for what our citizens say they want. If a Republican president and Congress do not enact legislation that gives voters something approximating what they feel they need, Republicans will be thrown out and Democrats will be given another chance. Let me tell you straight up that the economists advising the Democrats will not only give us a VAT, they will give us high progressive personal income taxes, and the corporate tax will not come down that much. They simply don’t buy my economic view of the world. They are neo-Keynesians through and through. Think Europe on steroids … even as we watch Europe getting ready to implode over the next four years.
There are a number of objections along the lines of, “If we do what you propose, it will hurt me. It’s not fair.” Well, in many cases I agree and sympathize with you. But at this point in the game, our whole political and economic situation is “not fair;” and we’re left with only difficult (but necessary) choices. One especially poignant objection came from a reader who had converted his entire pension plan to a Roth IRA, paid his taxes, and now I was, proposing a VAT that would make him pay his taxes again. He is quite right that this is unfair to him. But I don’t know what to do. It is simply not possible to devise a system that is fair to everyone in every way. We have to make some tough decisions. The needs of the many must outweigh the needs of the few. And I say that with a full understanding that, as Ayn Rand discovered and explained, the needs of the individual are what give rise to the need and possibility for value judgments to begin with.
That is the problem with making decisions in a government that is as big and complex as the US system is. We have let its growth get out of control, and going back would be so unbelievably disruptive in terms of lives and fortunes and jobs and futures that the reverse trip is simply not possible. We can’t rewind the clock. As The Gambler told us, “Every hand’s a winner and every hand’s a loser.” We have been dealt the hand we have, and we have to figure out how to play it to make it a winning hand. Folding is not an option.
What Happens If We Don’t Balance the Budget?