• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • VAT Finds Favor with Debt Commission Co-Chairman Bowles

    “I think there are many good arguments that you can make for a value added tax or a consumption tax, as opposed to a tax on wages” said National Commission on Fiscal Reform Co-Chairman Erskine Bowles on April 25 during a joint appearance with Co-Chair Alan Simpson on Fox News.

    This is a chilling statement both for what it says about tax burdens and what it says about tax reform. One of the most poorly kept secrets in Washington is that the President’s so-called debt commission is supposed to find the formula for dressing up the value-added tax (VAT) to make it acceptable to the American people. This is like trying to fit ruby slippers to a sow. A good clue to the difficulty of the task is the President was careful to ensure the commission reported after the mid-term elections.

    The only reason to consider the VAT is because the current tax system cannot support the massive spending surge the President has already pushed through let alone the additional spending he envisions or the entitlements wave to follow. Either he finds a way to finagle the VAT or he will be forced to pare spending back to previous levels. Either Washington puts a much bigger squeeze on the taxpayers, or Washington must go on a crash diet. It’s time to send the federal government to a fat farm.

    Co-Chairman Bowles statement is just as chilling when it comes to tax reform. The issue is that Bowles, a man of intelligence and policy experience, apparently does not understand that a consumption tax and a tax on compensation are economically equivalent. This is tax reform 101. A flat rate tax on consumption reduces the purchasing power of a given amount of wages, while a flat rate tax on wages reduces the amount of after-tax income available for consumption. If the amounts of revenue collected are the same, then the economic effects are the same.

    Saving out of wage income presents a wrinkle, but a small one, because saving occurs to shift the timing of consumption from the present to the future. So there is again no difference economically whether the wage income is taxed today or the consumption is taxed tomorrow.

    True tax reform, once this nasty VAT business is dispatched, faces a real uphill climb as much because of the poor understanding of basic tax theory among policymakers as the traditional and inherent political difficulties.

    Posted in Economics [slideshow_deploy]

    22 Responses to VAT Finds Favor with Debt Commission Co-Chairman Bowles

    1. John, Rhode Island says:

      Mr. Foster, I don't know where you took tax reform 101, but my education bears out that Erskine Bowles is actually making an accurate statement. If we had to choose between a tax on productivity and a tax on consumption, the consumption tax is less damaging to the economy than the income tax we currently employ.

      Even if the net revenue is equal, you're forgetting the auxiliary services that must be in place to support the current income tax. We spend almost 40 hours prepping for our income tax return, and then we paying an accountant to file the return. The IRS employs countless agents to police compliance. If we instituted a simple consumption tax (I actually prefer the fair tax as opposed to the VAT, but i digress), we would eliminate a lot of wasteful spending in this economy and business investment in the US would increase due to the lesser tax burden.

      That said, our politicians would never simply replace the income tax with a consumption tax. The consumption tax would augment the income tax, like it does in Germany and other parts of Europe, so this discussion is probably for naught.

    2. Timothy Bair, Grafto says:

      "Personal estate (as has been before remarked), from the difficulty in tracing it, cannot be subjected to large contributions, by any other means than by taxes on consumption. In populous cities, it may be enough the subject of conjecture, to occasion the oppression of individuals, without much aggregate benefit to the State; but beyond these circles, it must, in a great measure, escape the eye and the hand of the tax-gatherer"

      Alexander Hamilton, Federalist Number 12

      Hamilton could perhaps never have imagined a government (save the British Crown) and bureaucracy so pervasive which we regretfully endure today which may, at their discretion, delve into every aspect of a persons private affairs and finances.

      "In a time when many lands and properties, public and private, have become exempt or overtaxed by an ever expanding government and self dealing legislative action, the self infatuation of those within that government shall learn quickly the law of diminishing result and returns upon the capitalist and financial system for which they make such lofty pretense to hold great affection."

