This tax-and-budget analysis from Bruce Bartlett is wrong on many levels — in both its particulars and its overall sweep.
Bartlett claims the famous supply-side tax-cutters at The Wall Street Journal editorial page have, in a major reversal, opened the door to a Value Added Tax and thus a major expansion of overall taxation and American government. He thinks a new Journal opinion article from Columbia Business School dean Glenn Hubbard represents a big shift in the thinking of economic conservatives. I don’t see it that way at all.
A tax and budget expert and long-time conservative turned scold of conservatives, Bartlett was an early critic of the George W. Bush administration. Many would say he bravely criticized Bush’s spending and Medicare prescription drug expansion when most Republicans were going along for the ride. Many would also say he then overdid it and embraced tax increases, the ill-designed 2009 stimulus, and other policies he used to criticize. After decades explaining the virtues of low tax rates and capitalism, Bartlett has in recent years been excusing big-government excess. He’s also been campaigning for a national value added tax (VAT). Not to replace the current income tax system but to supplement it and substantially increase Washington’s overall tax haul as a share of the economy. He explained his new outlook in a recent book, The New American Economy: The Failure of Reaganomics and a New Way Forward.
His newest analysis — a sort of Journal-ology (remember Kremlinology?) — seems a similar case of hyper-contrarianism.
“Anyone who reads the Wall Street Journal‘s editorial page knows that it hates the value-added tax. I don’t mean hate the way it hates liberals, government regulators and the capital gains tax. No, the Journal hates the VAT more deeply and strenuously than anything else.
“The reason is that the Journal sees the VAT as the essential fuel of the welfare state. Without it a European-style welfare state cannot exist. Therefore, if you hate the welfare state — as the Journal does — you must oppose the VAT with every fiber of your being. No fooling around; the VAT means Armageddon, the end of America as we know it and victory for welfare state liberalism. If we impose a VAT we will all soon be cheese-eating surrender monkeys just like the French.
“The problem with the Journal’s hatred of the VAT is that it also embraces consumption-based taxation. Under a pure consumption tax there would essentially be no taxes on the returns to capital — no taxes on interest, dividends or capital gains. Such would be the Journal‘s Nirvana, the perfect tax system. . . .”
Bartlett thinks the Journal‘s supposed hatred of the VAT is irreconcilable with its other supposed high-enemy, the budget deficit.
“The problem now is that the Journal also hates budget deficits and they are now much too large to realistically suggest that they be eliminated solely by spending cuts, even if the nitwit tea party crowd thinks so.
“The Journal knows that revenues have to rise if we are to make a serious dent in projected budget deficits.”
Time to unpack all of this.
1. First, it’s not true that the Journal “hates budget deficits.” Bartlett, of all people, knows this. The Journal has never put deficits per se above the imperatives of economic growth. The Journal has for decades taken on many conservatives and Republicans who prioritized deficits over growth.
It made this point just the other day in an editorial criticizing the Obama budget:
“If this borrowing were financing defense investments or tax rate reductions to spur the U.S. economy, we wouldn’t be worried. But most of this money is going to transfer payments to individuals, or subsidies to home buyers and inefficient businesses that do little for wealth creation.”
The Journal has never obsessed over the deficit as an end in itself like, say, the Concord Coalition does. The Journal does oppose wasteful and counterproductive spending. Especially if that spending leads to slower growth, market distortions, and massively expanding debt that cannot be supported in a slower-growth environment. But my guess is the Journal, like Milton Friedman always said, would prefer a budget that spent $2.3 trillion and borrowed $200 billion to a budget that spent $4 trillion and borrowed nothing.
In the very article that Bartlett thinks represents a fundamental shift in the Journal’s fiscal thinking, Hubbard writes flatly:
“The problem is spending.”
And
“Tax increases cannot plausibly make these problems go away.”
Like the Journal, Hubbard is not primarily interested in the budget deficit. Over and over, he emphasizes the impact of policy choices (like higher tax rates) on productivity, innovation, and economic growth.
“There is another way to look at the federal budget, however, and that is to focus on its effect on our economic health, not just the government’s fiscal health. Focusing on economic health means setting our sights on productivity growth — our future living standards.”
So it doesn’t seem the Journal, or Hubbard, have any desire to boost taxes to “reduce the deficit.”
