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Wednesday, March 29, 2006

The Best Tax Ever

I'm going to follow Brad DeLong who notes:

Brad DeLong: Bruce the Apostate: Fewer conservative--well, not "conservative," fewer Bush-loyal--websites are printing Bruce Bartlett's columns. So it is only fair that more reality-based websites do so.

So here's Bruce Bartlett on the need to raise taxes and, given the need, the optimal tax strategy to employ:

The Best Kind of Tax, by Bruce Bartlett, Commentary, NY Times: In my previous post, I tried to show that the magnitude of growth in government spending already in the pipeline is so great that it cannot be contained just by cutting. ... So we are left with the need for a new revenue source. When confronted by the need to pay for health and other spending programs, every other major country has turned to the value-added tax, or V.A.T. This is the best strategy tax economists have ever devised for raising revenue without investing a lot in enforcement and economic incentives.

The V.A.T. is a kind of sales tax embedded in the price of goods. A farmer who grows wheat, for example, pays, say, 10 percent on the sale. The miller buys the wheat ..., makes flour, and when that is sold, he also pays 10 percent, but gets a credit for the taxes the farmer paid. The baker who makes bread from the flour also pays 10 percent when he sells to the food store, but gets credit for the taxes paid by the farmer and the miller. Since taxes must be paid in order to claim credits for the taxes embedded in the bread at earlier stages of production, the tax is largely self-enforcing. And because the tax is applied only to consumption, its impact on incentives is minimal. ...

According to the International Monetary Fund, the tax base for the V.A.T. is about 37 percent of G.D.P. in industrialized countries. With our G.D.P. close to $13 trillion, that means about $5 trillion would be available for taxation. A 10-percent V.A.T. would raise $500 billion in new annual revenue ... The average V.A.T. rate is 18 percent, according to the Organization for Economic Cooperation and Development, ranging from a low of 5 percent in Japan to a high of 25 percent in Sweden, Denmark and Hungary.

We should bite the bullet and put in a V.A.T. For now, the revenue could be used to fix glaring problems in the tax code, such as the Alternative Minimum Tax. In the longer run, it could be raised gradually to pay for Medicare and other programs. The burden is on those who oppose a V.A.T. to spell out how spending could ... be cut or taxes raised by the order of magnitude I have outlined.

    Posted by on Wednesday, March 29, 2006 at 12:06 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (41)


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