      Timothy Bair

      http://www.facebook.com/note.php?note_id=31797013

    3. MJF, CT says:

      The Obama Administration can dress and try to doll up VAT all it wants but if it walks like a pig, and smells like a pig, it must be a pig!

    4. J.C. Hughes, Texas says:

      The tea parties are most appropriate given the absolute taxation abuses handed down between 1913 and today's self-serving congress. And now an additional federal sales tax? Our nation's constitution, specifically article 1 section 8 and tenth amendment, is intentionally being neutralized, misinterpreted and/or completely ignored by these biased congressional ideologues. We need a return to our founders' intended message and design. We as a nation are continuing to pick up the pace toward our own destruction.

    5. Brad, Chicago says:

      Doesn't a VAT disproportionately punish the people who are spending more money (a.k.a. driving the economy)? It's both progressive and regressive. People making more money will spend more money and, therefore, pay more total tax than people who make and spend less. People on government assistance (who aren't already paying taxes on their wages) will suddenly have to deal with everything costing more. This thing just sounds like a horrible idea.

    6. Wildcat from Dallast says:

      I have to echo most all of George Will’s thoughts he so aptly put in one of his articles that I’ll include below. While I agree they can have an exceptionally minor VAT only after they repeal the 16th Amendment, establish (if they must) the FAIR TAX, change the corporate tax structure enabling businesses to write off the cost of health insurance as a cost of doing business [making an allowance for individual policy holders to do likewise provided they provide proof of said insurance], changing the structure of how the government pays out nursing home benefits for Medicare and especially Medicaid while simultaneously incentivizing citizens taking personally financial responsibility for such care and not penalizing any financial gain (which is usually temporary) for excess benefits derived from Long Term Care (LTC) insurance policies, not taxing social security benefits and not paying illegal aliens any welfare benefits.

      I had responded to HF on this before when Sen. McCain got a resolution passed in the senate 84 to 13 with only 2 not present to not pass a VAT in the senate. My thoughts remain as such and I’ll include them just below this sentence.

      While Bruno has an exceptionally viable concept and strategy (with amendments) to follow I think Sen. McCain did get this one off to the right start by being proactive for a change. He also apparently didn’t have to “sell” this idea to anyone since it met a fully bipartisan vote of 84 to 13 with only 2 not voting.

      We needed a strong way to stop the next serious (post November elections) madness that was being readied to foist upon us. Now we need a similar one in the House. That will make it more difficult to go the other way once that special committee (with Andy Stern) releases their foregone conclusions that we need a VAT to maintain this level of spending.

      There are several tax and incentive concepts that could be applied to extract the American citizens out of this mess without overburdening everyone’s wallet. Simply not funding the Progressives/Statists/Socialists programs would stall the spending aspect. Repealing specific unnecessary programs including the HCR act, and if need be, dismantling federal departments that haven’t met their mission since inception (DOE) and others. Repealing the income tax from 1913 and replacing it with the FAIR TAX, no increase tax on gas or diesel fuel but review the inclusion of a specifically targeted and minor percentage VAT of 5% with half of that going to repay Social Security and the remaining half going to pay down the principle of the debt with the caveat that as the one becomes fully paid off that portion of the VAT now gets applied to the remaining program in need of reimbursement and once completed the VAT ends on December 31st of that year without exception. There is a need to incorporate a severe punitive action for any Legislator OR member of the Executive branch who even attempts to modify any of the terms is this law once enacted.

      To stimulate the economy without increasing government spending I would enact something designed to actually help every citizen relative to health insurance (therefore health care) and improve their personal financial status. First off I would change how businesses (small, medium and large) account for their employees health insurance premiums. Return to the practice used for a year or two during WWII (but make it permanent) that businesses will write off all health insurance premiums as a cost of doing business! Now, those who before had to contribute pre-tax dollars for their health insurance now have more usable money in their paycheck. Next is to allow those working citizens (NO non-citizens & NO ILLEGAL Aliens) to obtain a waiver to not pay tax on their individual health insurance policies provided their employer does not provide that type of health insurance.