2. Bartlett misses the point about the VAT in particular and consumption taxes in general. He says there are really only two ways of taxing consumption broadly, a retail sales tax or a VAT. But Bartlett seems to forget about another option, one that he himself persuasively advocated for decades: it’s the flat income tax, which, through its exclusion of savings and investment, is also just a tax on consumption. (Income – Savings = Consumption.) He briefly mentions the Hall-Rabushka flat income tax but then, in his critique of the Journal, says the Journal has only two options given its principles –- a sales tax or VAT. What happened to the flat income tax in the matter of just a few paragraphs?
The Journal has always opposed a European style VAT on top of our current anti-growth tax code. The point is not that they hate a VAT conceptually. The point is that they don’t want the federal government’s share of the economy to grow dramatically from its already too-large and too-intrusive level. But I doubt the Journal is fundamentally opposed to a VAT-like levy under any circumstances . . . because as they surely know, it is in fact an efficient way to collect revenue.
In fact, two of the Journal’s favorite people — economist Art Laffer and Wisconsin Rep. Paul Ryan — both support a broad-based consumption tax, but only as part of a major tax overhaul.
More than a decade ago, Laffer proposed a hybrid system composed of a flat low-rate individual income tax and a flat low-rate business value added tax. His goal was to essentially capture the entire economy twice (very broad base) with two very low rate taxes. (Perhaps, Laffer once told me, the rate would be 9% on each, if the country decided it wanted to collect a total of around 18% of the economy, the average federal tax take since World War II).
And just two weeks ago in a prominent Wall Street Journal op-ed, Ryan outlined his comprehensive long-term budget plan, which would transform Medicare, Social Security, and the tax code.
Ryan’s plan included a dramatically simplified individual income tax and also a variant of the VAT, which
replaces the corporate income tax — currently the second highest in the industrialized world — with a business consumption tax of 8.5%.
But the goal was just the opposite of boosting Washington’s share of the economy. In fact, over many decades, Ryan’s plan, as scored by the Congressional Budget Office, maintains federal tax revenues at near the historical average (19% of GDP) but reduces spending in the year 2080 to just 13.8% of the economy. The point was to collect revenue efficiently and maximize economic growth while still providing a broad array of social spending, albeit more responsibly administered than under the current path, where spending explodes to 34.4% of GDP by 2080 and the public debt reaches a preposterous 716% of GDP.
3. Bartlett missed Hubbard’s point. Hubbard is not proposing a major upward shift in both spending and taxes. He’s proposing some accountability and brutal honesty among policy makers.
When Hubbard brings up the possibility of a new broad-based consumption tax, it is in the context of Washington’s out-of-control spending.
“if the administration wants to maintain the spending path on which its budget blueprint places us, it must confront and propose significant, broad-based tax increases.” (my emphasis)
“If” is the key here.
“To raise the revenue for the president’s welfare-state ambitions, the tax increases must necessarily be broad-based, as, for example, with a broad-based consumption tax. A useful start would be to calculate — and present to the public each year — the broad-based consumption tax required to pay for higher spending.”
I don’t think Hubbard is endorsing Obama’s “welfare-state ambitions” nor a “broad-based consumption tax required to pay for higher spending.” He’s merely insisting that policy makers get real about the costs (including the tax burden) of their proposals. Isn’t this what he means when he challenges the Administration to “calculate — and present to the public each year” the new taxes implied by their proposed spending?
“In the end, the reason to get the nation’s fiscal house in order is less about deficits or debt as percentage points of GDP than about our future.”
Ross Douthat makes one of the points Hubbard attempted in his op-ed. Namely, policy makers must step up to the plate.
To the consternation of some of his more risk-averse colleagues, [Paul] Ryan has offered up a serious small-government approach, painful cuts and all. His liberal critics should take up his challenge, and tell us just how high they’re willing to see taxes rise instead.
The goal is not to figure out how to pay for a massive welfare state. The goal is to avoid creating a larger and more intrusive welfare state. Bartlett utterly capitulates on the first point and abandons the second. The Journal has not yet folded its cards, and for good reason. As Ryan shows, there are much more attractive options.
If a huge expansion of the American welfare state were unavoidable, the Journal and I would probably prefer Bartlett rather than Bernie Sanders design the tax code. But there’s a big difference between taking 18% of the economy in taxes or 35% in taxes, efficient or not. Unfortunately, Bartlett is looking for ways to efficiently fund ever-growing government.
— Bret Swanson
Update: See Bartlett’s follow-up offerings here at Forbes.com and here at his blog.
