Rep. Paul Ryan (R-Wis.) may have included a business consumption tax in his budget vision several years ago, but conservatives don’t appear to be holding that against Mitt Romney’s new running mate.
Consumption taxes – especially the dreaded value added tax (VAT) – can make conservatives queasy. But some economic thinkers on the right say the consumption tax that Ryan included in his “Roadmap for America’s Future” had key differences with VATs.
Douglas Holtz-Eakin, the chief economic adviser to Sen. John McCain’s (R-Ariz.) 2008 presidential campaign, said Ryan realized that it would be easier to fix the existing way businesses are taxed than to substitute in an entire new system.
Ryan’s two most recent budgets, which both passed the House, would lower rates while eliminating tax preferences – a framework also favored by the House’s top tax writer, Ways and Means Committee Chairman Dave Camp (R-Mich.).
“I admired him for putting together what he thought was best policy, and then figuring out what could be sold politically,” Holtz-Eakin, a former head of the Congressional Budget Office now at the conservative American Action Forum, told The Hill. “In the end, you’ve got to get to yes.”
Still, analysts have viewed Ryan’s roadmap, which he first rolled out in 2008, as the purest expression of his vision.
At the same time, Romney has stressed that the Republican ticket will be running on his tax and budget ideas and Brendan Buck, a spokesman for the campaign, told The Hill that was how Ryan wanted to proceed.
For his part, Ryan told reporters four years ago that he envisioned the roadmap as a way to spark a broader conversation about how to get deficits under control.
“This is not going to pass law in this session of Congress. That is not my objective,” Ryan said when he introduced the plan in May 2008. “My objective is to do my part as one person in Congress to change this debate, to get people talking about not even if we have a problem, but talking about how to fix the problem.”
Under the roadmap framework, the corporate income tax, which currently has a top rate of 35 percent, would have been tossed aside, to be replaced with an 8.5 percent consumption tax. Businesses would pay the government once a quarter, with its liability based on the difference between its sales and purchases.
Ryan said the proposal would make it easier for American companies to compete worldwide, by taxing goods imported from abroad but not taxing exports on their way out.
He added that his plan would also encourage investment, by allowing companies to more quickly write off purchases, and eliminate tax incentives to allow for a low rate.
Ryan’s business tax proposal received some mixed reviews on the right, at least in part because conservatives themselves are somewhat divided on the question of consumption taxes.
Nonpartisan analysts have also said they are intrigued by Ryan’s interest in a consumption tax, noting that the U.S. is now in the minority by not employing a VAT.
Clint Stretch, formerly of Deloitte Tax, told The Hill that Americans still have to decide how much government, and how generous of an entitlement structure, they want to fund.
“It shows that he’s at least willing to look at and understand the consumption tax mode,” Stretch said of Ryan.
Generally speaking, conservatives like to tax consumption more than savings and investment, as Ryan was seeking to do, and some of the more prominent consumption tax proposals have also come from the right.
“I was an academic,” said Holtz-Eakin. “Everyone has a first love of consumption taxes.”
Many conservatives also favor the sort of flat tax famously pushed by Steve Forbes – which would target consumption without the features they don’t like in a VAT.
In a VAT, a levy is added at each stage of manufacturing and production, making it one of the more efficient ways to collect revenue. And that’s exactly what worries figures like Grover Norquist, the anti-tax crusader and founder of Americans for Tax Reform.
Norquist and other critics of the VAT say it would be easier than other taxes for policymakers to raise, and merely be an ATM for liberals seeking to expand the size of government.
“He was getting at all the right ideas,” J.D. Foster of the Heritage Foundation said about Ryan’s plan.
Foster also noted that, unlike a VAT, Ryan’s business consumption tax wouldn’t be levied on each transaction.
“I think he discovered after the fact that it wasn’t quite what he was looking for,” Foster added. “He is a student of fiscal policy, but he’s not an expert in tax policy, in the sense that there are people who study this all their lives.”
But Daniel Mitchell of the libertarian Cato Institute said he was worried about Ryan’s flirtation with a consumption tax, and that any disparities between the Wisconsin Republican’s plan and a VAT were distinctions without a difference.
“A VAT by any other name would smell as unsweet,” said Mitchell, who added he was a big fan of other planks in Ryan’s roadmap.
The major problem with a consumption tax, Mitchell said, is that policymakers without Ryan’s small government bona fides – like Senate Majority Leader Harry Reid (D-Nev.) or House Minority Leader Nancy Pelosi (D-Calif.) – would eventually be able to exert influence over its rate.
Some conservatives have said they could live with a consumption tax if other revenue streams, like the income tax, were taken away.
But Mitchell said that getting rid of the 16th Amendment was a tall order – and that he had some concerns about the GOP ticket as a whole when it came to consumption taxes, noting that Romney has sounded open to a VAT before as well.
“It’s something I’m sure that will cause me angst, worry and sleepless nights along the way,” he said.