Frontrunning 10.01.09 - The New Age of Tax

[david austin]

Taxing the taxed



As budgets swell and government coffers across the board run dry, the simple solution is one that would undercut the very backbone of one of Obamas main promises... No taxes to the middle class.


So how can you 'tax' without the impending feeling of being 'taxed'?


Countries across the world have a solution... and its not always what its cracked up to be.


America... welcome to the 'Value Added Tax' otherwise know as...VAT!


quoted from the WSJ so all can read:

A liberal think tank with close ties to President Barack Obama says the administration and Congress should consider raising taxes on Americans to help close federal budget deficits, an opening salvo in what is likely to be a protracted debate on tax policy.


In a draft report, the Center for American Progress says the size of projected budget gaps requires considering options including tax increases as well as curbs on annual spending and entitlement programs supported by Democrats.


Such ideas could pose problems for Mr. Obama, who pledged during the campaign to not increase taxes on families making less than $250,000. The report, which will be released on Wednesday, said the administration can't rely on taxing richer Americans and companies to reduce the deficit to sustainable levels by 2014 because those groups would see 40% tax increases.



"In all seriousness, responsible people know that additional revenue has to be part of the mix even if they believe in lower taxes in general," the report concludes.


The center's president and chief executive, John Podesta, who is an Obama adviser, said the administration should consider a tax on consumption, such as a value-added tax system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.


"As progressives we need to debate the policy merits and likelihood of enacting a range of options -- including designing a small and more progressive value-added tax, changes to the corporate tax code, and taxing upper income earners beyond reversing the Bush tax cuts," Mr. Podesta said in a statement Tuesday.


White House economic adviser Larry Summers and Treasury Secretary Timothy Geithner refused to rule out middle-class tax increases during Sunday talk-show appearances over the summer. "We have to bring these deficits down very dramatically," Mr. Geithner said on ABC's "This Week." "And that's going to require some very hard choices." But White House press secretary Robert Gibbs disavowed the comments.


The center's report marks a sign of potential division between the administration and its supporters. Health-care legislation, Afghanistan troop levels and terrorist detainee policy are among other areas where the administration has sometimes found itself at odds with components of its liberal base.


Another liberal coalition, the labor-allied Campaign for America's Future, is preparing a push for more stimulus spending later this month, another idea that clashes with the administration's thinking.


A conservative antitax group, Americans for Tax Reform, opposed Mr. Podesta's VAT idea, saying a value-added tax would apply to "most everything consumed by everybody." The White House didn't respond to requests for comment about the VAT proposal.


As the government looks for ways to reduce its big long-term deficits, a debate over taxes will likely be protracted. The tax debate is expected to heat up later this year, when Congress takes up changes to the estate tax, as well as some corporate research breaks and energy-related provisions.
Republicans and some Democrats also have been sounding the alarm on spending, and Republicans are considering attempts to cancel or redirect some funds from the February stimulus bill if they aren't spent by the end of 2010, said Sen. Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee.


Congressional Democrats also appear increasingly concerned about the government's fiscal situation. House Democrats are considering including criteria for reducing long-term deficits in next year's budget resolution, Rep. John Spratt (D., S.C.), the chairman of the House Budget Committee, said in a recent interview.


For the moment, outspoken progressives say they are sticking with Mr. Obama. "In areas where the president may be going down the wrong road -- like in Afghanistan -- I'm going to be vocal in my opposition," said Rep. Jim McGovern (D., Mass.), who has led a House effort to dissuade the administration from sending more troops to Afghanistan.


Still, "at the end of the day, anybody who tells you they're expecting perfection out of this administration from the progressive perspective is not living in the real world."

John D. McKinnon

Obamas all star economic team is led by captain Paul Volker. Former Fed Reserve Chairman Volker is also taking part in the initial tax reform meeting tomorrow. He has been a notably big fan of VAT. That should come as no real surprise...


So its been estimated that this tax is designed to increase government revenue by +250B a year. Under that assumption and modeling of current tax brackets and a bunch of math and crap that is pointless to get into, Its been estimated that a proper VAT would be in the 4-6% range. (Keep in mind that VAT in the EU runs in the double digits).


In a little bit I will use a real world example of how a VAT, while being a perceived necessary evil, can be disastrous to a recovering economy.

[PETA]

Like GHWB.... Obama's prolly gonna eat that campaign pledge

[david austin]

The likely way this will be pitched is as a 'revenue-neutral' tax. Meaning that the natural embedded federal tax would be cut back while the explicit sales tax would be added (VAT). This is perhaps the ONLY way of debating this system that would fly with the public and Congress... until you do the math and look at what has actually happened in countries using VAT.

