Normally I write my own essays, but a light went off when I read this from Fortune Magazine Online. It contains so many numbers that back up the author's thesis so elegantly I felt it needed to be transposed directly. But this article ignited a big bright light over my head. It's not going to be a future resembling a Blade Runner type of social devastation, or the rending of the United States into separate confederacies, just a grayer more socially engineered future for us, like Western Europe. People in the US have peered into the abyss of free market social chaos and I think they may be ready for social democracy in the last capitalist bastion! What an interesting idea...I'm not sure how I feel about it just yet, but I have a blog so I am sure some thoughts will spill out into these pages between photo essays of the Fabulous Florida Keys:
by Shawn Tully, Editor at Large.
NEW YORK (Fortune) -- It's highly possible, if not inevitable, that Americans will soon live under a radically different tax system - one that the pundits and politicians aren't talking about.
It's called a value-added tax, or VAT, and it's been used for decades to pay the bills and sustain the immense growth of governments around the world, from France to Mexico to Australia. Created in 1954 by a French economist, the VAT is the most potent, efficient machine for revenue generation yet invented.
And if there's one thing the U.S. government needs as the federal budget balloons, it's a ton of new revenue. "The bottom line is that the income tax cannot support the level of spending that's projected, something other countries faced years ago," said Roberton Williams of the Tax Policy Center, a non-partisan research institute. Today the VAT raises almost half of the total government revenue in France, and a similar share in most of the developed world.
The VAT is essentially a sales tax, except that it's charged at each stage in the development of a product instead of at the moment when the product is sold.
Take, for instance, a car with a sticker price of $30,000 and a value-added rate of 10%. Ford might buy its steel and other materials for $8,000 plus $800 in a VAT tax. A dealer then pays $25,000 plus a $2,500 tax for the finished vehicle. Ford takes an $800 credit for the tax it already paid and sends $1,700 to the government. A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer collects the $3,000, takes a credit for the $2,500 worth of taxes already paid, and sends $500 to tax authorities. Ultimately, the government pockets $3,000, or 10% of the retail price of the car, in taxes.
The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn't arouse nearly the uproar caused by increasing income taxes.
The ease with which a VAT can be increased points to one of its big drawbacks: Governments see it as an easy way to pay for increased spending, which is a potential drag on economic growth.
Even so, the VAT would be better than the other likely alternative: A higher retail sales tax. If the national sales tax were raised to, say, 20%, consumers would cheat by paying cash to avoid it, and retailers would submit because they'd sell more goods by cutting the price 20%. With the VAT, every step of the manufacturing (and tax collection) process is documented.
Make no mistake: A VAT may be unavoidable in the United States. The reason is that spending is rising far faster than the revenue that can conceivably be generated by the current tax regime.
.
Let's examine the numbers. Under our current tax system, receipts are projected to remain pretty flat, at about 18% to 20% of GDP, far into the future. But spending is slated to rise to 24% of GDP in 2030 and 28% in 2050, excluding interest on the federal debt. If taxes aren't increased enormously, future deficits, and the enormous borrowing they require, will swamp the budget with ruinous interest costs.
Today, the income tax raises around $1.1 trillion, or around 9% of GDP, with payroll and corporate taxes contributing the balance. The deficit now stands at around $580 billion, including the Social Security surplus that's helping to pay the bills. But that surplus is also rapidly disappearing. So to balance the budget, America would need to raise income taxes by 53%, assuming the other taxes remained at current rates.
The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an extra 2% of GDP. That would require an additional $270 billion in income taxes.
All told, that's a total tax increase of $870 billion, or almost 80%. That's not including the estimated $240 billion cost of President-elect Barack Obama's healthcare plan through 2018.
The rub is that the fiscal pillar America has relied on since 1913 - the federal income tax - can't possibly support the looming new era of spending. All economists agree that when top income tax rates get too high, Americans will work, save and invest less. Tax collections would increase far more slowly than rates, and eventually level off completely.
The VAT may be the only answer. "We're moving towards European levels of spending," said Andrew Biggs, an economist at the American Enterprise Institute "If you go there, you need a more efficient way to raise revenue."
But the VAT, on top of encouraging bigger government budgets, has another problem: Middle class taxpayers would be hit harder by a VAT because they spend more of their income on goods like clothing and cars than high-earners. That's especially distressing to Obama and Democrats, who have pledged to make the tax system far more progressive by raising rates for the wealthiest Americans.
One partial solution would be to exempt staples such as food, gasoline or fuel oil from the VAT and impose extra-high charges on yachts and jewelry. To help middle-class taxpayers, the federal government could also send subsidies to tens of millions of taxpayers based on their incomes. The French, for example, mail checks to families depending on how many children they have.
But given the nature of politics, said Biggs, "the problem is that those rebates might be tied to some social agenda, not to making the system fair."
European governments have typically seen VAT hikes as an easy way to raise revenues during a recession. In some countries, government spending is more than 50% of national income. The results have been fiscal stability, but lackluster growth and a dearth of dynamism and entrepreneurship.
Given the budget numbers, the United States has already chosen a path of far bigger government. The trap has been set. It's unlikely America can escape without a VAT.
