Romney's Christmas Gift To Voters: A VAT Tax

Mitt Romney gave an interview to The Wall Street Journal over the weekend, discussing his concepts on tax policy. I think the mere fact that Romney used the tactic of concealing the discussion, not just in a "Friday night news dump" way, but in a Friday-before-Christmas-news-dump, should tell the reader everything they need to know about what Romney had to say on taxes.

So, what did he say, you ask?

In typical Romney fashion, he didn't say much. From the WSJ interview:

...it’s hard not to conclude that the candidate is trying to avoid offering any details that might become a political target. And he all but admits as much. “I happen to also recognize,” he says, “that if you go out with a tax proposal which conforms to your philosophy but it hasn’t been thoroughly analyzed, vetted, put through models and calculated in detail, that you’re gonna get hit by the demagogues in the general election.”

This is perfectly in keeping with Romney's 59-point plan, which I broke down in this post. Not a single point of the 59-point plan could be described as "bold", "controversial", or "original". It's a plan designed to be the least-offensive to the largest number of people.

Romney's tax proposal is equally vague and inoffensive:

"What I like—I mean, I like the simplification of a flat tax. I also like removing the distortion in our tax code for certain classes of investment. And the advantage of a flat tax is getting rid of some of those distortions."

He says this in regard to either a consumption tax or a "true flat tax".

In other words, he's playing both sides of the tax debate- some people like consumption taxes, some (like me) like flat income taxation, so Romney says he likes either.

Here's the interesting part:

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

I think it's important to pause here and give the reader a refresher on the VAT. I hate to say this, but it's true: The extent of the average American's knowledge of the VAT tax can be summed up as "VAT = Europe" and "Europe = Good (for a Democrat) or Bad (for a Republican)".

I know of no better explanation of the VAT and its dangers than this discussion with Murray Rothbard (via Reason.com, and I highly encourage the reader to read the entire article):

The VAT is essentially a national sales tax, levied in proportion to the goods and services produced and sold. But its delightful concealment comes from the fact that the VAT is levied at each step of the way in the production process: on farmer, manufacturer, jobber and wholesaler, and only slightly on the retailer.

The difference is that when a consumer pays a 7 percent sales tax on every purchase, his indignation rises and he points the finger of resentment at the politicians in charge of government; but if the 7 percent tax is hidden and paid by every firm rather than just at retail, the inevitably higher prices will be charged, not to the government where it belongs, but to grasping businessmen and avaricious trade unions.

While consumers, businessmen, and unions all blame each other for inflation like Kilkenny cats, Papa government is able to preserve its lofty moral purity, and to join in denouncing all of these groups for "causing inflation."

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes —and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

As you can see, it's no surprise that VAT taxes are instruments of big socialist states.

The question, then, is whether or not Romney is proposing a VAT tax, but avoiding the conservative slings and arrows of such a proposal (by pointing out that Paul Ryan proposed a VAT at one point)?

Jim Pethokoukis believes so, but doesn't believe it's such a bad thing:

You can have a value-added tax that is economically efficient and pro-growth but does not have the transparency issues that Norquist and other small-government advocates worry about. Many flat taxers, for instance, like the 19 percent Hall-Rabushka flat tax, a plan which has served as the model for many flat tax proposals. As with the X tax, businesses under a Hall-Rabushka system would deduct cash wages from the cash flow on which they calculate the VAT.

Being a flat taxer, and one who has recommended Hall and Rabushka's book in a previous post, I have to make a point on this subject: The VAT-like effect of their plan comes from the fact that they propose taxing business expenses, something most flat taxers (in my experience) find objectionable. This is, in fact, my principal disagreement with the Hall-Rabushka plan (and one of my several disagreements with consumption taxes of all forms)- taxing business expenses creates a barrier to entering self-employment, and a barrier to small businesses' ability to compete against large businesses.

By this standard, the Forbes flat tax- which includes a deduction for business expenses- is definitely preferred by the majority of flat taxers I know (though it's possible there's a large community of flat taxers somewhere, whom I haven't met, and who favor taxing businesses in this fashion).

And on the subject of Paul Ryan: I like the man, but I am not a Paul Ryan cheerleader like some others, precisely because some of his proposals aren't all they're cracked up to be. Let's remember that, in addition to propising a European-style VAT, he recently partnered with Ron Wyden (D-OR) to craft a new Medicare proposal, which Dean Clancy aptly described as "Obamacare for Seniors". Romney's name-dropping effort shows that Ryan's name recognition among Republican voters is far better than his plan recognition.

In sum: Mitt Romneycare used Christmas weekend, when nobody reads or watches political news, to announce- in a vague and weasly way- his support of a VAT tax. And no matter how you slice it, VAT- in any form- is a bad idea.