      A fortified health savings account plan in which tax exempt money would be placed in a separate interest bearing account for individuals and families to draw from to better deal with routine or even unexpected health care costs that if not used could be rolled forward indefinitely and could be willed to other family members for portions not used. Make the annual max amount per family member in the range of $5K to $10K and tied to social security numbers. If, by chance the money is not fully consumed by the time they reach the age of retirement or nursing home admittance then they can use the money to improve their quality of life however they choose.

      In order to reduce future financial liabilities by the government for both Medicare and for Medicaid, why don’t we incentivize taking personal responsibility for our individual healthcare (to include long term care insurance [LTC]) during the preponderance of our lifetime? We already know that the greatest costs associated with these programs routinely occur in the last few years of the person’s life. Let’s start a program where citizens who purchase and maintain Medicare Supplement Insurance plans above the federally mandated Plan C and who purchase and maintain a LTC insurance policy that would cover the current cost plus and an additional $100 per day benefit of the most expensive type of skilled nursing home care which is a dementia or Alzheimer’s unit, with the following mandated features: inflation rider, return of premium rider, lifetime benefit and a 90 day elimination period. Four additional important facets include that the individual pays no tax on the premium dollars to cover these insurance policies, that benefits paid above and beyond the cost of the nursing facility will not be taxed (by the federal and the state government period) and the government will pay the first 90 days of their nursing home (assisted living and/or skilled nursing) stay and the patient does not have to change “beds” from a Medicare or Medicaid bed to a self paying bed. Paying for the first 90 days of which ever happens (assisted or skilled) is dramatically cheaper than paying for the entire stay much less the last six months to a year. The government’s financial liability is reduced and patient gets to choose and control his or her destiny. Also, since most insurance policies include Hospice care, that cost too is removed from the government’s liability. Also, I would repeal the social security and Medicare/Medicaid law enacted during the Carter administration that had the government take on the financial responsibility for giving those aforementioned benefits to illegal aliens! That will go a long way to making those programs solvent longer. Next is to make the uncovered illegal alien pay before any medical services are rendered like they do in Germany today. No free care for illegal aliens.

      Well, I think I’ve covered enough of a rough draft of a working concept to actually solve some of our country’s most critical issues without stripping the citizens of any of their personal liberties while retaining their dignity throughout their lives.

      And, now below this I have included George Will’s article that I perused from Newsmax:

      For VAT to Work, Repeal 16th Amendment

      Monday, 19 Apr 2010 03:18 PM

      Article Font Size

      By: George Will

      When liberals advocate a value-added tax, conservatives should respond: Taxing consumption has merits, so we will consider it — after the 16th Amendment is repealed.

      A VAT will be rationalized as necessary to restore fiscal equilibrium.

      But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government.

      Believing that a crisis is a useful thing to create, the Obama administration — which understands that, for liberalism, worse is better — has deliberately aggravated the fiscal shambles that the Great Recession accelerated.

      During the downturn, federal revenues plunged and spending soared. And, as will happen for two decades, every day 10,000 more baby boomers are joining the ranks of recipients of Medicare and Social Security, two programs with unfunded liabilities of nearly $107 trillion.

      In the context of this concatenation of troubles, the administration's highest priority was to put an enormous new healthcare entitlement on the welfare state's rickety scaffolding. Why? Because the liberals' lunge to maximize government's growth depends on quickly creating a crisis that can be called a threat to the entitlement menu, and to the currency as a store of value. Then the public can be panicked into accepting the addition of a VAT to the existing menu of taxes.

      A VAT is collected on value added at stages during the process of production, but most of its burden is borne by consumers. They file no VAT returns, so its stealthiness delights the political class, which can increase it in small, barely noticed increments, with every percentage point yielding another $100 billion.

      Although the nation's welfare often varies inversely with that of the political class, a VAT would ameliorate a real problem: Americans consume too much and save too little. Furthermore, today's baroque tax code drives economic distortions and enables corruptions.

