Start Making Sense

Today at NYU I participated in a panel, sponsored by the ABA and Tax Analysts, about the current leads for tax reform (whether it is so-called or actual). My fellow panelists were Ajay Mehrotra, Peter Merrill, Ray Beeman, and Lee Sheppard. Here is a photo (thanks to the Tax Analysts Twitter site).

I’m second from the left, and the others are in the order where I called them above. The U.S. federal government tax system brings this joke to my brain invariably, at discussions of tax reform, because of how it varies from everyone else’s. All peer countries have a VAT, a lower statutory corporate rate than we do, and less comparative reliance in their taxes systems on tax revenues.

It’s not merely because of the wisdom of crowds that we might reasonably suspect that we have it wrong. All that being said, the tax reform is easy. Obviously, I’m kidding when I say that taxes reform is easy. However the thing is, properly managing “THE OTHERS” should mean that you can get a much better fiscal system, by one’s lighting, whether you are on the left or the right politically, or anywhere in between.

Indeed, it even should mean in the rule that there potentially are “Pareto deals” available from the standpoint of people on the left and the right. If they could make a deal in good trust towards creating a stable new fiscal system that included a VAT, there ought to be available options, in regards to “THE REST,” that would leave both relative sides happier than they are actually.

Why can’t we have a recognized VAT? Part of the problem is historical (1970s-tax revolt, the defeat of Al Ullman in the 1980 election after he advocated a VAT, Reagan “revolution,” etc.). But it’s more than just historical – in the end, years have handed down since then, and it still appears to be true.

To my brain, the main element to why we can not have a VAT is situated partly in the old Larry Summers joke that’s frequently quoted but hardly ever analyzed. People usually just point out this joke and proceed. But there are two odd reasons for having it. First, it’s paradoxical. Why should liberals and conservatives be so myopic in opposite ways? Even whether it’s true, it generally does not make sense without further explanation.

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So how can we explain these two unusual aspects? I see two main points. First, even beyond your US it’s politically hard to present new taxes like the VAT. In many countries, it got help from, say, its replacing disliked gross receipts taxes, or being truly a precondition of joining the EU, or responding to fiscal problems.

Without something like that, it’s a difficult political sell even without crazy US politics. Second, US political dissents, and both sides’ risk aversion, stand in the true way of the offer. The end result is that one can only introduce a VAT by camouflaging it. So that, as it happens, for a structural reason only Republicans can do this. They can sub it set for the existing corporate income tax, and not admit that it’s a VAT, thus avoiding both the label and the creation of a new tax instrument. But the Democrats can’t do this, given that they generally want to retain the corporate and business tax, unless they can identify something else to displace it with.