Economy & Budget

A dishonest debate on VAT

The debate over a national sales tax, or value-added tax (VAT), to tackle the country’s deficit and debt problems is becoming fiercer as we approach the fall election. Unfortunately, the facts are becoming more obscure, and the narrow scope within which a VAT makes sense is being lost. This should be clarified or the nation will miss an opportunity for reform or impose a tax that makes things worse.

The current debate centers on the European experience. Opponents decry the VAT since it has not solved European deficit problems, rates have steadily increased, and revenues from the VAT have enabled Europe’s large welfare state. All of these arguments are correct but not the end of the story.

VATs are a major source of revenue in Europe. Nations of the European Union are required to impose a VAT as a condition of membership. The minimum rate allowed is 15 percent, which currently only Luxembourg uses. Most member countries have much higher rates, with Denmark, Hungary, and Sweden all imposing the maximum rate of 25 percent.

It is also true that European governments have consistently increased their VATs. However, the increases are a result of the design, which imbeds the tax in the final price of goods and services, where consumers do not see it. Such opacity provides convenient cover for politicians and bureaucrats to increase rates, but this design flaw can be corrected. Our northern neighbor’s experience shows that rate increases are not inevitable.

Canada introduced a VAT, the goods and services tax (GST), in 1991 at a rate of 7 percent, and it’s visible to consumers. That explains why Canadians loathe the GST and why it would be political suicide for any political party to suggest increasing it. Indeed, the rate was recently reduced to 5 percent.

In the United States, promoters argue that a VAT can solve the deficit problem with the least amount of economic damage. This argument is both right and wrong. The increased revenues generated by the VAT in Europe have not solved their deficit and debt problems. European governments simply spent the additional revenues rather than using them to balance their books.

Those arguing for a VAT based on lower economic costs also have a point because not all taxes are the same. Corporate and personal income taxes impose enormous costs on an economy by discouraging work effort, investment and entrepreneurship, which ultimately reduces economic growth. The incentive effects of consumption taxes like the VAT, on the other hand are minor, and thus one of the least costly ways to raise revenue.

Switching from costly taxes like corporate and personal income taxes to a VAT makes a great deal of sense. The key consideration is how resources from the VAT will be used. Here again the Canadian experience is informative.

Government spending in Canada as a share of the economy declined from 52 percent in 1991 when the GST was introduced to roughly 39 percent in 2007. (It has since increased owing to the Great Recession.) In other words, the revenues from the GST in Canada were not used to finance more government spending. In fact, Canadian governments switched from income to consumption taxes, which made the tax system less costly, while also decreasing the overall tax burden.

If the plan were to reduce spending in the United States and concurrently implement tax reform based on greater reliance on consumption taxes in place of corporate and personal income taxes, then a VAT makes sense. Unfortunately, that’s not the argument being made by proponents of the VAT.

They want more government spending and a new revenue source, on top of all the others, to finance it. Such an expansion of government, even if financed by a low-cost tax, will not fix deficits and debt, and will mean less economic prosperity in the future.

Jason Clemens is the director of research at the Pacific Research Institute (www.pacificresearch.org). Prior to joining PRI in 2008, he was a senior researcher at Canada’s Fraser Institute for 11 years.

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YouCut: Eliminate federal employee raises (Rep. Michele Bachmann)

Over 87,000 votes have been cast for this week's winning YouCut proposal to Eliminate the Federal Employee Pay Raise scheduled to go into effect next year. Later today, I'll be bringing this legislation to the House Floor for a vote.

As part of his FY 2011 Budget submission President proposed raising federal civilian pay by 1.4% beginning in January of next year. This will be on top of the 2.0% raise federal civilian employees received this past January, the 3.9% raise they received the previous January, and the 3.5% raise they received the January before that. Freezing federal civilian pay at the current level for one year would save approximately $2 billion next year and $30 billion over ten years.

If the Democrats are really serious about cutting spending, this legislation is a great place to start.

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Help provide justice for Native veterans (Rep. Ann Kirkpatrick)

On Monday, folks across America will come together to pay tribute to our greatest heroes – those who fought and died to keep this Nation safe and free. We owe them and all of our men and women in uniform an eternal debt of gratitude.

Sadly, Washington has not always done enough to pay that debt. Even now, many Native American Veterans are struggling to keep a roof over their heads because of their service – they are being denied housing assistance because they are receiving benefits they have earned with their sacrifices.

I introduced the Indian Veterans Housing Opportunity Act to right this wrong.  This common sense bill makes sure that Veterans disability and survivor benefits are not counted as income under a critical Native housing program.

