So in this article from The Washington Post it is reported that Fed Chairman Alan Greenspan reported to the President’s Advisory Panel on Federal Tax Reform that some form of consumption tax, a sales tax or value-added tax, could spur economic growth through the promotion of savings and capital formation required for investment.
He also states later in the article that ‘serious’ transition issues would exist and that it may be necessary to institute a consumption tax while leaving some form of income tax in place.
My question to you, my good friends, is:
Do you believe a consumption tax would spur economic growth? Or would the downward pressure on spending damage the multiplier?
What do you believe the ‘transition issues’ would be and could they be overcome in the short term.
What do you think of having BOTH a consumption and income tax?
Is this a part of Greenspan’s ‘get spending under control goddammit!’ campaign?
Absolutely not. As Senator John Linder, who sponsors the Fair Tax Amendment states, the 10th and 13th largest economies in the world operate on a sales tax alone now: Texas and Florida.
The Fair Tax will work. It will abolish the income tax, and every citizen will get a monthly refund to reimburse for spending up to the poverty level. So those at the poverty level will not pay taxes!
The third, fourth, fifth and eigth* largest economies require both a VAT or sales tax AND an income tax to work (as does California, which is the fifth, if we are counting states as world economies). It is hardly a forgone conclusion that a VAT alone would provide enough revenue. Simply having a VAT is terribly regressive, even with refunds. I’d be interested in seeing where “break even” wound up being; that is, who winds up paying more money and who winds up paying less, based on income level.
Capital, in the form of loans, has been cheap the last few years. Are businesses have trouble raising capital in order to expand? If they aren’t, then it seems that more capital qua capital isn’t required. That said, there needs to be more incentive for American’s to save; we currently depend on other countries to do our savings for us.
Probably.
Germany, the UK, France, and Canada. Other’s might, but I’m reasonably sure about those.
Yes, I believe that a consumption tax would be a positive stimulus for growth. While incomes (especially corporate) are taxed, those who provide these incomes wield disproporionate political power. This power often results in growth-dampening protectionism, subsidization, and pork barrel spending. Eliminate the source of this power and substantial resources are freed up for growth and development.
Texas and Florida are not independent countries, and their governments do not spend money on such things as defence forces. Their citizens benefit from, and pay taxes for, such Federal programs as Social Security and Medicare.
Also, some of the things that California funds at a state level Texas funds a city/county/school district level through property taxes.
So while I, a Texan, may not pay an income tax to the state, I pay %0.2548 of my houses value to my county and around %1.8 of its value to my local school district (there’d be another levy in there if I lived in a city).
Not surprisingly my property tax is pretty close to what I was paying in income tax while I was living in California…
Tough question, and I would defer to real economists on that one. Greenspan’s endorsement is a plus, but I’d like to see a few others weigh in.
The biggest one would be gauging revenues. We have a pretty good handle on how much the current tax system generates, but a consumption tax would alter people’s behavior in ways that are difficult to predict.
The other big one would be phasing out the income tax altogether. I would bet dollars to donuts that we would NEVER get rid of the income tax.
One more way for the government to get its hands on my money. No thanks.
I don’t think so. This is so pie-in-the-sky and would take so long to implement that it wouldn’t address the current problem.
Having watched the Mr. G’s testimony, his comments on this subject suggest this has been a deal breaker in the past and would be a significant hurdle if such a change were attempted in the future (if I’m hearing him correctly).
In layman’s terms the problem is one of (perceived?) double taxation during transition, “Hey, you taxed my income on these dollars, now you’re taxing my spending of these same dollars!”
I did not hear any suggestions on any solutions to this issue.
My cynical nature tells me this will happen when the US goes metric.
First and foremost, I think that NO form of tax overhaul and restructuring will work unless we put a cap on government spending. I have heard a proposal that I agree with: Congress cannot submit a budget in any fiscal year that spends more than 99% of the tax revenues received in the preceding fiscal year (with exceptions for war and other national emergency). Immediate effect is that the government goes in the black and stays that way. The 1% “surplus” is applied to reduction of the national debt, as well as the 30+% of the existing budget amounts that are earmarked for debt. As the debt pays down, more money is available for other programs. Eventually the debt is paid off; the 1% surplus is then rebated back to the states, probably as block grants.
