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In Argentina, like many of other taxes, VAT was supposed to be a temporary tax in emergency times. Maybe since 1975 we are in tough times, cause VAT not only still exists, but it has been raised lots of times, now is at 21%.

I'm with you on the political economy...have been making similar case against the introduction of a land tax in NZ unless there are structural declines in spending.

In Denmark we have a flat rate of 25%.

Why would a "libertarian" economist favor a VAT over a national sales tax and repeal of the 16th Amendment?

Because he's a "libertarian" economist not a libertarian economist?

Great post. Thanks.

> As David Lange, a former New Zealander Prime Minister,
> once observed, even drug dealers pay VAT."

They pay VAT yes, but they don't *charge* VAT. This is important because it gives them a price advantage over other recreational goods. The avoidance is still there, it has just changed in form. It moves from buying to selling. Yes, the drug dealer must pay VAT on his legally obtained materials and when he spends his income, but he doesn't charge it on his illegal transactions.

The real advantage from a tax collection point of view (as many have observed) is that there are far fewer businesses to track than there are income earners. But, if VAT is used alongside income tax then both must be tracked anyway.

This makes the whole black/gray economy become relatively much more attractive.

> This would open the door to a lot of lobbying to exempt many products."

Indeed. In Britain the famous Jaffa Cake case rumbled on for years, there were sometimes articles about it in the media.
http://en.wikipedia.org/wiki/Jaffa_Cakes

I think ruling Jaffa cakes to be cakes was quite fair though. But I still don't see why cakes aren't classed as luxuries but biscuits are.

I would prefer the harms of the collapsing welfare state due to the unwillingness to compromise rather than the maintenance of (even a semblance of) the present system through any increase in the tax-take of government. We do not have to get the advocates of the welfare state to agree to reductions explicitly. Crisis will force it. I realize this may sound crazy to some people. But I am just being candid about my preferences.

I'd like to second Mario Rizzo. It's a lot of fun to watch systems collapse, and I'm really enjoying Greece right now. However, if I were a progressive, I'd be pushing like crazy for a VAT right now. If one does not want the current system to fall apart, it seems to me that a VAT is the least cost way to achieve that.

Compared to Tyler, I incline more towards the view of Mario and other libertarians.

But that's a big part of any of these judgments and I'm not sure that Tyler isn't right.

In a momentous econ/political turmoil, will the shake out look more like a greater despotism and a breakdown in Hume/Smith Anglo-American conventionalist sensibilities about government, a breakdown wherein our political life starts to look more like Greece, Brazil, etc. (with no return?), or something more in line with a "Back to Bach!" spirit for Smithian liberal verities and the presumptions they carry?

Interesting times.

By the way, Mike Clark and I explore the areas and extent of agreement between direct and overall liberty.

Implementing VAT is clearly a reduction of direct liberty, but is it a reduction or an augmentation of overall liberty? Would there be be less overall liberty in the world without the implementation?

Tyler apparently thinks that the VAT is desirable, and presumably that it would augment overall liberty. I believe he would agree that it is a reduction in direct liberty.

Fred apparently disagrees, affirming that this is but another case in which direct and overall agree.

The paper is here:
http://mercatus.org/publication/direct-and-overall-liberty-areas-and-extent-disagreement?id=22648
(A somewhat shortened version is forthcoming in Reason Papers.)

A crisis won't end the welfare state. I think Governments will simply resort to outright confiscation of the assets of the upper and middle classes.

@Current:

The argument for crisis, I believe, is that, in comparison to a more deliberated time of increases in confiscation, in crises times the welfare state will be hacked back more.

I would stress to all of you that I favored spending reductions, in black and white. (Nor would I pass a VAT now.) But if those don't happen, what next? I didn't endorse a VAT, I asked to see a better solution. I am waiting...

I'll cover the New Zealand example on MR.

Curruent:

Thanks for that explanation about drug dealers. I thought the idea was that they charged VAT, which I found plenty puzzling.

Frederic:

You say, "History shows that VAT rates generally go up quickly but rarely go down." Isn't the issue, however, whether government spending goes up? Of course I allude to Milton Friedman's point that spending is the real measure of the tax burden. Does the evidence suggest that a VAT causes the rate of growth of government spending to increase?

Roger,

You are right in saying that the fact that the VAT rate goes up doesn't mean that total government outlays go up as well. My point is that when one looks around (and this is only recollection from my days doing work on taxation), one can observe that countries with VAT have rates that generally tend to go up along with government spending. High VAT rates are generally found in Europe and they correlate with bad economic performance. VAT rates of 19 to 25% do impact the economy greatly and I believe the temptation is great to increase rates over time when more revenues are needed.

