The American Conservative, November 2009

american conservative november 2009In this issue, former FBI employee Sibel Edmonds names some prominent US officials whom she believes to have accepted bribes from foreign governments.   

Eve Tushnet visits a Washington, DC locale known to the federal government as Meridian Hill Park, though she has “only seen its maiden name in two places: District government plaques and local girl Florence King’s autobiography, Confessions of a Failed Southern Lady.”  Everyone else calls it Malcolm X Park.  Tushnet compares the design of the place to a ziggurat, a Sicilian village, a complex borad game, and the world’s largest Slinky.  I can see why; there are also some views which remind me of M. C. Escher.  Whatever the park’s designers were thinking, they don’t seem to have been thinking of crime prevention.  “It’s an array of alcoves linked by narrow paths and staircases… The high walls and ample foliage make it a haven for people whose professions or hobbies require a talent for lurking.”  No one seems to be committing any crimes during Tushnet’s visit, though she does have her suspicions about a man who introduces himself as a podiatrist.  

A humor piece is written as if it were a diary entry by classicist-cum-neoconservative madman Victor Davis Hanson.  The locution “No American wishes to contemplate the idea of war, but” occurs three times, the locution “No Namibian mercenary wishes to contemplate the idea of war, but” occurs once.  A truly Hansonian piece, I’d say.   

Pat Buchanan calls for the USA to adopt a border adjusted value-added tax:

 

Let us do unto our trading partners as they have done unto us. As they rebate value-added taxes on exports to us and impose a value-added tax on our exports to them, let us reciprocate.  Impose a border tax equal to a VAT on all their goods entering the U.S. and cut corporate taxes on all manufacturing done here in the United States.

Where they have tilted the playing field against us, let us tilt it back again.  Transnational companies are as amoral as sharks. What is needed is simply to cut their profits from moving factories and jobs abroad and increase their profits for bringing them back to the U.S.

 

There is currently a proposal before the US House of Representatives under the title “Border Tax Equity.”  Its sponsors describe it in just the language Buchanan uses here.  I’m skeptical of that plan; even if you set this “border tax” at a low enough rate that a corporate income tax shelter for US manufacturers would make it revenue-neutral, VAT is such a complicated system that adding it to the US tax regime on top of our existing taxes would likely discourage investment here.  

On the other hand, if the USA were to abolish the corporate income tax and the Federal Insurance Contributions Act tax (FICA) and replace them with a border-adjusted value added tax, that might well help US manufacturers.  Most of the 148 countries that collect VAT rebate it on exports, while the USA does not rebate corporate income tax when American companies ship their goods abroad.  So switching to a border-adjusted VAT would remove a competitive disadvantage the USA faces.  And FICA, a tax which employers pay in proportion to the number of people they employ, is an outright job-killer. 

Moreover, these two taxes are the heart and soul of the USA’s lunatic system of financing health care.  Employers provide health insurance largely because health insurance premiums are deducted from corporate income tax, but not subject to personal income tax.  So they can increase their employees’ compensation by a greater amount for each dollar they put into health insurance than for each dollar they put into wages.  FICA is hypothecated to Medicare and Social Security, thus funding the single biggest health insurer.  If the USA is going to move from a health care system in which insurance bureaucracies are the customers to one in which patients are the customers, it will have to begin by changing the tax regime.  And if the USA is going to discard a trade policy based on an uncritical application of the principle of comparative advantage and replace it with one which is designed to defend a high-wage economy in the US, it will have to adopt a border-adjusted VAT and do away with the corporate income tax and FICA.

This issue of The American Conservative does not speak with a united voice on the idea of value-added tax for the USA.  Libertarian economist William Niskanen is against it.  In his review of Bruce Bartlett’s The New American Economy, Niskanen summarizes Bartlett’s discussion of the US national debt.  Then:

Bartlett argues in favor of a value-added tax. But there are at least two questions that should be resolved before jumping from the awesome estimates of the U.S. federal debt to the case for an American VAT. First, what are the comparative costs of alternative means to reduce the burden of the federal debt other than an increase in taxes of any kind? Possible measures include the deferring of the age for full retirement benefits, changing the nature of the benefits that would be acceptable to the current voting population, and adopting policies that would increase economic growth. Second, what types of taxes would be most effective in limiting the political demands for government spending? The U.S. time-series evidence suggests that government spending has been negative function of the tax share of GDP, given the nature of our tax system. The cross-country evidence, however, suggests that government spending is a positive function of the average VAT rate. A more visible tax, such as an income-based consumption tax, is likely to lead to a lower level of government spending than a nearly invisible VAT. Such a tax may be the most efficient way to collect a given amount of fiscal revenues, but it would probably lead to a higher level of government spending.

I am prepared to accept Bartlett’s argument through to its arithmetic conclusion that “Large tax increases will be necessary to pay for all the promises that have been made.” But I want the above two issues to be addressed carefully before concluding that our future should include a VAT.

By “government spending has been negative function of the tax share of GDP,” Niskanen means that the lower US taxes have been, the higher US government spending has been.  This should not be surprising; if we think of taxes as the price government charges for its services, and we remember that demand for any service tends to rise as the price of that service goes down, it is precisely what we would expect. 

Not being a libertarian, I’m not obligated to answer Niskanen’s second question,  “What types of taxes would be most effective in limiting the political demands for government spending?”  But I might point out that public debt is in effect a postponed tax, and under our current tax regime it is this postponed taxation which chiefly finances the expansions of the federal government.  Whatever form of taxation may be most effective at limiting political demands for government spending,  public debt obviously does nothing at all to limit those demands.

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