      Corporations do not pay taxes; they collect them, passing the burden to consumers as a cost of production. And corporate taxation is a feast of rent-seeking — a cornucopia of credits, exemptions and other subsidies conferred by the political class on favored, and grateful, corporations.

      Because the income tax is not broadly based, it radiates moral hazard: Its incentives are for perverse behavior. The top 1 percent of earners provide 40 percent of that tax's receipts; the top 5 percent provide 61 percent; the bottom 50 percent provide 3 percent. So the tax makes a substantial majority complacent about government's growth.

      Increasingly, the income tax is codified envy. A VAT is the political class' recourse when the resources of the minority that is targeted by the envious are insufficient to finance ravenous government.

      Because a VAT would shred Barack Obama's promise not to increase any tax on households with incomes less than $250,000, he must hope the deficit reduction commission he created will provide cover for his apostasy. But 14 of the commission's 18 members must endorse any recommendation.

      Good luck finding two votes for a VAT among the six Republican members — Sens. Judd Gregg, Tom Coburn, and Michael Crapo, and Reps. Paul Ryan, Dave Camp, and Jeb Hensarling.

      And wait until the political class' most imperious masters, the elderly, are heard from. When they worked, they paid taxes on their incomes; retired, they will resent — they are virtuosos of resentment — being taxed when they spend their savings.

      Because a VAT potentially taxes everything, it would be riddled with exemptions. This is because it maximizes the political class' opportunities for showing favoritism — by, for example, exempting certain "green" goods.

      It also widens that class' scope for the pleasure of being bossy. For example, it could reduce a VAT's regressiveness — like rain, a VAT falls equally on the rich and the poor, but the poor devote a larger portion of their income to consumption — by exempting most foods but not those that the nanny state disapproves: "Put down that sugary soda and step away from the vending machine!"

      Money is time made tangible — the time invested in the earning of it.

      Taxation is the confiscation of the earner's time. Although some taxation is necessary, all taxation diminishes freedom. Adding a VAT without subtracting the income tax would constrict Americans' freedom much more than the healthcare legislation does.

      Because the 16th Amendment will not be repealed, adoption of a VAT would proclaim the impossibility of serious spending reductions, and hence would be the obituary for the Founders' vision of limited government.

      George Will's e-mail address is georgewill@washpost.com.

    7. Paul says:

      I was kind of for a VAT tax—-as a "replacement" for the income tax.

    8. Pingback: » Financial News Update – 04/27/10 NoisyRoom.net: Fighting for the Constitution

    9. TheCynicalEconomist. says:

      John, Rhode Island…

      LOL man, wake up! These people are talking to enact VAT on TOP OF YOUR CURRENT TAXES!

      The debt commission IS NOT choosing between VAT or income taxes. They are choosing between rising the income tax rates and enacting VAT as a "bonus" on top of your current taxes… Thats how they do it in the Socialist States of Europe

    10. TheCynicalEconomist. says:

      John, Rhode Island…

      Ooops! When I wrote my comment I have read only the 1st paragraph of your comment…

      We are actually in an agreement. I agree with you!

      Eliminate all taxes and institute the Fair Tax as the ONLY TAX in USA!

      According to all the studies, that must jump start the US economy

      Apology for my previous comment.

    11. Melva Missouri says:

      We definetely do not want the VAT on top of the income tax BUT the Fair Tax which is a consumtion tax would also get rid of the income tax. Fair Tax is the winner over all of the taxes. It is more fair and will be revenue neutral.

    12. Lisa, GA says:

      The VAT would not replace the income tax; but the FairTax would replace the income tax, payroll tax, inheritance tax, and all other federal taxes. But, the government will still get the same amount of money because, even though individuals would pay less, more people will be paying. Everyone would pay the same tax rate on NEW products and services (used products are not taxed!). Because of the prebate, the FairTax would not burden the poor. The FairTax is a good idea for everyone.

