Posted on 15 February 2013 by Michael Stumo.
Here is the slideshow presentation I gave to a group in San Diego yesterday. The event was called “Manufacturing in the Golden State.” It describes the math about how a consumption tax could reduce the domestic tax burden, include imports in our tax base, narrow the trade deficit, increase U.S. production, and fund reductions in the income tax while maintaining progressivity.
Tax Reform for International Competitiveness and Economic Growth
French increase VAT rather than devalue currency
The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs
Does USTR Even Know What a Trade Deficit Is?
Yale Study: China PNTR Caused US Mfg Employment Decline
Low Savings Don’t “Cause” the Trade Deficit
Manufacturing Mart: The Supply Chain Trade Show
How Ending Currency Manipulation Will Help Manufacturers
Michael C. Sekora: Technology-Based Planning
EconomyInCrisis.org
The Results of The Fairest Kind of Tax Poll by right-leaning Scott Rasmussen follows:
http://www.rasmussenreports.com/public_content/business/taxes/february_2013/43_view_sales_tax_as_fairest_kind_of_tax
43% View Sales Tax As Fairest Kind of Tax
Americans tend to consider a sales tax the fairest kind of tax and are least happy with income and property taxes.
A new Rasmussen Reports national telephone survey finds that 43% of American Adults, when given four chief types of taxation, view a sales tax as the one that is most fair. Twenty-six percent (26%) rate an income tax as fairest, while six percent (6%) feel that way about property taxes and 5% consider a payroll tax the most fair. Twenty percent (20%) are undecided.
I think the comparison of the different taxes in public opinion comes with the knowledge by Americans that the income tax is riddled with complexity that is sometimes gamed. News reports of offshore income, unreported income, tax loopholes, and tax evasion by those wealthy enough to hire armies of accountants along with the knowledge that one of the most prestigious accounting firms, Author Anderson, was involved in some of these tax dodges which lead to their demise. It is no wonder that when they are polled they want something much more simple and with less chance of politicians selling loopholes to wealthy clients. I would submit that the results of the polls have these factors in mind, not just a straight comparison of different types of taxation.
Sales taxes seem to have much more transparency and might seem harder to dodge. Everyone is charged the tax the same at the point of sale with sales clerks not able to manipulate the rate for different customers, unlike the IRS income tax code.
Tom
…a new survey finds more than a quarter of Americans believe that God “plays a role in determining which team wins” at sports events:
http://religion.blogs.cnn.com/2013/01/29/poll-quarter-of-americans-say-god-influences-sporting-events/
According to Gallup polls, about 45% of Americans believe God created humans in their present form within the last 10,000 years:
http://www.gallup.com/poll/21814/evolution-creationism-intelligent-design.aspx
…49 percent of Republicans and six percent of Democrats believe ACORN stole the 2012 election for Barack Obama — despite the pesky fact that ACORN folded in 2010:
http://www.theatlanticwire.com/politics/2012/12/yes-half-republicans-think-acorn-which-doesnt-exist-stole-election/59632/
My point is that polls are not the right way to judge the validity of whatever answer is posited, for example, “sales tax” to the question “which type of taxation is most fair?”
The definition of “fair” is obviously subjective, and when applied to taxes becomes political and heavily influenced by self-interest. I agree with Mr. Stumo in the first slide when he asks “Can we maintain tax system progressivity?” The principles there are that tax burden should fall on those who can most afford it, and the wealthy are those who have benefitted most from the overall system of laws and governance and infrastructure that made their wealth accumulation possible.
Moving on to slide 6, I am glad to see the stark comparison showing that Americans are not “overtaxed” when compared to EU 15 countries, many of which rank higher in the Economist magazine’s quality of life index despite (and probably because of proper use of) higher rates of taxation:
http://www.economist.com/news/21566430-where-be-born-2013-lottery-life?fsrc=scn/tw/te/tr/thelotteryoflife
Sweden, Denmark, the Netherlands, Finland, Ireland, Austria, Belgium and Germany are the EU 15 countries ranking higher than the USA on that index. Switzerland and Norway are the other European countries beating the US on that list. This is obviously not a scientific ranking, considering the Economist’s adoption of a widespread fallacy of federal deficits being a burden, as shown in the statement that “America, where babies will inherit the large debts of the boomer generation, languishes back in 16th place.” Modern Monetary Theory points out that:
“Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children. Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce….the idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous….we all know we don’t send real goods and services back in time to pay off federal government deficits, and that our children won’t have to do that either. Nor is there any reason government spending from previous years should prevent our children from going to work and producing all the goods and services they are capable of producing. And in our children’s future, just like today, whoever is alive will be able to go to work and produce and consume their real output of goods and services, no matter how many U.S. Treasury securities are outstanding. There is no such thing as giving up current-year output to the past, and sending it back in time to previous generations. Our children won’t and can’t pay us back for anything we leave them, even if they wanted to.”
