NYT: Obama administration calculating revenue from potential 5% VAT (consumption tax)

[Statistical]

Extending Mr. Bush’s tax cuts for those earning less than $250,000 would require new legislation by year’s end. If Mr. Obama seeks a temporary extension, rather than a permanent one, that will signal his intention to take additional steps relatively soon.

The deficit-reduction panel, led by Erskine B. Bowles, who was chief of staff in the Clinton White House, and Alan K. Simpson, the retired Republican senator from Wyoming, is scheduled to report on Dec. 1. The strength of its recommendations will influence the debate.

If the White House ultimately chooses a tepid stance, Mr. Obama would use 2011 to prove his commitment to paring spending — deferring tax increases until after 2012.

A more aggressive approach would seek quick action on Social Security. Alice M. Rivlin, a former Clinton administration budget director and a member of the deficit-reduction panel, said that would represent a “confidence builder.”

But since any Social Security plan would probably preserve benefits for those nearing retirement, it would not help the administration achieve its goal of reducing the deficit to 3 percent of gross domestic product, from 10 percent, within a decade.

One way to reach that 3 percent goal, by the calculations of Mr. Obama’s economic team: a 5 percent value-added tax, which would generate enough revenue to simultaneously permit the reduction in corporate tax rates Republicans favor.

Some deficit-reduction experts would applaud, but remain skeptical. “How you get from here to there” politically, Mr. Reischauer noted, “is unfathomable.”

http://thecaucus.blogs.nytimes.com/2010/04/18/reduction-is-theme-of-presidents-next-act/

I hope NYT is totally off the wall here.

OK, extending Bush tax cuts for those making <$250,000 I get.
ON Edit: Thanks for correction

Quick action on Social Security as part of deficit-reduction panel? That doesn't sound good.
A 5% VAT? Really?
Using the higher revenue to lower corporate tax rate?

Has anyone imaged what 5% VAT would do to your personal finances. VAT applies to everything. Utilities bills, groceries, health insurance, copays, prescription drugs, even large purchases like a home or auto.

A VAT would further shift the tax burden from rich (who have relatively low consumption relative to total income) to everyone else.

[Skink]

1. These must be the ideas being brought to the table by the Republicans.

[Deep13]

2. What a stupid idea.

How can anyone justify raising taxes on the poor while extending the Bush tax cuts on the rich?

[Statistical]

3. I hope the NYT is "reaching" because it is so off the wall stupid.

I have heard some bluedogs rumbling that we shouldn't raise taxes while the recession is going on (but who knows after) so maybe it does have some merit.

[Captain Hilts]

9. The NYT is doing some excellent economic/financial writing and reporting these days. nt

[Gman]

4. I'm no expert on the topic here but

I sure as hell hope and damn well expect that he would extend tax cuts for those under $250K. Especially after the check I wrote last week.

[Statistical]

5. I am in the same boat but the bad news is extending the tax cuts would require Congressional action.

I haven't heard a peep out of Congress. If they do nothing then all the tax cuts (even on those making $5000 a year) go away automatically. Even worse will Republicans hostage the bill and try to cram in some extensions for the rich in same bill.

The closer we get to November the likelihood of anything being done drops to 0.

[TomClash]

6. WH may be floating the idea

This raises its ugly head every year. VAT has zero chance of passing here. Zero. Economic policy wonks love it and people hate it.

[Skink]

7. The vat sounds like a flat tax so I think the repubs are for it.

[Lance_Boyle]

22. it's a new tax - the Rs are vehemently against it.

If they were talking about *replacing* the current tax code with a VAT, Republicans would be for it. Adding it to the current tax code is a huge across-the-board *tax increase* for everyone - even the Republicans' constituents.

[sandnsea]

13. It's not the White House

It's just people who want to get their name in the paper so they're relevant. Whether on a task force or economic panel or whatever, it's not from the White House until it comes directly out of the White House. These are just individuals blathering away to whoever will listen.

[TomClash]

16. I hope you're right

But it doesn't matter anyway. It wouldn't get out of any committee in either house. It's a total nonstarter.

[sandnsea]

19. I'd support it to fund single payer

or Medicaid/Medicare For All. No deductibles, no co-pays. But that's about the only way I'd support a VAT.