First Published: December 2, 2008: 6:32 AM ET
It's called a value-added tax, or VAT, and it's been used for decades to pay the bills and sustain the immense growth of governments around the world, from France to Mexico to Australia. Created in 1954 by a French economist, the VAT is the most potent, efficient machine for revenue generation yet invented.
And if there's one thing the U.S. government needs as the federal budget balloons, it's a ton of new revenue. "The bottom line is that the income tax cannot support the level of spending that's projected, something other countries faced years ago," said Roberton Williams of the Tax Policy Center, a non-partisan research institute. Today the VAT raises almost half of the total government revenue in France, and a similar share in most of the developed world.
The VAT is essentially a sales tax, except that it's charged at each stage in the development of a product instead of at the moment when the product is sold.
Take, for instance, a car with a sticker price of $30,000 and a value-added rate of 10%. Ford might buy its steel and other materials for $8,000 plus $800 in a VAT tax. A dealer then pays $25,000 plus a $2,500 tax for the finished vehicle. Ford takes an $800 credit for the tax it already paid and sends $1,700 to the government. A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer collects the $3,000, takes a credit for the $2,500 worth of taxes already paid, and sends $500 to tax authorities. Ultimately, the government pockets $3,000, or 10% of the retail price of the car, in taxes.
The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn't arouse nearly the uproar caused by increasing income taxes.
The ease with which a VAT can be increased points to one of its big drawbacks: Governments see it as an easy way to pay for increased spending, which is a potential drag on economic growth.
Even so, the VAT would be better than the other likely alternative: A higher retail sales tax. If the national sales tax were raised to, say, 20%, consumers would cheat by paying cash to avoid it, and retailers would submit because they'd sell more goods by cutting the price 20%. With the VAT, every step of the manufacturing (and tax collection) process is documented.
Make no mistake: A VAT may be unavoidable in the United States. The reason is that spending is rising far faster than the revenue that can conceivably be generated by the current tax regime.
.
Let's examine the numbers. Under our current tax system, receipts are projected to remain pretty flat, at about 18% to 20% of GDP, far into the future. But spending is slated to rise to 24% of GDP in 2030 and 28% in 2050, excluding interest on the federal debt. If taxes aren't increased enormously, future deficits, and the enormous borrowing they require, will swamp the budget with ruinous interest costs.
Today, the income tax raises around $1.1 trillion, or around 9% of GDP, with payroll and corporate taxes contributing the balance. The deficit now stands at around $580 billion, including the Social Security surplus that's helping to pay the bills. But that surplus is also rapidly disappearing. So to balance the budget, America would need to raise income taxes by 53%, assuming the other taxes remained at current rates.
The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an extra 2% of GDP. That would require an additional $270 billion in income taxes.
All told, that's a total tax increase of $870 billion, or almost 80%. That's not including the estimated $240 billion cost of President-elect Barack Obama's healthcare plan through 2018.
The rub is that the fiscal pillar America has relied on since 1913 - the federal income tax - can't possibly support the looming new era of spending. All economists agree that when top income tax rates get too high, Americans will work, save and invest less. Tax collections would increase far more slowly than rates, and eventually level off completely.
The VAT may be the only answer. "We're moving towards European levels of spending," said Andrew Biggs, an economist at the American Enterprise Institute "If you go there, you need a more efficient way to raise revenue."
But the VAT, on top of encouraging bigger government budgets, has another problem: Middle class taxpayers would be hit harder by a VAT because they spend more of their income on goods like clothing and cars than high-earners. That's especially distressing to Obama and Democrats, who have pledged to make the tax system far more progressive by raising rates for the wealthiest Americans.
One partial solution would be to exempt staples such as food, gasoline or fuel oil from the VAT and impose extra-high charges on yachts and jewelry. To help middle-class taxpayers, the federal government could also send subsidies to tens of millions of taxpayers based on their incomes. The French, for example, mail checks to families depending on how many children they have.
But given the nature of politics, said Biggs, "the problem is that those rebates might be tied to some social agenda, not to making the system fair."
European governments have typically seen VAT hikes as an easy way to raise revenues during a recession. In some countries, government spending is more than 50% of national income. The results have been fiscal stability, but lackluster growth and a dearth of dynamism and entrepreneurship.
Given the budget numbers, the United States has already chosen a path of far bigger government. The trap has been set. It's unlikely America can escape without a VAT.
First Published: December 2, 2008: 6:32 AM ET
10 comments:
I remember reading an article in Reader's Digest about the VAT when I was in 7th grade, which would've been about 1967. The U.S. government was talking about this, and Richard Nixon's (!) reverse income tax, i.e. guaranteed income.
I'm hoping people have finally realized the economic dogma the Republicans have been trying to shove down everyone's throat is a load of crap, with no basis in fact.
I think the U.S. is going to emerge from this mess resembling Europe far more closely than most may realize... because that's really the only way out of this mess...
No, there is another way... complete meltdown and a 100 years of restructuring.
