P.J. O’Rourke once quipped about spending in Washington: “The budget grows because, like zygotes and suburban lawns, it was designed to do nothing else.” To help pay for their addiction to more spending, the left is now calling for a value-added tax or VAT.
Cato Senior Fellow Dan Mitchell, in conjunction with the Center for Freedom and Prosperity Foundation, has produced a video conclusively showing that the VAT will do nothing to stop deficits since governments that have adopted VATs have a proven track record of only raising spending even further after they pass. Watch:
Click here to view the embedded video.
Heritage’s own Curtis Dubay wrote on the VAT this July:
A VAT piled on top of current income and payroll taxes would suffer from the following additional problems:
Hidden Tax Increase. Sound tax policy requires that taxes be transparent to taxpayers. But taxpayers will not see the portion of the VAT paid by businesses unless Congress requires that businesses show the full VAT paid on receipts. Even then, however, taxpayers could be unaware of the total amount they pay because they are unlikely to keep their receipts and add up the total annually.
Economic Distortion. Taxes impose a cost on society above their explicit price because they reduce economic efficiency. Economists generally agree that VATs are more efficient than most of the taxes currently imposed on U.S. taxpayers. But that is only if they apply to all goods and services in an economy.
Due to political considerations, a VAT in addition to current taxes would likely exempt politically sensitive items like food, clothing, health care, and housing. This would drive the tax rate higher to achieve the same amount of revenue and impose new economic distortions. Industries that get an exemption will be more profitable, compared to taxable industries, than they would have been without the tax. This means more capital will flow to these industries. This will lower economic well-being because capital will not flow to its most efficient market-determined use.
More Economic Power to Washington. A VAT not levied on all goods and services would give Congress even more power over the economy. Industries would lobby heavily for exemptions from the VAT for the economic benefits described above. This would give Congress an even larger roll in picking winners and losers in the marketplace. Success would depend less on ingenuity
There is one, and only one, notable development in the Chinese tires case. The rest is old news, non-news, or nonsense.
Why does anyone care about this case? It’s certainly not because of the amount of trade affected. Replacement tires constitute a drop in the bucket of US-China trade.
It’s not because it will dent US unemployment. Three years of tariffs on tires from one country will do almost nothing for production in the US.
It’s not because of the potential Chinese reaction. The level of grassroots interest in this is nothing like the level needed to actually worry the Party. The Ministry of Commerce will use domestic politics to justify demands or actions, but it is a negotiating tool in this instance, nothing more.
The PRC has far too much to lose in a genuine trade confrontation with the US. And low-end tire tariffs hardly prevent Chinese trade policy from proceeding on its merry way - simultaneously seeking to locate jobs at home and move up the technology chain for strategic reasons. The difficulty of doing both simultaneously necessitates not only distortions of comparative advantage, but a broadly mercantilist model for most of the traded goods sector. This approach is not threatened in the slightest by replacement tire tariffs.
The case is not even a notable development in US policy at the operational level. The International Trade Commission has been slapping tariffs on Chinese goods at the rate of nearly two products per month. The notion that the USTR conducted serious negotiations offering to halt tire tariffs for substantial Chinese reform is silly - it will take much, much more than that to alter Chinese trade practices.
The only reason the tire tariff matters is the precedent that it may create. Will there be more safeguard cases? Will other unused weapons in the American trade arsenal be trotted out against the PRC?
One source of risk, of course, is the Congress. But Congress has been remarkably restrained in the face of near 10 percent unemployment. In any case, the legislative branch is expected to agitate for protection; it is the executive branch which defends the national interest in open trade.
Here lies the true reason for all the face. The tire case may be the first real insight into President Obama’s views on trade with China. It may be because, eight months into his term, we have neither a strong philosophical statement nor a set of practical details from a President who has repeatedly shown the ability to offer both.
President Obama clearly doesn’t want to say anything more about trade than he has to. That is an abandonment of his responsibilities. The uncertainty created is what has sparked the near-frenzy over a possible trade conflict.
The sole important aspect of the tire case is the fact that, despite the perfect opportunity, President Obama still refuses to tell the country and our partners what he thinks about China trade. No more empty or contradictory soundbites, sir, time to lay it on the line.