Citation: Mosler, Warren (2010-08-13). The 7 Deadly Innocent Frauds of Economic Policy (Kindle Locations 411-413, 419-420, 427-432). Valance Co Inc. Kindle Edition.
I am not so sure about this, Will. Government deficits and borrowing takes tax burden off of those who are not currently paying the taxes to run the government and placing those debts on future economic activity. It is a transfer of wealth and obligations from current to future generations.
The part where comes into play is whether or not this government borrowing crowds out investments. In the current economy, it is not crowding out investments as the low interest rates show. The demand for money has so declined that we have low interest rates. The wealth that the average Joe thought they had evaporated with the housing crisis. Government could come in and increase their demand to make up for this with little effect on prices since over all demand did not increase and actually decreased due to the part of the economy that was lost (and that lost to international trade).
The government can and is monetizing the debt which is much better than borrowing in the current situation. My biggest problem is that we are doing this to bail out the banking system that made really bad mistakes and we held no one accountable. There are other times when this would be a really bad policy. Republicans are just not very good at determining when the best policy is the best policy.
We had two things that happened at the same time in the banking industry. One was regular lending in a bubble economy and the other was a fraudulent system that helped create the bubble. The former is a responsibility of the government to help out and the latter is one that the government has a responsibility to prosecute or allow civil justice to reward and punish. Wall Street has successfully stopped the latter from happening in defense of the former.
Republicans are also blocking taxes on the very wealthy and in effect borrowing off of future tax revenues. This is what deficits that are not monetized do. Monetized deficits don’t matter if they are not affecting interest rates and creating inflation.
I would much rather see these activities happen in the private economy than by government action. It is not happening because we have policies that are geared toward the wealthy harvesting economic activity with essentially little responsibility because of the too large to prosecute or too large to have creative destruction in our justice system.
Tom T.
I am not so sure about this, Will. Government deficits and borrowing takes tax burden off of those who are not currently paying the taxes to run the government and placing those debts on future economic activity. It is a transfer of wealth and obligations from current to future generations unless monetized. The limits of monetizing all spending are in increased interest rates and inflation and their expectations. A good example of these limits can be found in the stagflation that Paul Volker brought under control during the Reagan administration. We are NOT in a period like that now but we could get back into that kind of period in the future.
The part where comes into play is whether or not this government borrowing crowds out investments. In the current economy, it is not crowding out investments as the low interest rates show. The demand for money has so declined that we have low interest rates. The wealth that the average Joe thought they had evaporated with the housing crisis. Government could come in and increase their demand to make up for this with little effect on prices since over all demand did not increase and actually decreased due to the part of the economy that was lost (and that lost to international trade).
The government can and is monetizing the debt which is much better than borrowing in the current situation. My biggest problem is that we are doing this to bail out the banking system that made really bad mistakes and we held no one accountable. There are other times when this would be a really bad policy. Republicans are just not very good at determining when the best policy is the best policy.
We had two things that happened at the same time in the banking industry. One was regular lending in a bubble economy and the other was a fraudulent system that helped create the bubble. The former is a responsibility of the government to help out and the latter is one that the government has a responsibility to prosecute or allow civil justice to reward and punish. Wall Street has successfully stopped the latter from happening in defense of the former (not good enough of an argument).
Republicans are also blocking taxes on the very wealthy and in effect borrowing off of future tax revenues. This is what deficits that are not monetized do. Monetized deficits don’t matter if they are not affecting interest rates and creating inflation.
I would much rather see these activities happen in the private economy than by government action. It is not happening because we have policies that are geared toward the wealthy harvesting economic activity with essentially little responsibility because of the too large to prosecute or too large to have creative destruction in our justice system.
