EACH POINT ON THE CHAIN
Arguments for Value-Added Tax in the US, and using VAT to fund basic income
The Wall Street Journal lays out the basics: “Unlike a traditional sales tax, a VAT is a levy on consumption that taxes the value added to a product or service by businesses at each point in the chain of production.”
VATs are ubiquitous—except in the United States. According to a 2013 Hamilton Project report, “In recent years, the VAT has raised about 20 percent of the world’s tax revenue (Keen and Lockwood 2007). This experience suggests that the VAT can raise substantial revenue, is administrable, and is minimally harmful to economic growth.” The TPC notes that “every economically advanced nation except the United States” has a VAT. Countries adopted VATs over time: the EU first unified all its VATs in the 1970s, China adopted a VAT in 1984, Canada in 1991, and so on. Now the US is the only country in the OECD without one.
Why is there no VAT in the US?
"Back in 1988, Harvard economist Larry Summers [...] explained that the reason the U.S. doesn't have a VAT is because liberals think it's regressive and conservatives think it's a money machine. We'll get a VAT, he said, when they reverse their positions." (Forbes.)
A VAT could certainly be a revenue-raising powerhouse. According to the CBO, a 5% VAT could raise 2.7 trillion dollars in 2017-2026 with a broad base, or 1.8 trillion with a narrow base—the most massive of all the options for revenue in their 2016 report.
And as for the regressive concerns, VAT proposals usually suggest adjusting other taxes or credits commensurately. A 2010 Tax Policy report considers a VAT in the context of lowering payroll or corporate taxes, and the Hamilton Project suggests adding tax credits or straightforward cash to low-income households.
VATs are appealing beyond their ability to raise a lot of money. They’re also easier to administer and document than other tax forms. A 2014 study by Dina Pomeranz examines the way the VAT is documented in Chile, and finds that "forms of taxation such as the VAT, which leave a stronger paper trail and thereby generate more information for the tax authority, provide an advantage for tax collection over other forms of taxation, such as a retail sales tax." Beyond that, Michael Graetz argues in the Wall Street Journal, "shifting taxes from production to consumption would stimulate jobs and investments and induce companies to base headquarters here rather than abroad." The Tax Foundation has advocated for a VAT to replace the Corporate Income Tax for similar reasons.
VAT and UBI
In a Medium post, Santens explains the benefits of a 10% VAT to fund UBI: "For those who fear the idea of people taking their basic incomes and earning no additional income, it would mean that aside from the other 90% that gets transformed into wages and salaries through purchases of goods and services, 10% of their basic incomes would go right back into funding everyone else’s basic income."
In a 2012 paper, Philippe Van Parijs and Yannick Vanderborght make the case that a VAT is preferable to income tax for funding UBI in the European Union. "Whether in developed or in less developed countries, the main advantages claimed for VAT over the income tax at the national level are that it has a tax base that extends more widely beyond wages and that it turns out to be, if anything, less regressive than actual income tax schemes, adulterated as these tend to be by exemptions, discounts, the separate taxation of capital income, loopholes and sheer evasion."
Per Scott Santens on Twitter, other than its massive scale and ease of administration, VAT matches UBI because it prevents the perception that the government is giving out money, then removing it via income taxes.
- Andrew Yang's campaign platform proposes a 10% VAT to fund UBI. Link.
- Miles Kimball takes issue with common arguments about VAT’s regressiveness. Link.
- At Bloomberg, Jason Mast tells the history of Michigan’s failed VAT attempts. Intriguingly, Howard Heideman, one of the tax’s creators, thinks an easily remediable accounting decision was a large reason for the failure: "I think had Michigan administered its VAT using the invoice credit method, it would still be in effect." Link.
- The USCIB has a list of rates around the world.
- Center for Global Development on redistribution in developing nations: “In the rich world, the poorest citizens tend to be net financial recipients from the government—they get more in transfers than they pay in taxes. But that’s not true in some developing countries…. The mechanics of a VAT are easier to implement for a weak state, and so organizations like the IMF have pushed countries down this path, prioritizing the need for revenue over a concern for equity.” Link.
- VoxDev on the role of discretion in tax-collecting. Link.
- Brad DeLong smacks down John Cochrane on VAT arithmetic. Link.
WAY TOO SHORT
How Parent PLUS loans worsen the racial wealth divide
RACHEL FISHMAN of NEW AMERICA scrutinizes Parent PLUS loans, federal loans with high borrowing limits which parents can take out to help their children attend college.
KEVIN CAREY summarizes on Twitter: “Instead of making college affordable for black students, the federal government is making what are arguably predatory loans… Parent PLUS has become yet another ‘universal’ program that, in reality, makes the black/white wealth gap worse.”
From the report:
“New analysis of Education Department data show just how risky PLUS loans are for these families. This analysis also shows that when parent loans and student loans are considered together, federal student loan policies are driving an intergenerational accumulation of debt that burden the neediest families.