    13. Don Aspromonte Dalla says:

      The author has no understanding of the FairTax, which would actually solve the problem. His confusion is obviously the result of speaking about something he has not studied. Study the FairTax and see if you still believe all income taxes and consumption taxes are the same if they confiscate the same amount of money from the populace.

    14. Windsailor,New Jerse says:

      Let's get real folks, any tax proposal generated by any commission sponsored by the government will have a singular purpose……to raise the governmental income. The long forgotten Grace Commission(1980s) proposed ways of cutting expenses and look what happened to it's suggestions…..NADA, nothing, shelved and forgotten.

      The purpose of government is to expand until it controls all resources, at that point it will wither and die because continued growth is unavailable. All governments eventually become a cancer on it's subjects, point out one that hasn't.

    15. Harry TC says:

      They want a tax on a tax on a tax. Adding a tax on consumption! We pay a tax on most everything already, and now we will be taxes for the Healthcare for which a VAT will be added on top!!

    16. Wildcat from Dallast says:

      I have to echo most all of George Will’s thoughts he so aptly put in one of his articles dated April 19th.that I read in Newsmax. While I agree they can only have an exceptionally minor VAT only AFTER they repeal the 16th Amendment, establish (if they must) the FAIR TAX, change the corporate tax structure enabling businesses to write off the cost of health insurance as a cost of doing business [making an allowance for individual policy holders to do likewise provided they provide proof of said insurance], changing the structure of how the government pays out nursing home benefits for Medicare and especially Medicaid while simultaneously incentivizing citizens taking personally financial responsibility for such care and not penalizing any financial gain (which is usually temporary) for excess benefits derived from Long Term Care (LTC) insurance policies, not taxing social security benefits and not paying illegal aliens any welfare benefits.

      I had responded to HF on this before when Sen. McCain got a resolution passed in the senate 84 to 13 with only 2 not present to not pass a VAT in the senate. My thoughts remain and I think those concepts could be an integral and viable part of our much needed solution.

      I think Sen. McCain did get this one off to the right start by being proactive for a change. He also apparently didn’t have to “sell” this idea to anyone since it met a fully bipartisan vote of 84 to 13 with only 2 not voting.

      We needed a strong way to stop the next serious (post November elections) madness that was being readied to foist upon us. Now we need a similar one in the House. That will make it more difficult to go the other way once that special committee (with Andy Stern) releases their foregone conclusions that we need a VAT to maintain this level of spending.

      There are several tax and incentive concepts that could be applied to extract the American citizens out of this mess without overburdening everyone’s wallet. Simply not funding the Progressives/Statists/Socialists programs would stall the spending aspect. Repealing specific unnecessary programs including the HCR act, and if need be, dismantling federal departments that haven’t met their mission since inception (DOE) and others. Repealing the income tax from 1913 and replacing it with the FAIR TAX, no increase tax on gas or diesel fuel but review the inclusion of a specifically targeted and minor percentage VAT of 5% with half of that going to repay Social Security and the remaining half going to pay down the principle of the debt with the caveat that as the one becomes fully paid off that portion of the VAT now gets applied to the remaining program in need of reimbursement and once completed the VAT ends on December 31st of that year without exception. There is a need to incorporate a severe punitive action for any Legislator OR member of the Executive branch who even attempts to modify any of the terms is this law once enacted.

      To stimulate the economy without increasing government spending I would enact something designed to actually help every citizen relative to health insurance (therefore health care) and improve their personal financial status. First off I would change how businesses (small, medium and large) account for their employees health insurance premiums. Return to the practice used for a year or two during WWII (but make it permanent) that businesses will write off all health insurance premiums as a cost of doing business! Now, those who before had to contribute pre-tax dollars for their health insurance now have more usable money in their paycheck. Next is to allow those working citizens (NO non-citizens & NO ILLEGAL Aliens) to obtain a waiver to not pay tax on their individual health insurance policies provided their employer does not provide that type of health insurance.

