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"America has two great dominant strands of political thought - conservatism, which, at its very best, draws lines that should not be crossed; and progressivism, which, at its very best, breaks down barriers that should never have been erected." -- Bill Clinton, Dedication of the Clinton Presidential Library, November 2004

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Thursday, May 28, 2009


spare change we can believe in: the case for a VAT

posted by Aziz P. at Thursday, May 28, 2009 permalink View blog reactions

So much economic hand-wringing, yet all its good for is to reiterate the same tired stale posturing from liberals and conservatives alike. Here's the basic problem.

1. Domestic spending can't go down. It's a fantasy to imagine that even draconian cuts would be tolerable or politically viable. Like it or not, Americans want their social services and safety nets. All the conservative handwringing about Socialism is a Red herring, pun intended. Anyway discretionary spending (non defense, non medicare, non social sec) is a tiny fraction of the overall budget anyway so theres very little to cut; American services are actually an incredible bang for the buck, especially compared to European counterparts.

2. Defense spending can't be cut. The world is a bad place. We have to spend a lot of money in a lot of places for basic reasons of security and global policy. Isolationism doesnt work; 9-11 proved that. Bottom line: we need resources to deal with the crap out there and that cost will only go up.

3. Social security and medicare will not be cut. Fuggedaboutit. It would be nice if we could avoid adding new pieces to it, though, like President Bush did (wouldnt it be great if a president had some constitutional authority to stop legislation in some way? ahh, fantasy...)

(I will admit here that I favor a single-payer insurance system, btw, and am absolutely opposed to social security "reform". Neither one will ever happen.)

So, what are we left with? Its wonderful that conservatives are now concerned about deficits, though they were not quite so worried about them when the cost of going to war in Iraq was being discussed back in 2002. Cheney then invoked Reagan in saying deficits dont matter; its hilarious how libs and cons alike have inverted their positions since then).

Still, we seem to be somewhat on the same page now, at least. Deficits do matter; they make the Chinese unhappy and we cant have that!

So what's the bottom line? We have deficits, and we have spending. So, we need more revenue. 20 years of conservatives arguing that tax cuts are the holy grail for increasing revenue have been shown to amount to essentially nothing; the Laffer curve is discredited. And the less said about "trickle-down" economics the better, voodoo indeed.

However, theres something to be said about reducing (or abolishing outright) corporate tax rates - along with steamrolling out any possible loophole for evasion in offshore tax havens or whatever. Pay less; but pay your fair share. Or, stop using the United States' roads, airports, postal system, electricity grid, water, internet, EM spectrum, etc to do your business, your call.

But ok I've just said we need more revenue, not less. How does cutting corporate taxes help? Well, it doesn't, in a vaccum, but actually cutting corp tax rates (dunno, by half?) might be almost revenue neutral once you factor in the cessation of rampant tax evasion and cheating. Maybe not, but it still needs to be done. Still, the real reason to throw the dog this bone is to help soften the blow for the real medicine: a value-added tax.

"aiieeeee!" scream the fiscal conservative warriors, but they seem to forget that the VAT is the best antidote to assuredly higher corporate taxes down the line. Rep. Bill Thomas (R) tried to start a debate on this back in 2005; presumably he had his own arse handed to him on a platter, but kudos to him for the effort. In fact there are two kinds of VAT, one the European system (which would essentially add a new layer of accounting to our system here) and the subtraction method used in Japan (where the VAT is a modest 5%), which could easily be applied here in the US using the existing corporate tax machinery. We might want to consider a reduced VAT, say half, for the housing industry, though. Plus, leveling VAT on imports and exempting all exports would be a great equalizer for our industries, especially the automotive one.

How much? well, taxes tend to increase over time, and its best to start out small and grow as needed. So, I'd favor a 15% VAT (half that for housing, none on food), with exports exempt. In addition, the AMT should be repealed and the corporate tax rate cut in half, as well as personal income tax reduced to zero on family incomes below $100,000. Plus, by law 50% of all revenue from the VAT would be required to pay down the deficit for the first ten years.

Who am I kidding? Obama wont dare break his sacred moderate mold - he's already taken single-payer health care off the table (even though its by far the best bang for our healthcare buck, and preserves the best aspects of the present system including consumer choice). So its no surprise that a VAT is off the table, at least until his second term. But I doubt Congress will play along either even then, thanks to that annoying two-year turnover on the House which guarantees that our elected representatives are always focused on the elected part instead of the representative part.

And the political establishment is not going to be any better - see here for a preview of the knee-jerk anti-tax attitude from Republicans, and Dems will also chime in in sorrowful tones about the regressiveness of it all upon the poor. Still, in principle a VAt is just a tool, and there should be some way of reaching bipartisan agreement about how to implement it for maximum benefit to actually solve the problems we have instead of just exploiting them as grist for our endless political mills.

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About Nation-Building

Nation-Building was founded by Aziz Poonawalla in August 2002 under the name Dean Nation. Dean Nation was the very first weblog devoted to a presidential candidate, Howard Dean, and became the vanguard of the Dean netroot phenomenon, raising over $40,000 for the Dean campaign, pioneering the use of Meetup, and enjoying the attention of the campaign itself, with Joe Trippi a regular reader (and sometime commentor). Howard Dean himself even left a comment once. Dean Nation was a group weblog effort and counts among its alumni many of the progressive blogsphere's leading talent including Jerome Armstrong, Matthew Yglesias, and Ezra Klein. After the election in 2004, the blog refocused onto the theme of "purple politics", formally changing its name to Nation-Building in June 2006. The primary focus of the blog is on articulating purple-state policy at home and pragmatic liberal interventionism abroad.