Friday, February 1, 2008

#106 - A 1% Tax... too good to be true



This interview of Mitt Romney by Mark Larsen has become immortalized in mythology of this 2008 presidential season. Although, more interesting in this interview is the mention of a 1% Value Added Tax, and the claim that CATO and Mises has both crunched the numbers. If such a tax is viable I'd be all in favor of it cause it doesn't seem like it'd hurt savings and responsible consumer behavior like our current tax system or discourage leisurely spending like a 23% fairtax.

If anyone has the links to CATO or Mises crunching the numbers on this 1% tax, please post it in the comments. I want to believe this is a real option, it seems like this would really go a long way in fixing the economy.

7 comments:

Chris said...

I'm looking for the report as well with no luck so far. There seem to be a few non sequitors in the interview. M1 numbers wouldn't be used to determine the income from such a tax. Instead, you'd look at a much larger number, the GDP. It's 13 trillion dollars. 1% on that is 130 billion dollars. If this replaced the income tax, the government would lose 900 billion dollars. I doubt that's a realistic step to take.

JeffGladchun said...

You're wrong about the GDP, as that measures only FINAL goods and services and none of the intermediate purchases necessary to create these goods and services. The 1% VAT tax would tax a MUCH larger figure than the GDP.

Chris said...

This actually isn't my understanding of it. The GPD is actually a function of the money supply times all the times that money changes hands on average, hence it's exactly relevant. You could also think about it this way, GPD is a measure of all the goods and services produced in a year. All of them. What else is there to buy? GDP covers each and every transaction for goods and services. The video references M1 numbers, which are less than GDP. In other countries that use a VAT tax, their tax rates are on the order of 15-20%, not 1%. I just think people are idiots and don't understand this.

Chris said...

Oops, I missed your point and you're likely correct. It seems in some places GDP = Money Supply x Velocity of Money, which should be a sufficient estimation. But it does seem GDP leaves out intermediate numbers in all cases. I'll figure out why that is later. But for now, what we need is Gross Output, which includes intermediate prices. In 2004, the Output of the US was 21 trillion dollars, leaving our government 200 billion dollars instead of over a trillion. 800 billion dollars in cuts still doesn't seem reasonable, though now you only need to make the tax ~5% to be equal to the Income Tax. You still need Corporate Taxes and Social Security taxes though. How does that sound?

JeffGladchun said...

your understanding of GDP is erroneous. This is straight out of my old macroeconomics text book:

Gross Domestic Product is the market value of the final goods and services produced in a country during a given period.

Many goods are used in the production process. Before a baker can produce a loaf of bread, grain must be grown and harvested, then the grain must be ground into flour, and, together with other ingredients, baked into bread. Of the three major goods that are produced furing this process- the grain, the flour, and the bread- only the bread is used by consumers. Because producing the bread is the ultimate purpose of the process, the bread is called a FINAL GOOD. In general, a final good or service is the end product of a process, the product or service that consumers actually use. The goods or services produced on the way toward making the final product- here, the grain and the flour- are called intermediate goods or services. and are not counted in GDP. Only FINAL GOODS OR SERVICES are counted in GDP. (Frank, Bernanke, and Obst)

Do you see now? The 1% VAT tax would tax the crop used to produce the grain, tax the flour, tax the mill used to grind the flour, tax the ovens used to raise the bread, etc etc etc etc...

JeffGladchun said...

I missed your second response while typing out my last one.

I can think of one way the government can cut spending by over 1 Trillion dollars in just a few months...

Can you?

Thane Eichenauer said...

A 1% tax isn't any better and just might be worse than a National Retail Sales Tax with Prebates (AKA Fair Tax). Bleeding the economy by 5 or 25 cuts@1% instead of 1 large cut (23%) doesn't reduce the overall harm to the economy one over the other.

Yes, supposedly (if we believe the Fair Taxers) the income tax and the rest is abolished (again, IF you believe them) with either (supposedly). But then you have just as much tax avoidance going on as before. Nobody wants to pay any taxes, any day in any way.

The solution is to reduce government spending and also reduce overall government taxation, not dream up more ways to tax businesses and individuals.

There is no such thing as a Fair Tax (or a fair VAT).

Europe hasn't used the VAT to eliminate income taxes and there is absolutely no reason to think the closet socialists in the US would eliminate the income tax and replace it with a VAT.