What you are describing with your MMT arguments by Mosler on these issues are the conditions we face now with demand being stripped from the economy by wage and therefore demand suppression. We could easily be back in the stagflation era if conditions change. As a reminder, we entered into the Carter/Reagan early stagflation era with supply shocks of energy created by political events within the Middle East.
There are many countries that have experienced the results of perennial poor economic and national balance sheet problems, Greece being one of the most recent. It is much harder for the U.S. to be in this situation because we are THE world power and the reserve currency. The attempts by China and Russia to come up with substitutes of the dollar as the reserve currency are the real threat. If the dollar is not the reserve currency and we still rely heavily on world goods (like oil), the MMT theories you suggest may look a lot like the reality those in Greece are living. Everything is relative to current conditions, rules, and policies.
Tom T.
Hi Tom, I agree with all you wrote above, except the opening sentence: “Government deficits and borrowing takes tax burden off of those who are not currently paying the taxes to run the government and placing those debts on future economic activity.”
I know that what you wrote seems common sense, and had been true for millennia when money was based on gold or silver, a commodity the government had to get through taxes or loans before it could spend. But in our post-gold world, that holdover in common wisdom is not actually true for a currency-issuing monetarily sovereign state like the federal government.
Consider the words of Warren Mosler on this issue:
Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.
Mosler, Warren (2010-08-13). The 7 Deadly Innocent Frauds of Economic Policy (Kindle Locations 174-177). Valance Co Inc. Kindle Edition.
Here is more in explanation:
The federal government isn’t going to “run out of money,” as our President has mistakenly repeated. There is no such thing. Nor is it dependent on “getting” dollars from China or anywhere else. All it takes for the government to spend is for it to change the numbers up in bank accounts at its own bank, the Federal Reserve Bank. There is no numerical limit to how much money our government can spend, whenever it wants to spend. (This includes making interest payments, as well as Social Security and Medicare payments.) It encompasses all government payments made in dollars to anyone. This is not to say that excess government spending won’t possibly cause prices to go up (which is inflation). But it is to say that the government can’t go broke and can’t be bankrupt. There is simply no such thing.
Mosler, Warren (2010-08-13). The 7 Deadly Innocent Frauds of Economic Policy (Kindle Locations 220-226). Valance Co Inc. Kindle Edition.
The purpose of taxes and all other sources of revenue to the federal government is to remove aggregate purchasing power from the economy, in order to prevent inflation from being caused by government spending, which, with a fiat currency, is not much different from a stadium issuing points or an author writing words, the issuance of which does not require any prior collection of points or words.
This opens up a new range of possibilities for public spending, which still has to be controlled to prevent inflation. But it does give much room for purposeful and constructive deficit spending that can vastly improve real wealth creation if used efficiently, for such projects as infrastructure or education or other mobilizations of labor and resources to productive use.
Hi again Tom, Even in a fiat currency world where spending by a monetarily sovereign state is not constrained by revenue, taxation must still occur to remove spending power to prevent inflation caused by too much currency chasing too few goods. And so your point is still valid that such taxation is very much an issue of fairness in terms of WHOSE purchasing power will be thus diminished.
I think the Modern Monetary Theorists are correct that this is not an inter-generational issue because real goods and services are never passed backwards through time:
http://mythfighter.com/2009/09/07/introduction/
EXCERPT:
9. Fact: There is no post-gold standard relationship between federal debt and tax rates, which have remained level through massive deficits. (See graph, below) Fact: You and I, who are the children and grandchildren of the ’80′s, have not paid the massive Roosevelt and Reagan debts. Taxes do not pay for federal spending. Federal spending creates dollars.
9.a. Fact: Federal deficit spending does not use “taxpayers’ money.” Federal spending creates money ad hoc. When the government spends it credits bank accounts. No taxes involved. By definition, deficit spending means taxes do not equal this year’s spending let alone previous year’s spending. Only surpluses use taxpayers’ money, by causing recessions. For the above reasons, our children and grandchildren will not pay for today’s money creation, but they will benefit from today’s deficit spending — better infrastructure, army, education, R&D, safety, security, health and retirement.
END EXCERPT
I’ll continue below in another post, since this website does not like more than 1 link per post….