Having said that, let’s assume that some sort of cap is in place. With that: 1. Do you believe a consumption tax would spur economic growth? Or would the downward pressure on spending damage the multiplier?
Yes, I think it would spur economic growth. 2. What do you believe the ‘transition issues’ would be and could they be overcome in the short term.
Well, the majority of states have a state sales tax, so the mechanics of collecting the tax are already in place. The others would have to implement a sales tax collection mechanism. In addition, there will always be those who holler “What about the poor?”. I think their issues are well addressed at http://www.fairtax.org/, and I think this is the plan that should be implemented. 3. What do you think of having BOTH a consumption and income tax?
Not just no, but HELL NO! 4. Is this a part of Greenspan’s ‘get spending under control goddammit!’ campaign?
Possibly. But whether it is or not, it’s a damn good idea and I think we as taxpayers need to hold our respective Congresscritters’ feet in the fire and get it implemented. I’d actually like to see it as a Constitutional amendment that first repeals the 16th , then replaces it with the consumption tax.
I’ve been a huge proponent of the Fair Tax proposal, but I’m concerned about creating a huge underground economy. With the estimates I’ve seen for the tax rate, here in Texas when you include the state and local sales tax, all purchases would be taxed at well over 30%. Quite a huge incentive for off-the-book transactions.
Also, I’ve never quite understood the reasoning when they say that prices will fall so much that the net result will be equivalent cost with Fair Tax added. I don’t see how that’s possible.
[QUOTE=Jonathan Chance]
So in this article from The Washington Post it is reported that Fed Chairman Alan Greenspan reported to the President’s Advisory Panel on Federal Tax Reform that some form of consumption tax, a sales tax or value-added tax, could spur economic growth through the promotion of savings and capital formation required for investment.
He also states later in the article that ‘serious’ transition issues would exist and that it may be necessary to institute a consumption tax while leaving some form of income tax in place.
My question to you, my good friends, is:
I think what would damage the multiplier is that such a tax would increase the regressivity of the American tax system. The multiplier is a matter of dollars getting re-spent and re-re-spent; if the people who bear the brunt of the taxes are those who would otherwise be the ones most likely to spend that money, then you’re reducing the multiplier.
Damned if I know.
I believe a mix of smaller taxes is on the whole easier on the economy than one big tax. But I don’t think a consumption tax is good in the first place, so I don’t want it with or without an income tax.
In the words of Sen. Reid and Dr. Krugman, Greenspan is a hack. He knows that there isn’t enough nondefense discretionary spending to make that big a difference. And it has to be apparent to pretty much everyone in the world by now that Bush’s tax cuts haven’t done a whole lot to stimulate the economy, so it hardly makes sense to cut Social Security in order to preserve them, which is what Uncle Alan would like us to do.
He’s all but openly a Starve-the-Beast proponent at this point. He has long since ceased to be any sort of honest broker with respect to the U.S. economy. I have no respect left for him. Next year won’t be too soon for him to toddle off the stage.
I disagree. The economy is booming in my end of town; new buildings going up right, left and sideways. My business is growing and one of the reasons is that people have more discretionary income.
Granted, that is empirical observation and I’m quite sure someone has a list of stats to say it just ain’t so, Joe. But it sure appears to me that the cuts have worked and more cuts would work even more.
Don’t forget hidden taxes. For example, employers have to match taxes on employee salaries. That goes away, so the overall cost of labor goes down. That hidden tax is incorporated into every level of resale that an item goes through, so it’s actually much greater.
There is also the cost of compliance with the existing nightmare of a tax code. It’s huge and you better believe it gets passed right on. That would go away as well.
I don’t really think we need to stimulate investment, at least not in the corporate sector. Both the stock and bond market are fully-, if not over-valued. I don’t believe that a consumption tax would encourage the “right” kind of investment, and if you’re gonna use the heavy hand of government anyway you might as well do it the right way, eh?