This House approved the bill unanimously last month, and Native Veterans should not have to wait any longer for justice. I call on the Senate to observe this Memorial Day by passing this important measure.

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Obama's spending proposals not genuine (Rep. Jerry Lewis)

The president and this Democrat Congress have demonstrated their apathy toward massive government spending at nearly every turn. They have approved a failed trillion-dollar ‘stimulus’ bill, punted decisions on spending reductions to a drawn-out fiscal commission, failed to pass even the barest budget blueprint, and this week are pushing for over $30 billion in additional ‘jobs’ spending on a must-pass emergency troop funding and disaster assistance bill.

Now the president is trying to appear fiscally responsible by saying he’s going to cut certain items out of spending bills – ostensibly from accounts that, in total, make up less than one-tenth of one percent of the
federal budget. This plan not only intrudes on the constitutional authority of Congress to determine federal spending, but also would have only a minuscule effect on real savings for the American taxpayer.

The president’s proposal today is merely a public relations maneuver to distract the American people from the fact that his policies and those of the Democrat Congress have led us to unprecedented and devastating levels of deficit and debt. Our economy and our people are in crisis, and we should be focusing on what our constituents really want and need: genuine budget reform, less government spending, more jobs, and a stable economic future for our country.

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We are listening, America — speak out! (Rep. Jim Jordan)

Right now, there is a family sitting at their dining room table, looking over receipts and figuring out how they can cut a few extra dollars from their budget. They may be calculating the cost of a summer vacation or cutting coupons to make the most of their next grocery trip.

But that family is doing what Washington refuses to do: tighten their belt and make the tough decisions to live on what they have. Families don't answer their problems with more spending. But Washington does.

We have recently seen countless examples of the disconnect our Congress has with the people they represent. In the same year of record unemployment and economic decline, this Congress has exploded our deficits, loaded us with health care regulation and increased taxes. They've named post offices while continuing to ignore our near-ten percent unemployment rate. They've prioritized misguided legislation such as Cash for Caulkers instead of listening to the American people.

I hear your frustrations every day -- when I stop by your business, bump into you at the gas station or even on my Facebook page. You are tired of more spending and you have more unemployed friends and family members than ever before. Simply put, Congress' to-do list doesn't match up with yours.

It is time to change the priorities of Washington and introduce a new way of doing business -- a business where the American people drive the agenda in Congress.

House Republicans are on the brink of bringing such an agenda from America. We will listen to Americans and get to work for them right away.

Our new project -- America Speaking Out -- is unprecedented and is finally giving Americans the pen and paper. You will have a seat at the table when it comes to building the agenda.

In stark contrast to the Washington arrogance, House Republicans want to hear what you think should be a part of a new policy agenda. Whether it’s on the economy, spending, family values or national security -- your priorities will be reflected.

On the new online forum, AmericaSpeakingOut.com, you can lend your voice to build a new agenda. Using the best of social media, AmericaSpeakingOut.com will allow you to submit a policy solution, promote your priorities, debate the ideas posted by other Americans, and share the conversation with your friends and neighbors via Facebook and Twitter. It is our hope that AmericaSpeakingOut.com will become the home to an unprecedented online conversation between Americans and their elected representatives.

Now is America’s time to rewrite our to-do list -- a groundbreaking way of changing Washington and giving you what you need.

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Wall Street reform ends 'too big to fail' (Sen. Jon Tester)

You've probably already seen the ads on TV or heard them on the radio. Out-of-state groups are shelling out millions to sway your opinion on a very important bill I'm working on in the Senate Banking Committee -- a bill that finally ends the era of "too big to fail" on Wall Street.

I can see why some folks with a lot of money to burn don't want this bill to pass. They don't want it to pass because it finally puts referees on Wall Street. And without refs on Wall Street, business has been brisk for a handful of well-off Americans.

But our entire economy almost collapsed a year-and-a-half ago because there were no referees on Wall Street. And sadly, hardworking, honest taxpayers -- and our entire economy -- paid the price.

The bailouts President Bush asked for in 2008 weren't the answer. That's why I voted against both of them.

The best way to fix this problem -- and to prevent it from happening again -- is to rewrite the rules. To require big banks and huge financial institutions to play by those rules. And to take "too big to fail" out of the equation.

The Wall Street reform bill, which combines good ideas from Republicans and Democrats -- does just that.

It will create a bipartisan council of regulators to serve an "advance warning system" to snuff out problems well before they hurt the entire economy. It will streamline existing regulators, giving them the power to write rules and enforce them on America's biggest banks.

The bill will not, however, affect Montana's banks. Montana's Main Street banks and credit unions played by the rules during the financial crisis. I made sure this bill won't create more hassles or costs for banks that do honest business.

