Tuesday, October 13, 2009

The Push Continues for a Value-Added Tax and Lots and Lots of Debt

Early in his Presidency, Bill Clinton was overheard to muse about the good things that the Government could do with the revenues from a Europe-styled value-added tax (VAT). This idea went away after it received a frosty reception but has been resuscitated in the Obama era.

In a refreshingly honest and allegedly fiscally responsible manner, two Brookings Institute economists have a WaPo editorial laying out the need for and virtues of a VAT. The title is: Bend the Revenue Curve; Health Reform Alone Won't End Deficits.

Only an economist could speak about "bending" the revenue curve when talking about tax increases, pure and simple. And only the Brookings Institute and their allies seriously believe that the more government becomes the payer/subsidizer etc. for Americans' health care, the more money it and we will save. No doubt the pharmaceutical industry bellied up to the health care reform bar with a $150 M ad campaign to save us money!

Medicare was supposed to be a small, easily affordable program. Now, everyone's paycheck has a 2.9% additional tax laughingly called a "Medicare tax". But it's just a tax that goes into general revenues.

The VAT proposed by Drs. Aaron and Sawhill is just another tax in addition to the crazy quilt of taxes Americans are faced with.

Unfortunately, the more one taxes something--in this case production and sales of goods and services--the less one gets of it.

In investing, one of the enduring adages is to keep it simple. Large scale unemployment in the U. S. never occurred for long until the interventionist president Herbert Hoover hoved onto the scene. What we think of as one depression from 1929-32 was at least two. The 1929 downturn appeared to end quickly in 1930, with a major decline in unemployment in the first half of 1930, but an immediate double dip occurred, perhaps related to the Smoot-Hawley Tariff Act of June 1930. The low-tax region of Hong Kong has had nothing but economic dynamism decade after decade.

The saying that the government is best that governs least is from to the anti-slavery activist Henry David Thoreau- hardly a reactionary.

Part of me applauds the point made in the above-linked editorial: pay for what the government spends, but only part of me, because I don't believe they mean it. All of me believes that the progressive agenda involves paying for all the good things that the progressives want government to do for the people with unending borrowing and where suitable with frank money printing. The commentator Marshall Auerback states this repeatedly, such as in Time for a New "New Deal":
Is President-elect Obama another Franklin Roosevelt, ready to embark on a radical remaking of the country’s political and social fabric?

We hope so. There is no shortage of places in which to invest: extended unemployment insurance, state fiscal relief, increased food stamp programs, and large scale infrastructure. No question, there will be more debt, lots and lots of it.

The American progressive agenda is a copy of what the European "Social Democrat" parties advocate. To Europe's credit, the socialists are honest about what they are. If America wants to go more and more socialist, at least it should do so with a much simpler tax system. Adding a VAT on top of all our other taxes and exemptions would be inefficient and confusing.

As stated at EBR many times, statism is on the march in the U. S. It became apparent for real a year ago with the statist/crony capitalism actions of the Bush Administration and the Fed in response to the failure of highly leveraged financial companies. It is intensifying under the Obama Administration. The most consistent financial market response has been toward higher gold prices.

The market does not always get the future right, but investors need to be aware of the major trend and separate it from the churning actions. Short term, Goldman Sachs came out last week with a call for a relatively weak economy in 2010, no Fed action to raise short term interest rates for a year or so, and a rally in the 10 year Treasury toward 3% by yearend 2009. This strikes me as realistic, and I bought TLT back after a sudden 3-4 point sudden dip, but only for a trade. When the powers that be in Washington want more debt and more spending, with more taxes to allow yet more borrowing and spending, the unending supply of debt offerings hardly makes for a compelling long term supply-demand proposition.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment