“I think there are many good arguments that you can make for a value added tax or a consumption tax, as opposed to a tax on wages” said National Commission on Fiscal Reform Co-Chairman Erskine Bowles on April 25 during a joint appearance with Co-Chair Alan Simpson on Fox News.
This is a chilling statement both for what it says about tax burdens and what it says about tax reform. One of the most poorly kept secrets in Washington is that the President’s so-called debt commission is supposed to find the formula for dressing up the value-added tax (VAT) to make it acceptable to the American people. This is like trying to fit ruby slippers to a sow. A good clue to the difficulty of the task is the President was careful to ensure the commission reported after the mid-term elections.
The only reason to consider the VAT is because the current tax system cannot support the massive spending surge the President has already pushed through let alone the additional spending he envisions or the entitlements wave to follow. Either he finds a way to finagle the VAT or he will be forced to pare spending back to previous levels. Either Washington puts a much bigger squeeze on the taxpayers, or Washington must go on a crash diet. It’s time to send the federal government to a fat farm.
Co-Chairman Bowles statement is just as chilling when it comes to tax reform. The issue is that Bowles, a man of intelligence and policy experience, apparently does not understand that a consumption tax and a tax on compensation are economically equivalent. This is tax reform 101. A flat rate tax on consumption reduces the purchasing power of a given amount of wages, while a flat rate tax on wages reduces the amount of after-tax income available for consumption. If the amounts of revenue collected are the same, then the economic effects are the same.
Saving out of wage income presents a wrinkle, but a small one, because saving occurs to shift the timing of consumption from the present to the future. So there is again no difference economically whether the wage income is taxed today or the consumption is taxed tomorrow.
True tax reform, once this nasty VAT business is dispatched, faces a real uphill climb as much because of the poor understanding of basic tax theory among policymakers as the traditional and inherent political difficulties.