A few weeks ago, a secretive organization called the Committee for Truth in Politics saturated Montana's airwaves with TV and radio ads. The ads called Wall Street reform a "bailout."

Why? Good question. Calling the Wall Street reform a "bailout" -- even though it isn't -- is a poll-tested way get folks to be against it.

In response to those ads, thousands of callers were automatically patched into my office to tell me, "vote against the bailout." Many callers were relieved -- and confused -- to learn that Wall Street reform is not a bailout. No matter how you spin it. This bill is just the opposite.

The fact is, Wall Street reform will finally make some much needed changes to the way things work, to protect the good actors on Main Street -- and across rural America -- from the bad actors on Wall Street. And it ends "too big to fail."

I've posted the Wall Street reform bill online at tester.senate.gov/legislation. You can also follow the progress of the bill at facebook.com/senatortester. As this very important legislation moves through Congress, I'll make sure it's the best possible bill for Montanans.

And I'll make sure we have an honest debate based on the facts.

Cross posted from the Huffington Post

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Which checkbook?

When it comes to the effect of the Citizens United decision on real world politics, the relevant question is when a CEO decides to spend on politics, which check book does he reach for? The company’s checkbook or his own?

Before Citizens United changed America elections, a CEO had to pay for political speech in favor or against federal candidates with his own dime.  After Citizens United, he can use someone else’s.  And what’s worse, there is a lack of transparency about corporate political spending.  No SEC regulation or rule requires disclosure of corporate political spending to shareholders or the investing public.

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It's time to end risky gambling on Wall Street (Sens. Jeff Merkley and Carl Levin)

When historians look back at the financial crisis of 2008 and the Great Recession that followed, they will fix their blame, in part, on the invention of complicated financial products that hid massive risks and spread them throughout the economy. They will record how Wall Street chased short-term gains at the expense of functioning markets, long-term economic stability and the well-being of the financial institutions themselves.

Those future historians will also look at how the government responded to the mess. They will examine whether members of Congress took the serious steps needed to avoid another crisis. The votes taken in the Senate this week will be crucial in determining the answer.

The high-risk trading of these complex and opaque instruments with a firm's own money -- and not on behalf of a client or investor -- is known as "proprietary trading." This trading became an increasingly large share of the business of Wall Street in the last decade. But when those gambles went south, the financial fortresses on Wall Street crumbled, and taxpayers were stuck paying a $700 billion bailout for the bad bets because pension funds, educational institutions, endowments and other institutions would have been severely damaged in the process.

It was no accident that these firms have increasingly focused on trading for their own account instead of serving their clients. The huge amounts of information and capital they control gives them advantages in betting on market trends. There is a lot more money to make if those bets pan out than by simply serving their clients. Of course, as we all have learned, the bets don't always pan out and this strategy carries huge risk.

The increasing reliance on high-risk trading to drive profits also creates enormous conflicts of interest between a big firm and its own clients. As the Senate Permanent Subcommittee on Investigations uncovered, Goldman Sachs traders made huge sums betting on the collapse of mortgage-backed securities that Goldman itself had created and sold to its customers. It's as if Goldman built and sold a car with no brakes and then took out life insurance on the new owner.

Even in the absence of a spectacular collapse, the focus on proprietary trading damages families and businesses. Every dollar spent on trading is a dollar not lent on Main Street. We need our banks to return to the primary business of making loans to businesses and consumers who can get our economy rolling, not operating their own trading desks.

This week we have the chance to address the problems caused by these hazardous investments in three ways. The Merkley-Levin amendment restores the wall that keeps high-risk investing out of commercial lending banks. It requires greater capital requirements at investment banks to protect against losses. And finally, it eliminates conflicts of interest, such as those we saw with Goldman Sachs, in which bankers package and sell a security, and then bet against it.

We can enact these common-sense rules of the road, while preserving the flexibility that financial firms need to conduct business. But we can only do it if Americans tell their senators loud and clear that it is time for a change.

Wall Street opposition to reform is no surprise -- the old system worked out pretty well for them. In the short-term, they made profits through risky bets. When those bets went bad, they were bailed out.

Thus, there is little downside for banks in keeping the existing rules on Wall Street.

But there is huge downside for Americans. We have barely begun to recover the jobs and savings that were lost. History can't be allowed to repeat itself.

The vote this week will answer a critical question: is Congress on the side of the American worker who lost so much in the Great Recession or is it on the side of the Wall Street firms that put all of us at risk?

We need every American to make their voice heard and send a message loud and clear: the days of Wall Street recklessly betting against our futures are over.

Cross-posted from the Huffington Post

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