But I agree that we need to save in order to promote long term economic stability. It’s just that it should come in the form of reduced consumer, governmental, and corporate debt.
I believe that, while we should rein in all forms of spending, not only “non defense discretionary”, we can also make an even greater impact on the national debt by increasing taxes. I think that raising taxes, if we can save the proceeds, will help us more in the long run than cutting them. While at the same time simplefying parts of our tax code that don’t lead to economic efficiency.
But it’s mainly about savings. If and when the rest of the world figures out America isn’t that great an investment, it will be hellish for the government and corporations to try to borrow. So we should eliminate as much of that as possible, with an emphasis on government debt, since that belongs to everyone.
Of course the $64 trillion question is how do we do this without causing a depression.
Well, yeah. It’s not like economic conditions are the same everywhere across the U.S. I’m glad for you that Houston’s a boom town right now. If they’re still pumping oil out of the ground in Texas, it ought to be booming, with light crude at just under $54/barrel.
Yup. Economic statistics are widely available on the Web. The U.S. economy is growing, but not rapidly; given the enormity of the tax cuts, we ought to be having a recovery that would put all previous post-recession recoveries to shame. But we’re not. Hell, we still have fewer private-sector jobs in the U.S. than we did when GWB was inaugurated four years ago, and you can go to www.bls.gov and look that up.
TANSTAAFL, dude. The ‘cuts’ have been paid for, for the moment, by borrowing. But you can only borrow so much for so long before you have to start paying it back, one way or another.
When the dollar loses 30% of its value over the next year or so, that will be one way in which payback happens. And how much will our economy have to grow to make up for that across-the-board 30% loss of value? A whole damned lot, that’s how much. And there’s a lot of structural reasons to wonder whether that’s going to happen anytime soon.
First of all, the employer’s share of the payroll tax may be ‘hidden’ to you, but everyone knows it’s there. It’s not like the economists leave it out of their calculations.
But I call…well, not bullshit, but hand-waving. What’s the multiplier effect of the payroll tax, really? “That hidden tax is incorporated into every level of resale that an item goes through, so it’s actually much greater.” OK, I bought a book and some CDs on Amazon. On that last resale, the one from Amazon to me, how much did the 15.3% payroll tax on wages add to the transaction? Oh that’s right, almost nothing, since the transaction was practically untouched by human hands. Ditto for when Amazon bought the book and CDs from their suppliers.
But you just said the tax cuts were good. Now they’re bad, because they made the tax code more complicated. (They did.) That’s the danger of hand-waving arguments comprised of lots of generalities - it’s easy to find out you’ve suddenly lost an argument to yourself.
I think you’re overestimating the effect of the tax cuts. It’s true that increased consumer spending will stimulate the economy, but it comes at a huge price: a deficit. The deficit can be avoided by cutting government spending, but then that will slow the economy, so it’s a zero sum game (in simple terms).
I think the major reason for the current boom that you see is the super low interest rates we’ve had for the past few years. At lower interest rates, business owners are more willing to borrow money to expand their business. Also, investors would be less likely to throw their cash in a CD or bond because with low rates, they would get better returns investing in more physical projects. Additionally, many homeowners chose to refinance their loans at lower rates, and some took out extra money to make improvements on their property, stimulating the construction business. Many renters also took the oppurtunity to purchase homes, getting a great deal on the mortgage rates.
Now here’s the kicker. High defecits will eventually cause inflation and higher interest rates. I believe the low interest rates of the past few years are mostly due to Clinton balancing the budget and eliminating the defecit. I guess we can test our theories over the next few years. As interest rates and inflation clime, will the economy turn sour or will the tax cuts keep everything running smoothly?
I think the slow job growth is due to Clinton’s balancing of the budget, which resulted in a strong dollar. With a strong dollar, companies would be more likely to move production and services overseas, if possible, because the price of labor in the U.S. is too costly. Everyone in America benefits from this because Americans are able to get their products and services at better prices. But many people get screwed over, mainly those whose job was affected. The issue America needs to address is how to keep the jobless from suffering so much while the dollar is strong. Cutting taxes for the wealthy would probably be the worst thing you could do.
