National Review Online Contributors
Sell Out Conservative Movement on VAT Tax
Today, some NRO senior editors ceased to be serious on the key conservative issue of taxes in general, and a VAT in particular.
In two separate "The Corner" entries, Andrew Stuttaford and Kevin Williamson embarrassed themselves and their blog sponsor by agreeing with Indiana Governor Mitch Daniels that a VAT is good for America. I'll get to their pieces in a bit, but first here is ATR's argument against a VAT in a nutshell:
- A European-style ("credit invoice") VAT is opaque because it's embedded inside the cost of the good or service, not added on top of it (like a U.S. sales tax is). This opacity has made it easy for European politicians to raise the VAT rate over time. It started out as a 5 percent rate in most countries. The average rate is now just under 20 percent, and the EU requires countries to have a 15 percent minimum VAT rate to be a member
- Assuming a European VAT base, a 1 percent VAT in the U.S. would yield about $50 billion per year in annual, new tax revenues
- The European experience has not been the VAT replacing other taxes. In fact, the aggregate European tax burden (comparable to the U.S. in the 1960s) grew as the VAT grew. All other types of taxes (personal income, corporate income, investment, etc.) grew as the VAT grew. More tax revenue led to more government spending which led to the need for more tax revenue, ad infinitum.
When Mitch Daniels said last week that a VAT as a part of tax reform is worth exploring, he obviously didn't see the damage that a VAT did to Europe. The simple fact is that a VAT in the U.S. would lead, over time, to higher aggregate levels of taxation. It's likely that the other taxes will rise as a VAT grows. The burden of proof is on those who say this won't happen, since the facts of history show otherwise.
As for a VAT as a total replacement, that's just not going to happen. If there was ever enough of a political consensus to repeal the 16th amendment to the Constitution, why would we ever want to replace it with an opaque tax that's easy to raise? That level of political consensus would more likely lead to a tariff and excise tax regime. Besides, debating repeal of the 16th amendment is akin to talk of restoring the Holy Roman Empire. It's a waste of time outside a booze-filled graduate dormitory bull session.
On to the shocking apostasy of Stuttaford and Williamson. Stuttaford didn't like the fact that ATR President Grover Norquist called Daniels' pro-VAT musings "outside the bounds of acceptable modern Republican thought."
First off, the opinion is outside those bounds. You don't get to be a conservative on taxes anymore if you're calling for the implementation of the same "tax reform" that created Western European bankrupt socialist states. You can turn in your tax bona fide at the door, governor.
Second, there's an implication (echoed in Andrew Sullivan's take on the matter) that ATR/Grover doesn't have the right to set boundaries on the tax issue. Of course we do. ATR takes the lead on every major tax fight and oversees the Taxpayer Protection Pledge, a staple for true fiscal conservatives. This means we are one of the most influential and important tax-focused conservative groups. It also means we take the lead on setting the boundaries of acceptable conservative tax policy. If Mitch Daniels had called for trigger locks, the NRA would rightly come down on him, and everyone would see that they had a right to do so. It's the same with us on taxes.
Stuttaford was by far the less problematic of the two, and the more reasonable. Which is saying something.
Now onto Kevin Williamson ("Exchequer"). It's hard to know where to begin here. First, he references "epistemic closure," which implies that anti-VAT conservatives (that is, virtually all conservatives) have stubbornly refused to even listen to VAT proposals. This is wrong. We have listened, for several decades. Upon reasoned and considered deliberation, we have rejected it as unwise. Failure to persuade does not make the target of the persuasion dumb or ignorant. It makes the persuader a sore loser if he complains.
Second, it's a false choice to say that the only options for balancing the budget are a VAT on the one hand, or a next-year, permanent shutdown of the Pentagon and Social Security Administration on the other. We have a deficit because the government is set to spend more than it has historically. Obama's budgets call for federal spending to be about 24 percent of GDP, when it's been closer to 21 percent in living memory. Those same budgets call for tax revenues higher than the historical 18 percent of GDP by the end of the window.
The solution, as Dan Mitchell of Cato points out, is to simply grow the government at a 2 percent rate for the next decade. This assumes that all tax hikes are avoided, and that nothing in the current budget is cut (a very conservative estimate given the waste of the Bush-Obama years). The result is a balanced budget without raising taxes.
This is exactly what happened in the 1990s when the GOP took control of Congress. They restrained government spending, and let the denominator of GDP (fueled by a 1997 cut in the capital gains tax rate from 28 to 20 percent) grow faster than the numerator of spending. The result was surpluses in pretty short order.
For the longer-term over-spending issue, the solution is to enact large personal accounts for younger workers (which would pre-fund Social Security benefits within two generations), and free market healthcare reforms to put patients in charge of spending and price competition. Neither of these requires a VAT. In fact, a VAT would only make the problem worse as it would fuel yet more unfunded entitlement promises.
So taxes do not need to go up, Kevin. There's every reason to believe we can avoid tax hikes, but only if conservatives don't sell out the movement on taxes in order to be "open minded" (to defeat).
Finally, it's a sham to say that the Taxpayer Protection Pledge has somehow caused higher government spending. The Pledge is there for one simple reason--to protect taxpayers from getting more of their money stolen by the government. It doesn't make cotton candy or cure the common cold. It's a key tool of limited government, but not 100 percent of the strategy. ATR is and always has been very supportive of cutting government spending and reforming the entitlements. Kevin suggests a spending Pledge. Fine. How does one enforce that? There are dozens of spending votes every year. Would a signer have to vote against everything involving a penny of higher spending? If so, great. But the "T" in "ATR" stands for "taxes." Our job is to protect against tax hikes, not win every fight in the world on every issue. To blame a no-tax pledge for higher spending is a non sequitor and criminally-naive.
Besides, for all intents and purposes the Tax Pledge is a spending pledge. When politicians have taken taxes off the table, they have no fiscal choices but spending. Spending cuts are all that's left. They can borrow, to be sure. But even then, the debt must be re-paid with spending cuts if taxes are not an option. You never get to spending cuts until you've taken away the escape hatch of quick-fix tax hikes.
Taxes are the lifeblood of the state. Higher taxes would not lead to a balanced budget. Higher taxes would lead to more government spending, which would lead to even bigger deficits and calls for even higher taxes. Most conservatives intuitively get this. It's too bad these guys at NRO (and maybe NRO itself) seems to have forgotten these basic conservative tax principles. "Math" is not at issue--common sense is.