Thursday, November 17, 2005

Tax Thursday II: Why every Republican vote for the new Medicare prescription drug benefit was a vote for a new national Value Added Tax, if we're lucky.

Bruce Bartlett, conservative economic commentator and Treasury deputy assistant secretary for economic policy during the Bush I regime (who recently apparently fell on his sword for telling truth to power) was interviewed this week at Tax Analysts. It's behind a pay wall, but here are some interesting excerpts...

TA: You've been a vocal critic of a national retail sales tax. Meanwhile, interest in the idea seems to run quite strong, especially among conservatives. Can you tell us why you oppose the idea? And given its apparent popularity, do you think it still has some life left in it?

Bartlett: I oppose the sales tax almost entirely for administrative reasons. It simply won't work. The people who support it know nothing whatsoever about the actual operation of the retail sales tax or why every country that has ever looked into the idea has adopted a VAT [Value Added Tax] instead.

The VAT is a form of sales tax that overcomes all the administrative problems inherent in retail sales taxes. Yet the sales tax people oppose a VAT because it won't allow for abolition of the IRS, which is their primary goal. All their economic arguments for a sales tax are mere window dressing. All they really want is to get rid of the IRS. I think this is moronic.

TA: Many conservatives abhor the VAT, but you've endorsed it. Can you explain your thinking?

Bartlett: In the past, I was a strong critic of the VAT primarily because I feared that it would become a money machine that would lead to higher taxes and spending.

I changed my mind when I realized that there is really no hope of significantly cutting entitlement spending. Republican support for the Medicare drug benefit convinced me that spending in the U.S. is eventually going to rise to European levels and not much of anything can be done about it because it is being driven by programs with broad political support and a rapidly aging society.

Therefore, I concluded that if we are going to have European levels of spending, then we needed a European form of taxation. The alternative is to raise taxes in ways that would be much more damaging to growth than the VAT.

TA: How can you square your support for a VAT with your vigorous opposition to the estate tax? Granted, the estate and gift taxes don't raise an enormous amount of revenue, but they still brought in more than $24 billion in fiscal 2004. Can we afford to sacrifice that much money in our current fiscal climate?

Bartlett: Revenue from the estate tax is negligible and it imposes a heavy burden on capital formation.

But I really oppose the estate tax because it is driven by envy, yet does nothing to equalize the distribution of wealth. The ultra-wealthy avoid the tax through tax planning, so that the burden of the tax falls most heavily on those with modest wealth.

One reason I favor a VAT is because it would finance things like the abolition of the estate tax so that we can improve the structure of our tax system to make it more growth-friendly. I believe that our current system imposes a large deadweight cost that we can no longer afford.

As we move from being a low-tax country to being a high-tax country, we must work rigorously to reduce the deadweight cost of the tax system so that the tax burden reduces growth and productivity as little as possible...

The man is right on all counts.