Here in Canada we already have the VAT, we call it the GST, operates exactly as in this article. Companies pay and get an "input" tax credit and it is deducted from what is "owing". Also there are GST refund checks mailed out to low income thresholds every Quarter (3 months), based upon income as per your previous income tax returns. We are taxed to death up here. We have to pay 2 taxes whenever you purchase anything. 7% PST plus 5% GST which is 12% taxes. Even when we purchase something from the USA we have to pay your State Tax, plus when we cross the border we have to pay DUTIES (if applicable), plus the 5% GST and another 7% PST. The GST was originally 8%, then over the years it has been reduced a few times and it is now ONLY 5% (lucky us). If you go to the Maritimes you have to pay HST, which is Harmonized Sales Tax which is presently ONLY 13%. They are too poor to collect their own provincial sales tax so the FED Government kindly consented to collect it for them and eventually send the PST back to the Provinces (Newfoundland, NovaScotia, New Brunswick and PEI). Some staples (necessities) are Exempt from PST, but everyone has to pay the GST. I think there is a HUGH underground community up here. The Goverment is so hungry for $$ that recently I read that they have approached Ebay for the names of powersellers to determine if they paid taxes on their "income" from the sale of items over the internet
Wow, that is disturbing about Ebay. I know Clinton had put a ban on internet sales tax to forward its growth as a medium, but now you are supposed to pay (not many do I suspect - in the US).
Honestly, I don't want gov't intervention. I don't want it to fall apart either, but no one wants to hear the alternative - privatization. Either they fear the foreign hordes will own the US of A's infrastructure, or they gripe about how their tax dollars paid for it, how can it be sold to a private company. Frankly, you can put in safe guards for the former and the later allows free market to prevail (and can have safe guards as well to stop abuse). Instead we are going to other way with govt run steel companies, auto-manufactures, and banks.
WOW! everyone thought capitalism spanked the soviet union and here we are on the verge of socialism.
5 years from now, nobody will care as long as they have their iPods for their short drive in the SUV to work.
(Really, I am not this jaded, people's perception causes them much much misery - so try to have a positive note, really, I am being sarcastic most of the time).
I thought jeffrey hit the nail on the head. We beat the Soviet Union but now we are they! And Bobskoot's comments reflect what happened in Europe post WWII. Remember though that Canada provides National Health, heavily criticized by some, and without the option of buying private insurance, which means wealthy canadians come to the US. Plus Canadians notice our homeless population too, people who fell between the cracks in a country without a safety net. Now we all face the very real possibility of falling through those same cracks. How strong is our desire for a political statement of "freedom" versus watching our children learning to live in our cars? I hope to continue this discussion because I see this whole subject in shades of gray (grey if you are Canadian).
Some notes:
Alberta does not have PST.
You don't pay the US taxes if you order items via the net or mail.
You sometimes pay GST when the item crosses the border. After hundreds of parcels from the US, have yet to figure out the rhyme or reason to it. Seems random.
Criticize Canada's health care system all you like, I'd rather have it than not. My sister who lives in the US has a rare bone cancer that costs $10,000 per treatment. Good thing she has a job with good medical coverage or she'd be dead by now. In Canada, that just wouldn't be an issue.
Wealthy Canadians come to the US for medical services because they get service faster. For everyday stuff there's no need. I've had eye problems for about six months now, saw the doctor approximately 10 times and I think I paid $50 max.
Re: socialism vs free market, many people are missing the point. It doesn't have to be all one or the other. Why should it? Who says? Some problems are best solved by socialism, some free market. Pick and choose the best tool and apply it. America's McCarthyesque feelings about socialism are an impediment to fixing many problems.
Of course, if you vote incompetent fucks like Bush into your government seat... twice.. well... you have bigger problems on your plate that need to get worked on first.
D
One point you left out that is never mentioned in the US is that in no country that has a national health service have the people ever voted to end it.
As for Bush, that problem is solved, a little late perhaps but better late than never.
Socialism vs free market does have to be one or the other, because western european type social democracy isn't the sort of system that encourages 400 to one income ratios between the CEO and the employees who are at the bottom of the salary scale.Which is a feature of this free market economy.
It may well be that the new US order will improve things, but there's many a slip twixt cup and lip, in the words of our elders and betters.I await the cup with bated breath!
> Socialism vs free market does have to be one or the other
We'll have to agree to disagree on that one. That's a typically American view I'm afraid. I don't buy it at all.
D
If you think about it, we don't have a capitalist society now in its true form. We have a socieo-capitalist (is that a word?) market.
If it was true capitalism, you would see child labor, unchecked discrimination, more monopolies, and the wealth even more so divided (and not redistributed).
(Instead, we save that rote for other countries we off-shore the goods manufacturing too. It seems we rape and pillage on the home front's workers and those on the foreign shores?).
How do you see such a hybrid working? Like it is now with certain laws to prevent abuse or something different?
Let me start the issue again in another post (of my own) in a couple of days and we'll see where it goes from there. I am not a believer in totally free markets but I don't think most native born Americans have any idea what path they are really heading down by supporting state intervention in the bailout/rescue thing. Think the UK in 1947 and a great deal of good came with a great deal of intervention and oversight by the government, which will be a system people in this country are quite unused to seeing.
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