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Wednesday, May 27, 2009

The Shortest Democratic Revolution In History

Emanuel, o Emanuel:
"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.
Low-income families don't pay for insurance now, much less health care. Why would they be in favor of this? Why would older Americans, who are receiving health care through Medicare, be in favor of this?

Imposing a VAT of 10% would surely eliminate another 7-10 million jobs over two-three years. A bunch more people wouldn't be able to pay their mortgages, so mortgage defaults would rise. Credit card debts, likewise. DTI, baby. DTI RULES!

I know how to solve the problem, but it would strike at a key Democratic segment (the rich), which is why they won't do it. You have to widen our tax basis, and there is only one way to do that.

DU looked at this and reacted pretty negatively. Another thread, just posted.

MOM--I think I see what you're driving at, and I suspect I don't agree.

Wouldn't it work well to increase income tax rates across all brackets (preserving a relatively flat income tax) and simultaneously eliminate FICA, decrease corporate tax rates, and decrease cap-gains tax rates? More jobs, more investment, higher productivity, more opportunity, and more tax reciepts, I'm pretty sure.

I'm not completely against a VAT, either, but a recession is a bad time to impose one. And a whopping 10% increase in a short period of time is lunacy.
We don't need higher rates ... we need fewer loopholes. Killing the AMT-exemption on municipal and state bonds would be a good start ...
John - good point. Maybe I missed MOM's point.
Neil - yes, John has me right. I'd lower corporate tax rates to at least 25%, cut most the loopholes, and eliminate the exemption for muni bonds above 150K.

I'd also introduce a 10% taxation rate on IRA/401K funds after 3K annual income.

After that, I'd sit down and start whacking away at government. There is no way out but to cut substantially, and raising tax rates now to the levels that will eventually be required will only serve to bloat the government.

To raise tax rates is suicidal. The only thing to do is to broaden the tax base. But you still have to cut out a lot of government programs.

Hmmm, what's your reasoning on starting to tax tax-deferred accounts? I'm quite sure it will happen, as it's much too large a pot of money for government to ignore. I'm in favor of not having preferable tax treatment of one pile of money vs. another; but what is your reasoning?
Neil, my thinking is twofold: (a) you want the people with capital to risk that capital in investments that will increase productivity, not sit in safer investments due to a tax shelter, and (b) I don't think it's prudent to favor the established wealthy over those who are working to become wealthy -- an exemption for a specific type of investment income gives people who already have capital an advantage over those who are generating new capital.

I'm inclined to eliminate special treatment of capital gains in exchange for indexing the base amount so that one is taxing real capital gains rather than nominal capital gains. However, I'd have to see analysis of what effect that would have compared to the current situation before actually advocating it.
Neil - first, I don't favor raising tax rates until we come to grips with the reality that we need to hit the federal government with an axe. We are on the California curve, without a doubt. CA may be able to ask the federal government to guarantee its debt, but it will not work the other way around, so we are out of options.

Second, you cannot afford to tax wage earners and small businessmen too highly. It will cut investment and job creation if it's on the businesses, and if it's on the individuals we are further decapitalizing the population. So raising income taxes on wages and small business earnings has a sharp limitation. Third, one of our job problems is already our corporate income tax. Everyone else cut over about a decade and a half. It is interesting that the Dems in Congress constantly fawn over Europe, but don't notice that European countries have cut down their corporate income taxes. Third, John is right - the US cannot socially afford to create a European-style structure which favors the property-holding classes over the new entrants. We have too many of them. Old Europe is not the egalitarian paradise that people believe - if are in immigrant, poor job creation and high income taxes pretty much doom you, your children and your grandchildren to a life in the projects. This is the cause of much of their problems with Muslims.

Fourth, I do not look at at imposing a higher tax on significant wealth holdings as necessarily bad. If it is accompanied with some strict spending controls, the higher tax will be compensated for by preventing devaluation of dollar holdings. Thus the net real tax will be exceedingly low.

How, however, do we get fiscal control? Neither party will support it.
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