This report looks at the Parent PLUS loan program and how it exacerbates the racial wealth divide by promoting debt among low-income Black families. The report focuses on Black families because they experience a wider racial wealth divide, and there is alarming new evidence that they also have the worst student loan repayment outcomes of any racial or ethnic demographic. The first part of the report examines the demographics of Parent PLUS families using Education Department data. It looks at average intergenerational debt for those families who borrow using PLUS and student loans.
This analysis reveals that low-income Black families are burdened with large intergenerational education debts compared to their white peers. The second part of this report focuses on the implications of the racial wealth gap and how policies like PLUS have widened it. It shows how the PLUS program has come roaring back to life after the credit check regulation was weakened.”
- At the end of the report, Fishman makes policy recommendations: “Add an ability-to-pay measure using [Expected Family Contribution],” “Prevent institutions from listing PLUS loan amounts in financial aid letters,” “Hold colleges accountable for Parent PLUS default rates,” and more.
- Judith Scott-Clayton’s January report for Brookings looks at student debt over time, and adds to the picture of racial student-loan gaps. “The new data allow for the most comprehensive assessment to date of student debt and default from the moment students first enter college, to when they are repaying loans up to 20 years later, for two cohorts of first-time entrants…Focusing on borrowers only and projecting default rates out through year 20 (as shown in Figure 3) suggests that 70 percent of black borrowers may ultimately experience default.” Link.
Transparency and governance
In a recent article for the YALE LAW JOURNAL, legal scholar DAVID POZEN charts an "ideological drift" of transparency in government from the Progressive era to the present:
"In the formative periods of American “open government” law, the idea of transparency was linked with progressive politics. Advocates of transparency understood themselves to be promoting values such as bureaucratic rationality, social justice, and trust in public institutions. Transparency was meant to make government stronger and more egalitarian. In the twenty-first century, transparency is doing different work. Although a wide range of actors appeal to transparency in a wide range of contexts, the dominant strain in the policy discourse emphasizes its capacity to check administrative abuse, enhance private choice, and reduce other forms of regulation. Transparency is meant to make government smaller and less egregious.
Many factors have played a part [in this transition], including corporate capture of freedom of information laws, the exponential growth in national security secrecy, the emergence of the digital age and associated technologies of disclosure, the desire to facilitate international trade and investment, and the ascendance of market-based theories of regulation. Perhaps the most fundamental driver of this ideological drift, however, is the most easily overlooked: the diminishing marginal returns to governmental transparency. As public institutions became subject to more and more policies of formal openness and accountability, demands for transparency became more and more threatening to the functioning and legitimacy of those institutions and, consequently, to progressive political agendas.
This area of law and advocacy has become on balance substantially more libertarian, in both cultural and functional terms, than it used to be."
Link to the paper.
- A 2016 paper co-authored by Kate Crawford and Mike Ananny offers a critical examination of transparency in the realm of data ethics and algorithmic accountability: "Being able to see a system is sometimes equated with being able to know how it works and govern it… But can 'black boxes' ever be opened, and if so, would that be sufficient?" Link.
- For more on transparency in the digital ethics realm, a paper from Lilian Edwards and Michael Veale that addresses the "transparency fallacy" at the heart of the "right to explanation" discourse guiding European data legislation. Link.
- New reports from the New York Fed on household wealth, debt, and credit. Under discussion: "(1) an overview of recent developments on household balance sheets, with a focus on housing values and mortgage debt; (2) a discussion of how housing wealth has changed over time and how it is distributed across households; and (3) facts on the changing nature of how households have used their home equity." Link. ht Will
- A new study looks at the differences between how people respond to trolley problems and in real life: "Our results indicate that responses to hypothetical dilemmas are not predictive of real-life dilemma behavior, but they are predictive of affective and cognitive aspects of the real-life decision." Link.
- Please don't ignite the earth's atmosphere. Link. ht Jay
- From VoxEU: "Who evades taxes in developed economies? The question matters a great deal for the study of inequality because scholars typically rely on tax records to estimate the concentration of income and wealth). If the rich dodge taxes more than the poor, tax records will underestimate inequality." Link.
- "We identify significantly higher growth in economic activity in constituencies that elect women. Probing mechanisms, we find evidence that women legislators are less likely to be criminal and corrupt, more efficacious, and less vulnerable to political opportunism. We find no evidence of negative spillovers to neighbouring (male-led) constituencies, consistent with net growth." Link.
- "Attitudes toward globalisation have emerged as a new dimension of political alignment, alongside – or even instead of – the traditional left-right cleavage.… Highly skilled individuals approve of their government more when high skill-intensive exports increase, but approve of it less when high skill-intensive imports rise. More generally – and contrary to the conventional wisdom – unskilled workers do not oppose imports and blame their leaders for failing to protect markets." Link.
- "We find that extreme traffic increases the incidence of domestic violence, a crime shown to be affected by emotional cues, but not other crimes." Link.
- Ross Perlin of the Endangered Language Alliance with an essay about technology and endangered languages: "No technology developed so far can rival the intensive, unsung process of language transmission that takes place between adults and young children, almost always at home." Link.