Tuesday, March 30, 2010

Defusing the Debt Bomb

Fareed Zakaria is one of my favorite liberals.  He and conservative George Will account for 99% of the brainpower over at Newsweek. Zakaria has written a short, smart and well-reasoned article on how to tackle the nation's mounting debt. 

I don't agree with everything he said, and it's a little simplistic, but journalism such as this is what we need to help us understand complex issues.

He lays out three simple proposals:  Adopt a VAT, end certain subsidies, adjust entitlements

"Adopt a Value Added Tax (VAT)" 
I am only for this if we completely scrap the current tax code on US citizens and businesses.  None of this "we'll impose VAT now and adjust the income tax to compensate..."  No way.  Scrap it.  Then we can talk about the VAT.

A VAT is progressive, especially if basic food staples are exempted.  Rich people buy more stuff and more expensive stuff, so they would pay more tax under this plan.  It also removes the penalty for saving and investing while promoting capital formation that powers job growth.

"End the massive, distorting subsidies for home-ownership, health care, and agriculture"
I'm willing to raise Fareed on this one:  End ALL subsidies!  Let the free market chips fall where they may.  If it's a good idea it will survive; obsolete solutions will succumb to Schumpeter's creative destruction.  Up from the ashes will grow new ideas, new jobs and new solutions to society's challenges.  

"Make sensible adjustments to entitlements"
This will have to be done, one way or another.  Entitlements constitute around 50% of the federal budget and the share is growing, along with interest payments on the debt that fund these programs.

Slowly increasing the retirement age is one way government is already doing this.  "Ending Welfare as we know it" was another.  The greatest leap would be to wholesale divest the federal government of all extra-constitutional function and free up individuals, families and communities to tailor problem solving to each one's unique situation.

Fareed Zakaria, like Paul Ryan, has done a public service by putting his ideas out there.  You may not agree with them, but we need a vigorous debate on how to avoid fiscal calamity while not starving everyone in the process.  Putting government on a diet would be a good first step.


Christopher - Conservative Perspective said...

OMG! You do not support the idea of VAT do you?

If healthcare is not the final nail in Americas casket a VAT certainly would be.

Christopher - Conservative Perspective said...

A better example of how VAT works is say a refrigerator that now costs on average $800 before taxes.

With VAT (Value Added Tax) in place when the frig door is put in place a tax is added (value), freezer-tax added (more value added), shelving-tax added, crisper drawers-tax added and on it goes. Each and every process is taxed individually as more 'value is added.

You are correct as it is 'progressive' but now that refrigerator costs $2500 or more and thats before you pay the SALES TAX.

You want to see even more massive layoffs, plant shut-downs and or companies relocating outside the U.S. then just implement a VAT and the U.S. can quickly become a third-world country that the LEFT seeks even sooner than even they thought possible.

Silverfiddle said...

I know how a vat works. I lived in Europe. Remove the income tax and replace with a vat is economically feasible, according to economists I trust, including free-marketeers and Austrian School thinkers.

The fear is that they lay in a vat on top of what we have now. That would be a disaster

Finntann said...

Christopher, you miss the point.

The point is a simplification of the tax structure, although I agree with you...a VAT on top of the existing tax structure in the United States would be economically suicidal. Although Nancy Pelosi on The Charlie Rose Show has said a national VAT was "on the table" to help the government garner needed revenues.

In an of itself, an elimination of the income tax and incorporation of a VAT would probably be a good thing. Simplified, if you now make 100,000 you take home somthing less than 72,000 after federal and state income tax. With just a VAT, you take home 100,000 and pay 20-25 percent on purchases (to use the EU rates), so the more you consume the more you pay.

The problem as I see it is there is no way in hell the US government would eliminate the existing tax structure and impose a VAT...more than likely we'd see a VAT somewhere in the range of 5-15% imposed on top of the existing structure which would be bad, Bad, BAD.

Impact to business is generally not that bad, since at each stage of the VAT process the business paying gets to deduct the amounts previously paid....in essence they pay only on the increase in value, not 25%, 25%, 25%. I too have lived for a bit in Europe, and while I didn't make any significant high dollar purchases, the VAT wasn't really all that noticable in the day to day purchases I made.

Overall I think it a bad idea to let this administration and congress tinker with the tax structure because I feel that in the long run they are just looking for more money and we are just going to get screwed.


Christopher - Conservative Perspective said...

This is exactly why it should be shelved and not even discussed, have you ever seen even a so-called "temporary" tax go away in this country? NOPE.

When any politician, especially the socialists in this nation speak of VAT, it is in conjunction with or on top of both income and sales taxes.

Until a real revolution is launched and achieved, this subject should be tabboo as it will otherwise encourage them to our ultimate peril.

p.s.: I did not miss the point and we are not if Europe.

Silverfiddle said...

CORRECTION: The Austrian School is decidedly AGAINST a VAT. I Misspoke in an earlier post.

Chtistopher: I share your mistrust of this current government and I would not want them tinkering with tax policy because we would come out losers.

I do want to see out current burdensome, wasteful tax system replaced with something simpler, but as you caution, not at this time.

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