[Captain Hilts]

8. More REGRESSIVE taxation! nt

[MadHound]

10. Alternative suggestion to this stupidity

Cut military spending. Military spending makes up over half the budget. Bring the troops home, cut military spending in half, and gee, we would have more than enough money for the rest of the programs we fund, and could still cut back the deficit.

Cutting Social Security, or adding a VAT is a sure way of cutting one's political throat.

[sandnsea]

11. "those earning less than $250,000"

Not the rich, it states it very clearly.

And these are just comments from individuals, not from the task force as a whole and not from the White House itself.

[Statistical]

14. I'll update the post. In my anger I totally missed that. Honest mistake.

[WeDidIt]

12. Damned stupid idea when all that is needed is to

REMOVE THE FUCKING CAP ON SOCIAL SECURITY TAXES!!!

Problems solved and you affect less than 5% of the country.

[LiberalFighter]

15. Constitutional amendment prohibiting a Value Added Tax.

95% of the people should support that.

[Lyric]

17. I only support VAT if the Earned Income Tax Credit is doubled

and income taxes on people making less than 250k a year are substantially lowered (beyond what's already been done). That's the only way to offset the regressive nature of such a tax, and many European nations have chosen precisely this route--i.e., giving back tax revenue to people whose incomes are lower and middle class. It's important when implementing a VAT to make sure that the middle and working classes are not burdened.

[dmallind]

18. Not entirely unworkable with some changes

Why not a non-necessity VAT? Food, clothing, shelter, utilities and transportation excluded, say? Since disposible income and spending on non-essentials rise together (albeit not at the same rate - marginal propensity and all that) its hsould avoid the charges of regressive taxation.

[zipplewrath]

20. Go to any sales tax state

Those systems exist. And the exemptions are a huge source of political wrangling. Here in Florida we have an exemption for dry cleaning and ostrich feed. Cranberry juice is tax free, but toilet paper is not. I don't really think this would work well on a national scale.

[lumberjack_jeff]

21. A VAT is the stupidest fucking idea ever. n/t

[pampango]

23. Wiki explanation - no difference in tax amount between sales tax and VAT

Example

Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows , the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel.

Without any tax

* A widget manufacturer spends $1.00 on raw materials and uses them to make a widget.
* The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20.
* The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30.

With a North American (Canadian provincial and U.S. state) sales tax

With a 10% sales tax:

* The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.
* The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
* The retailer charges the consumer $1.65 ($1.50 + $1.50x10%) and pays the government $0.15, leaving the gross margin of $0.30.

So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.
With a value added tax

With a 10% VAT:

* The manufacturer pays $1.10 ($1 + $1x10%) for the raw materials, and the seller of the raw materials pays the government $0.10.
* The manufacturer charges the retailer $1.32 ($1.20 + $1.20x10%) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20.
* The retailer charges the consumer $1.65 ($1.50 + $1.50x10%) and pays the government $0.03 ($0.15 minus $0.12), leaving the gross margin of $0.30 (1.65-1.32-.03).

With VAT, the consumer has paid, and the government received, the same as with sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.

Note that in each case the VAT paid is equal to 10% of the gross margin, or 'value added'.

The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.

http://en.wikipedia.org/wiki/Value_added_tax

There are two problems with a VAT in the US (as opposed to Europe where it supports a very progressive social safety net). The VAT (like a sales tax) taxes consumption rather than production (income tax is, at least in theory, based on taxing your economic productivity rather than what you do with it). It plays a role in making European economy less reliant on overconsumption compared to the US. The more one saves rather than spends, the less taxes one pays.

One with a VAT in the US is that it would have to be counterbalanced by tax cuts in other areas to avoid a huge tax increase for middle and lower income people. That may not be possible or politically feasible.

The other is that it is inherently regressive unless it is structured to deal with the disproportionate impact on poor people. In Europe it may not be so bad if a regressive tax is used to support a progressive social safety net. At least the poor there get value for their money. But in the US such a regressive tax would be tied to a regressive social safety net. Hardly a good deal for the poor.

Either the VAT would have to be restructured to make it less regressive or the proceeds would have to tied to making our social safety net more like that of Europe.

[Statistical]

24. That doesn't make me feel any better. Sales taxes are horribly regressive.