      A fortified health savings account plan in which tax exempt money would be placed in a separate interest bearing account for individuals and families to draw from to better deal with routine or even unexpected health care costs that if not used could be rolled forward indefinitely and could be willed to other family members for portions not used. Make the annual max amount per family member in the range of $5K to $10K and tied to social security numbers. If, by chance the money is not fully consumed by the time they reach the age of retirement or nursing home admittance then they can use the money to improve their quality of life however they choose.

      In order to reduce future financial liabilities by the government for both Medicare and for Medicaid, why don’t we incentivize taking personal responsibility for our individual healthcare (to include long term care insurance [LTC]) during the preponderance of our lifetime? We already know that the greatest costs associated with these programs routinely occur in the last few years of the person’s life. Let’s start a program where citizens who purchase and maintain Medicare Supplement Insurance plans above the federally mandated Plan C and who purchase and maintain a LTC insurance policy that would cover the current cost plus and an additional $100 per day benefit of the most expensive type of skilled nursing home care which is a dementia or Alzheimer’s unit, with the following mandated features: inflation rider, return of premium rider, lifetime benefit and a 90 day elimination period. Four additional important facets include that the individual pays no tax on the premium dollars to cover these insurance policies, that benefits paid above and beyond the cost of the nursing facility will not be taxed (by the federal and the state government period) and the government will pay the first 90 days of their nursing home (assisted living and/or skilled nursing) stay and the patient does not have to change “beds” from a Medicare or Medicaid bed to a self paying bed. Paying for the first 90 days of which ever happens (assisted or skilled) is dramatically cheaper than paying for the entire stay much less the last six months to a year. The government’s financial liability is reduced and patient gets to choose and control his or her destiny. Also, since most insurance policies include Hospice care, that cost too is removed from the government’s liability. Also, I would repeal the social security and Medicare/Medicaid law enacted during the Carter administration that had the government take on the financial responsibility for giving those aforementioned benefits to illegal aliens! That will go a long way to making those programs solvent longer. Next is to make the uncovered illegal alien pay before any medical services are rendered like they do in Germany today. No free care for illegal aliens.

      Well, I think I’ve covered enough of a rough draft of a working concept to actually solve some of our country’s most critical issues without stripping the citizens of any of their personal liberties while retaining their dignity throughout their lives.

    17. Dennis, Connecticut says:

      Obama is a socialist, he will try to pass the VAT tax so he can fund all the new "Free-bee to the so called poor people, his core voting base.

    18. J.C. Hughes, Texas says:

      Harry TC is absolutely correct. First your income is taxed. With a VAT, your earnings will be federally taxed again at the register. In justice such maneuver is called double jeopardy. Let's hope folks have enough grocery money after state, county and local taxes are added to the mix. The federal government overstepped their taxation boundaries long ago with all their social entitlements. And this congress and administration boast about accomplishing more of the same? It would be helpful if the congressional leadership cared enough to understand the structural foundation of our nation. It doesn't matter how loud people shout that our country and economy are collapsing, democrats in congress and an arrogant president refuse to listen.

    19. Roy York,Pa. says:

      Just do away with the progressive tax and put in it's place a flat tax of around 13% Then sit back and watch the economy take off and put more people back to work while in the meantime dratsically cutting government spending( only what's necessary to include defense) More people working = more taxe revenue to reduce the deficit and pay down the debt.

    20. fw texas says:

      some get it others don't with income tax only the honest slaves pay taxes, with a consumption or sales tax all pay baised on what they spend no mater how they got their monies……… Illegal and Un reported income in the US is estimated at over 1.5 trillion think how10 to 20% of that would help.

      to me it is the only fair way to tax baised an what people spend their money on not how mych they can make.

    21. Bob, Bullhead City, says:

      I support a consumption tax only if the IRS and federal income tax is repealed. Everyone buys things even if you are unemployed. I thinks it's farer that taxing only people who work.

    22. Pingback: Fiscal panel co-chair supports lower corporate taxes and a VAT | The Daily Caller - Breaking News, Opinion, Research, and Entertainment

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×