So think of this example under the current system:

Note - I am using round numbers and a 10% State tax rate plus a 10% VAT

TV Wholesale - 1000
Embedded tax - 100
TV Retail - 1100
Current State Tax - 110
Total - 1210

Ideal VAT

TV Wholesale - 900*
Embedded Tax - 0
TV Retail - 900
Current State Tax - 90
Total Pre VAT 990
VAT 90*
Total 1080


*Now you see as a consumer would ideally be saving 120 by having the products embedded markup stripped away that was used to offset embedded tax cost. In a perfect vacuum this is the case. In the real world... not so much.

Reality VAT

TV Wholesale - 1100*
Embedded Tax - 0
TV Retail - 1100
Current State Tax - 110
Total Pre VAT - 1210
VAT - 110*
Total - 1320

So in reality the wholeseller would likely keep the price the same and tuck it somewhere on the balance sheet as increased margin on a given product. I mean really... when has anyone known a business to actually strip out margin when its not needed (nor recognized to be by your end consumer).

Before I get jumped on the generalizations I will make a special note that these are big round numbers and the model represents a product with real demand. Obviously the margin wouldnt stay maxed like my example but the point still remains. ANY embedded margin would cause the consumer inflation. In this example... to the tune of 9%.

Again I understand this level of instant inflation is unlikely but pennies add up and over time, with added natural inflation, these scenarios will only grow in discrepancy.


NOW... tag this example onto the 'Consumer is 70% of GDP' thesis.

What better way to get people spending than an instant round of inflation in everything from a car to a loaf of bread!!

[PETA]

Originally Posted by david austin

The likely way this will be pitched is as a 'revenue-neutral' tax. Meaning that the natural embedded federal tax would be cut back while the explicit sales tax would be added (VAT). This is perhaps the ONLY way of debating this system that would fly with the public and Congress... until you do the math and look at what has actually happened in countries using VAT.

So think of this example under the current system:

Note - I am using round numbers and a 10% State tax rate plus a 10% VAT

TV Wholesale - 1000
Embedded tax - 100
TV Retail - 1100
Current State Tax - 110
Total - 1210

Ideal VAT

TV Wholesale - 900*
Embedded Tax - 0
TV Retail - 900
Current State Tax - 90
Total Pre VAT 990
VAT 90*
Total 1080


*Now you see as a consumer would ideally be saving 120 by having the products embedded markup stripped away that was used to offset embedded tax cost. In a perfect vacuum this is the case. In the real world... not so much.

Reality VAT

TV Wholesale - 1100*
Embedded Tax - 0
TV Retail - 1100
Current State Tax - 110
Total Pre VAT - 1210
VAT - 110*
Total - 1320

So in reality the wholeseller would likely keep the price the same and tuck it somewhere on the balance sheet as increased margin on a given product. I mean really... when has anyone known a business to actually strip out margin when its not needed (nor recognized to be by your end consumer).

Before I get jumped on the generalizations I will make a special note that these are big round numbers and the model represents a product with real demand. Obviously the margin wouldnt stay maxed like my example but the point still remains. ANY embedded margin would cause the consumer inflation. In this example... to the tune of 9%.

Again I understand this level of instant inflation is unlikely but pennies add up and over time, with added natural inflation, these scenarios will only grow in discrepancy.


NOW... tag this example onto the 'Consumer is 70% of GDP' thesis.

What better way to get people spending than an instant round of inflation in everything from a car to a loaf of bread!!

Um... the fact that it took you that long to explain it kinda reveals the point. It's a tax.

Funny thing though, GHWB was made to eat his pledge by the other party. Obama, probably going to be made to eat his pledge by his own.

You go downstairs for the hotdogs today?

Send me your cell # - lost it

[david austin]

Originally Posted by PETA

Um... the fact that it took you that long to explain it kinda reveals the point. It's a tax.

Funny thing though, GHWB was made to eat his pledge by the other party. Obama, probably going to be made to eat his pledge by his own.

You go downstairs for the hotdogs today?

Send me your cell # - lost it

Had Breadwinners catered yesterday. I was home today kinda sick. With all of the flu crap going around I wanted to get out.

[PETA]

Yeah? Not sure if I brought it or got it at our office/building... about a week of crap 3-4 days of really bad crap. Stayed home when I had the fever infectious stage. Got back Monday to hear half the floor hacking. Wouldn't be at all surprised if it was swine flu. Hacking cough and intermitant fever. Mostly over it now.