The first time I every heard of value added taxes was in the early 1970s, and all the stuff I saw then said the VAT was a bad tax, you raised as much from a sales tax with far lower administrative costs. The economic and policy literature was as one-sided as I have ever seen on a topic, saying that the alternative to VAT, a simple retail sales tax, was cheaper to administer and yielded the same revenue. But both are regressive.
But many of our higher-tax OECD compatriots have VATs. If you ever have to contend with them, they are a huge pain for businesses (I had a wee taste with Australia’s GST, ugh). And those economists of years past missed a few bureaucratic virtues of the VAT:
1. It appears to hide the tax, Dumb as that sounds, it appears to work. Not adding the tax at the till seems to go over better with the chump populace, This is not trivial. Jean Baptiste Colbert once said, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”2. VAT is a great tool for increased information capture. VAT leads to more frequent, and for some businesses, more detailed reporting Welcome to the total surveillance society.
VAT, like all sales taxes, is particularly regressive. And it should in theory reduce consumption. Given the duty assigned by China, to shop so as to keep their factories running, a VAT would not endear us to them.
However, Greg Mankiw is raising alarms about income taxes, with a 5.4% surtax proposed fpr “top earners”, which his blog does not mention are defined as those earning over $1 million a year . Quelle horreur! Raise those marginal tax rates and everyone will give up and act just like the French and decide to have two and a half hour lunches.
Hhhm, Marginal tax rates are high in New York City (we even have city income taxes) and our sales tax is over 8% (atlthough this being a liberal enclave. food and clothing items below a certain price point are exempt) yet this is a famously workaholic town. Of course, you can only conclude so much from one data point, but it still suggests that high taxes are not necessarily a disincentive to income-earners.
In all seriousness, a VAT is a bad idea. Higher taxes are in our future, so we might as well get used to them. And the more visible the better, The more obvious it is how much we are taxed, the more the average guy is likely to demand a higher level of government services. Despite the often loudly trumpeted distaste for the European model, the Europeans I know do not seem unhappy about their taxes because they perceive that they are getting good value for their tax dolllar (before you think this to be too Pollyannish, they actually do complain less than Americans and even have the occasional nice word, In fact, the Germans and Austrians I know think our system is nuts. However, my sample excludes southern Europe). We’ve done the reverse here, taking as a given that low taxes (for an advanced economy) means we should reign ourselves to crappy service.
What is more than a tad distressing about this piece by Albert Hunt is that it show Bob Rubin still has a very influential role in policy, and appeasing the markets is seen as a major policy objective. That has the effect of putting considerable power in the hands of those who claim to know what it takes to appease the gods keep them happy.
From Bloomberg:
The Center for American Progress, run by former President Bill Clinton’s one-time chief of staff John Podesta, serves as unofficial kitchen cabinet and idea catalyst for this administration.The center had three recent private sessions of economic heavyweights, ranging from ex-Treasury chief Robert Rubin to liberal activist Bob Greenstein; one participant described the almost universal mood as “gloomy.”
Podesta will soon unveil plans for a public forum in September laying out the daunting fiscal challenges, while trying to fashion a “progressive” agenda to deal with them. Any serious effort will almost certainly include substantive spending cutbacks.
The centerpiece might be moving to a consumption tax, which is fraught with political and economic implications…
Some nervous congressional Democrats, prominent liberal economists and Warren Buffett believe another stimulus injection may be necessary. That might not be achievable politically, however, unless the economy really tanks or it is done in conjunction within a more comprehensive strategy dealing with the long-term, mind-numbing budget shortfall.
Roger Altman, an investment banker, doesn’t dispute the case for addressing economic sluggishness and only later turning to the looming fiscal crisis. He questions whether the public or the markets have such patience. Deficits don’t usually resonate much with voters….
Compared to boosting taxes directly on middle-income earners or slashing domestic programs, a value-added tax as a partial replacement for income and possibly some payroll taxes may be a more attractive alternative, Altman believes. A growing number of Democrats, such as Senate Budget Committee Chairman Kent Conrad and Obama tax-reform adviser Paul Volcker, concur.
If so, it will cause a political bloodbath, particularly if it is a big net revenue-raiser. The “sales tax” label can be lethal. Consumption levies are usually regressive, hurting middle class and poorer people the most, and almost three decades later there remains a belief that espousing such a measure cost the former House Ways and Means Committee Chairman Al Ullman, now deceased, his supposedly safe seat in 1980….
The Obama administration would like to defer any major action on closing the budget gap, certainly until after Congress deals with health care.
gronkk 
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Speaking of taxes, I was looking through the St. Louis Fed data series, and increases in inflation (even as small as 3 – 5%) are highly correlated with drops in real retails sales. When the powers do happen to engineer inflation, God help us. Real retails sales will most likely take another dive from their current -10% levels.