The debts are always easy to pay simply because they are due in the same currency the government creates at will.
http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/
EXCERPT:
Debt hawks do not (or do not wish to) understand the implications of Monetary Sovereignty. You never will see that term on such debt hawk web sites as The Committee for a Responsible Federal Budget” or the Concord Coalition. If you go to those sites you will see federal debt described in the same terms as personal debt – as an unsustainable obligation. While debt can be unsustainable for you, me, businesses, states, cities, counties and the monetarily non-sovereign EU nations, no debt is unsustainable for the U.S. government.
Debt hawks, and others ignorant of Monetary Sovereignty, suffer from Anthropomorphic economics disease — the false belief that federal finances are like yours and mine.
END EXCERPT
Sorry to CPA readers that I post so much in one discussion. Oh well, it just means I am very interested in the topic, and welcome critiques of my critiques as we all strive for a better understanding and better strategy to make America prosperous again…
Regarding slide 18 above, the “Competitive Tax Reform Example,” a more thorough exposition of Mr. Graetz’s tax reform proposal is found here:
http://www.the-american-interest.com/article.cfm?piece=1052
It’s worth reading, as he provides a brief history of the federal tax systems and a proposal to simplify and make more fair the US tax system. Although I am not convinced his tax reform proposals will solve all our problems of depression-levels of unemployment and poverty, nor be a silver bullet to solve our trade deficits, I still think his proposals are a promising step towards a more internationally competitive investment environment and a more efficient tax system that won’t waste so many billions of hours of tax preparation for individuals and households. The simplification of the income and corporate taxes he proposes is attractive, but the added complications of a VAT seem to me to create much paperwork and accounting for each business that adds value. But it gets done in 150 other countries so it must be realistic and navigable.
I know I sound like a broken record (mature readers will understand that simile) to always return to proposing Import Certificates (issued in the same value as exports) as the most direct and seemingly effective way to guarantee the outcome of balanced trade, but as I have argued in other discussions here, there are plenty of developed economies using a VAT that still have trade deficits. Therefore I see promise in BOTH proposals (Import Certificates and tax reform), which needn’t be considered mutually exclusive. To me, the tax reforms proposed by Mr. Graetz and described above by Michael Stumo might be a better tax system, but still, the only way to guarantee balanced trade would be to control the value of imports to be sure it does indeed equal the value of exports.
I must note that Mr. Graetz does not recognize the MMT insight that taxation functions to remove aggregate spending power in order to avoid inflation and NOT to actually fund federal spending. He thus sees federal deficits as bad things to avoid rather than useful if spending is properly deployed and even necessary according to Modern Monetary Theory, which says that in order for the private domestic sector to have a positive balance, the public sector must have a deficit.
One complication here is MMT recognizes 3 sectors in a monetarily sovereign state, which must balance to zero: domestic public, domestic private, and foreign. I leave out foreign here because MMT in my opinion is wrong to say trade deficits are to our advantage by giving us real goods and services in exchange for fiat paper. That quantitative analysis overlooks the qualitative problem that trade deficits function to move real wealth creation capabilities abroad, to the long-term detriment of American ability to innovate and manufacture and have an industrial ecosystem necessary for sustainable prosperity. After all his tax reform proposals, the states and municipalities would still face the same problems they do now, unless real economic growth occurred to increase the tax base and decrease the need for social safety net.
Will - I learned long ago to distrust ANY proposal for a governmental action that has only benefits and no bad side effects.
When has that ever happened in the real world?
Consider England in the year 1850. Most powerful economy. Currency used in international trade. Did they become a 4th rate power because they refused to use the tricks you suggest? No. They lost position simply because the U.S. could produce goods and service better than they could. And they were unwilling to change as their economic environment changed.
I did not read your argument carefully enough to see your mistake. But if you argue there will be no negative consequences to the large debt created by our government, you must be mistaken. Actions always have consequences. Including any actions to avoid paying for our debts with goods or services.
It appeared for a while that the U.S. financial system could create wealth by magic, by packaging together mortgages and insuring the package but the system overloaded the price of houses beyond the ability of consumers to pay, prices of houses collapsed nationally (for the first time in our history) and the free lunch was exposed as a fraud.
Lord Maynard Keynes expected nations to run a governmental surplus when times are good so that the country will be able to borrow when times are bad. Current practice (debt always) is not approved by the great man.