Canada could be seen as an exception. To my knowledge, they introduced a VAT in 1991 at 7% and it has since then been reduced twice down to 5%. But one should not forget that while it replaced some federal consumption taxes, the Canadian VAT comes on top of the consumption taxes that the Provinces charge. Some Provinces have a "Harmonized Sales Tax" which combine the federal VAT and the local tax. In such cases the rates are generally around 13%.

Tyler is saying that VAT is not great but in the current perspective (no spending cuts possible), it is probably the best alternative. My point was to say that while attractive, the VAT is not a path the US wants to take. This would reinforce the tendency towards a Europeanization of the US economy and would reinforce the power of the Federal Government.

I am not sure if there is any policy solution that would work at this stage short of cutting spending. Although cutting taxes may work too. Going the whole hog with a flat tax at 15%. Alternatively, letting the US government default and then go bankrupt (as Mario is suggesting) sounds like a possibility but I am afraid the repercussions of this event would be counterproductive for liberty in the world.

Does Tyler watch the News?

We're witnessing the greatest popular uprising since the American Revolution. And he wants to short-circuit it with "a bipartisan compromise." Excuse me, but I don't think the elctorate is in the mood.

Additionally, we've been down the bipartisn compromise road before. Remember the budget compromise under "read my lips" Bush 41? We got the higher taxes but not the spending cuts. Then Bush lost the election.

Mario is correct on political economic grounds: first crisis, then reform. It must get worse before it gets better.

My top candidates for budget cuts:

(1) I have noticed rethinking about the cost of the two wars (Iraq + Afghanistan) even among some conservatives as it passes the $1 trillion mark. Time to end the futile effort of nationbuilding. (I supported going into Afghanistan, but worried from the get-go about how we would extricate ourselves.)

(2) Abolish the Commerce Department. It is source of rent-seeking by big business and has no constitutional basis. Save about $14 billion.

(3) Abolish the Department of Education, which is the source of rent-seeking by the education lobby (Of course, no one reading this blog is included.). Education is not a federal function. Save about $64 billion.

Folks are free to come up with their own ideas. But we need to take a hatchet, not a scalpel to the federal budget. No smoke-and-mirror phoney cuts that are the inevitable outcome of budget deals.

The colonists wanted to secure for themselves the sacred rights of Englishmen, as they understood them. They were enshrined in the Magna Carta and the common law.

Those historical rights may be imperfect approximations of a natural rights concept of liberty. But they were what the colonists sought.

A country governed by the Constitution would have a much smaller central government. With a correct interpretation of the 14th amendment, the states would be geatly constrained in their economic depravations.

Whenever someone criticizes existing institutions, Thomas Sowell asks "compared to what?" What are the actual choices?

By all means, read Spooner. Also read Burke.

> The argument for crisis, I believe, is that, in comparison to
> a more deliberated time of increases in confiscation, in crises
> times the welfare state will be hacked back more.

Yes, that's the argument Mario is making. I don't agree with his assessment though.

I live in Ireland and I'm from Britain, I don't know that much about the US situation. But, I think its too optimistic to think that a crisis will lead to a significant reduction in the welfare state.

I've being living in Ireland during the recent crisis. The rate of unemployment benefit here is €210 per week, not including housing benefit, that's ~$283. Despite the horrible financial situation of the Irish state there has been little discussion about cutting welfare or other state services. Discussion has centered around how the tax rises are to be distributed and whether property developers should be bailed out.

In Spain, for example, the unemployment rate is about 19%. This is, of course, mainly caused by the state. But, there is little sign that this will change.

It's too much to hope the electorates and politicians will change. What's more likely to happen is that the most productive people will move around avoiding the states with the highest tax costs.

VAT's the matter with EU?

Following on Jerry's hatchet vs. scalpel analogy, Roy Childs use to say it's more important to cut muscle than fat from the government.
And let's abolish the Department of Defense.
It's offensive, and more about offense than defense.

And the Department of Transportation. Does anyone seriously think we need it to have a transportation system?

And the Department of Labor. What does it do besides baby sit the interests of labor unions and oversee the enforcement of various statist excrudescences such as Title VII of the Civil Rights Act of 1964, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, Title I and Title V of the Americans with Disabilities Act of 1990, the Civil Rights Act of 1991, and any other regulations associated with affirmative action that businesses have to sign off on?

(I got all these laws, etc. from an RFI form a friend had to fill out to do business with a Fortune 500 firm.)

I don't think you can use the experience of other countries to analyze political dynamics in the US. America was conceived in liberty, in a revolutionary ferment, and has never entirely lost that spirit.

Witness the Tea Party. In what other country would that happen? There is now a strong right-wing populist movement, and it is only just beginning.

