If I appear to be aggressively flogging the issue of Mitch Daniels and moving toward taxing consumption, it’s only because, at the national level, there is no more important issue. This debate is important, and I’m glad to be part of a movement and organization capable of engaging in it. The most recent installment of the debate (here on Somewhat Reasonable) is Ben Domenech’s well-written attack on Mitch Daniels’ trial balloon.
Since Ben’s post is so well put together, I’ll pull some nuggets from it to illustrate why a) Mitch Daniels was STILL right in floating his trial balloon, and b) why the conventional wisdom of Ben’s view is far more risky than promoting dramatic reform. Here goes.
Ben writes: [re: the VAT issue, after assuming it will never pass]…as a single policy issue, I find it fascinating, since few debates better crystallize the divide between the surging small government populists who distrust government and intellectual policy naifs who have learned little over the past decade about how government works.
Count me as a defender of intellectual policy naifs. While that barb may be aimed at folks like me, the fact is that folks like Bruce Bartlett, Arthur Laffer (more on that below) and Mitch Daniels are hardly “naifs.” Daniels is perhaps America’s most accomplished Governor, with a record of spending cuts and tax relief that has eluded most so-called conservatives.
Perhaps the genesis of this debate is the decades of overpromising on spending, combined with the understanding that there is no way the existing tax system could ever hope to pay half those IOUs, much less all of them. The strongest argument in Daniels’ favor is the unsustainability of the existing system.
Ben writes: The very idea of a VAT is a profoundly silly and pointless one, in my view, simply because it is so incredibly unlikely to come to fruition. American Democrats are unwilling to dramatically expand the amount of taxes paid for by the poor and lower middle class, and most Republicans understand that a VAT is only an improvement in the marketplace if it is a replacement for, not an addition to, the current tax code.
The very idea of promoting school choice is a silly and pointless one, in the eyes of many, because it is so unlikely to come to fruition. Teachers unions are simply unwilling ….
The very idea of arguing that the Soviet Union is an “evil empire” is a silly and fruitless one, because it is so unlikely that its defeat will ever come to fruition…
I think you get my point. Political viewpoints change, and the “open field politics” envisioned by thinkers such as Michael Barone is upon us. Who among us, in a world where Sens. Bennett, Murkowski, and Govs. Crist and Corzine are gone is willing to “play not to lose” instead of “playing to win.” That is essential issue. I care little what Rep. Boehner thinks from one moment to the next. He will do what the people want, once they are persuaded. Such persuasion is not an east task, I admit, but you have start somewhere.
As an intellectual policy naif, I only have one question. Is the replacement of income taxes with consumption taxes a good idea? If so, promote it. If not, don’t. If it’s better policy, then there is no downside to proposing it. Absent a strong push for a better tax system, we will get the worst of both worlds in any event.
The first step to creating a constituency for better policy is for someone to start talking about it. I am tired of an entire free-market movement negotiating against itself when faced with weak opposition like Democrat’s cheap class-war rhetoric and lame Republican leadership.
Ben writes: Fiscal conservatives who support a VAT’s passage in the American experience must necessarily deny or ignore nearly every data point from its practical application in Europe and elsewhere.
This is the most powerful anti-VAT argument. Strong as it is, however it is amazing how weak it is. For the US, it is important, if not an immediate imperative, to start debating the finer points of tax systems. I rail on about this because our current system is unsustainable. That is why our choices are so constrained. Absent a total shift from income taxation to consumption taxes, the fact is that we are going to end up with both of them eventually. Our entitlements promises, even if cut dramatically, are too large to be met with today’s system.
If you are one of those sad souls who believes we can re-run the 80s or the 90s, I simply ask you to look at the demands of the entitlement system. In the past decades, we could pretend that we were on top of the issue. Today, with the looming health and retirement costs of Medicare, Medicaid and Social Security, the idea that we can “grow our way out” of this is absurd.
We need deep spending cuts AND a better tax system. Pretending that tax cuts and economic growth will solve the problem is the mark of a real “intellectual policy naif” – more so than Mitch Daniels or I could ever be.
So where does Arthur Laffer come in? Just last night, while attending an event in St. Louis at an open house for the excellent Show Me Institute, I had the pleasure of listening to Arthur Laffer talk about the potential benefits of Missouri dropping its income tax and increasing some of its sales and consumption taxes. Nearly every economist sees income taxes as the most debilitating of all, and Laffer was no exception.
Anticipating writing this post, I asked him about the Mitch Daniels controversy and the optimal tax system. I was surprised by his answer, which was a virtual endorsement of 2 low, broad taxes. A flat income tax set at a low rate, with NO exceptions, and a flat VAT. Laffer theorized that these two taxes, could raise all the money we need if set at about 11%. (I hope to see the video of the event on line so as to corroborate these assertions.)
For my part, I’d like to see ALL income taxes abolished, with or without the repeal of the 16th amendment. Nothing is more ‘intrusive’ than our personal income tax system. Nothing mis-allocates business spending more than our absurdly high and horribly uncompetitive corporate income tax.
Last, and perhaps most important, the biggest political negative of consumption taxes, their regressiveness, allows us to open up the entire debate of Charles Murray’s plan to end the welfare state, simply by individualizing it. By giving every citizen over the age of 21 a stipend to cover the regressiveness of consumption taxes, we create the opportunity to individualize health insurance and savings, along with retirement accounts.
The growth of the Tea Parties provide evidence that the people increasingly looking for bigger and better solutions to the mess created by the last 40 years of political stalemate. By and putting everything on the table, and asking the Democrats to negotiate in good faith, we have an opportunity to shift our economy from the crumbling foundations of a failing tax system to a system where we improve the tax AND entitlement systems.
If the Republican Party uses the opportunity that is about to be presented to them as a platform for another stale “tax cuts for the rich”, “grow our way out,” “tax cuts raise revenues” tit-for-tat of the last few economic cycles (did you all forget how many time Ronald Reagan RAISED taxes?!) , they will fail utterly, and we will get a VAT in any event.
We need deep spending cuts, a better tax system, and more health and retirement savings accounts. There is one governor with the best record on those issues, and that’s Mitch Daniels. I think that makes him a great presidential contender, despite the calls to burn him at the stake for daring to question a tax system that has clearly failed.