It should be kept in mind that there are only four items substantially large enough that cutting them substantially will really make much of a dent in spending. Those social security, defense, medicare, and medicaid (interest on the national debt cannot be touched, although I could see a political move to default in the future if China were to make some demands on us based on our indebtedness to them, or it could arise from some sort of California-like gridlock between a president and a Congress hamstrung by an irresponsibly filibustering Senate). Even eliminating whole departments like Commerce or Education is pretty much small change.

Regarding the "fun" of "watching a collapsing welfare system," well, do any of you wannabe funsters have mothers who depend on medicare for her medical cost coverage? How would you like to see your mother refused admission to a hospital because of lack of insurance coverage? Yeah, yeah, extreme, I know, but when one wants to talk about a "collapsing welfare system" one really needs to think about what one is wishing for.

Jerry,

my substantial proposals:

1) aboilish department of agriculture, and all agricualtural and other business subsidies (all corporate welfare). That should be easy and bi-partisan, since everybody is in populist mood against corporate fat cats.

2) privatize social security according to Paul Ryan's model or more radically (ideally 100%)

3. Abolish Medicare, according to Ryan's plan in 10 or 15 years time.

I think this would be pretty substantial cut.

Barkley doesn't want to live in interesting time, I share his lack of enthusiasm.

I am friends with many long term unemployed people and several who live by cheating on disability welfare.

They could all have done productive jobs and had careers if they had wanted to. They didn't though, and the generous irish welfare state gave them an alternative.

I disapprove of their lifestyle, it's not something I'd ever do myself, and I've told them all that. It's damaging to wider society and unsustainable. But, I don't want to be around when things get tighter. Though in the long run I realise that things can't go on as they are.

Part of the problem is that the welfare states have made an implicit agreement with their populations that welfare is "cradle to grave". Many people, deserving and undeserving, will be cheated when this agreement is torn up.

I must chime in with Barkley and Current on interesting times. I think we need to think of what happened in Russia. Should it all come crashing down, "the free market" will generate all sorts of bad things that our theory says shouldn't happen. It's not so much that our theory is wrong. It's rather that a long history of interventionism prevented the evolution of social structures that would have served many of the functions now monopolized by the state. Were the state to just wink out of existence, how would those functions be served? The gap in our theory, I think, is deregulation. We don’t have much in the way of a theory of deregulation. As I keep insisting: 1) we need to plan deregulation using the Smithian tools of economic systems design and 2) the epistemic perils of deregulation are no less than the epistemic perils of regulation. To paraphrase Rodney King, why can’t we all just muddle through?

Mark Twain wrote a cautionary fable on getting what one wishes for:
http://www.ntua.gr/lurk/making/warprayer.html

> It's rather that a long history of interventionism prevented the evolution of social structures
> that would have served many of the functions now monopolized by the state.

Yes, take unemployment for example. Many folks say that if the state didn't provide unemployment benefit then insurance companies would sell it as a product, and other non-profit organizations like friendly societies and unions would do something similar. Certainly this is true.

However, each type of insurance is quite different. Car insurance, home insurance and the many types of insurance used by businesses are all different. These differences have evolved over centuries. Take ship insurance, the syndicates of Lloyds have been working on that since the 17th century.

But, the evolution of those services provided by the state is mostly stalled. It will take at least decades to make up for lost time.

I'am from argentina, and some years ago I have a small shop. We have a 21% Rate. It was a nightmare, for a services industries (where payroll is your main costs) VAT is a direct tax on revenue. You need to think of VAT in a complex economy, you need to tax imports, recover vat from export, handle capital investments, consider revenue recognition rules, the financial cost of vat charged on inventory. My expirience with vat, a nightmare.

You don't want to smooth tax revenues over the business cycles. Pro-cyclical taxes => anti-cyclical deficit => automatic stabilizer.

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Federal government would introduce a multiple-rate system in order to avoid taxing the poor. This would open the door to a lot of lobbying to exempt many products.

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A flat rate for VAT on all goods and services, and a flat tax rate on Income (barring the first 10K), and the abolition of all company tax ( the profit being taxed in the hand of the recipient).......and you have lift-off of your economy. Simple,fair,satisfactory and no more avoidance or evasions or fiddling of the tax returns.

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Increase the VAT other taxes is irreplaceable, but the regulation of tax coordination with the economy, the rate of increase and decrease, to be able to play a regulatory role in the economy, so that a more reasonable economic structure, social equity, there must be Conducive to economic development.

e economy, the rate of increase and decrease, to be able to play a regulatory role in the economy, so tha

Increase the VAT other taxes is irreplaceable, but the regulation of tax coordination with the economy, the rate of increase and decrease, to be able to play a regulatory role in the economy, so that a more reasonable economic structure, social equity, there must be Conducive to economic development.

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