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
That’s what David Schoenbrod and Richard B. Stewart call Waxman-Markey in their Wall Street Journal op-ed today:
As a candidate for president in April 2008, Barack Obama told Fox News that “a cap-and-trade system is a smarter way of controlling pollution” than “top-down” regulation. He was right. With cap and trade the market decides where and how to cut emissions. With top-down regulation, as Mr. Obama explained, regulators dictate “every single rule that a company has to abide by, which creates a lot of bureaucracy and red tape and often-times is less efficient.”But the House bill would, if passed by the Senate this autumn, fail the environment and fail the test of economic efficiency.
The top-down directives come in three forms. First, electric utilities, auto makers and states get free allowances on the condition that they comply with regulations requiring coal sequestration, alternative energy sources, energy conservation, advanced auto technology and more. Second, many other provisions of the 1,428 page bill mandate outright regulation on subjects ranging from how electricity is generated to off-road vehicles and household lighting. Third, still other provisions provide subsidies for government-chosen technology “winners” such as alternate energy sources, plug-in vehicles and weatherization of old buildings.”
Free allowances do not lower the costs of Waxman-Markey; they just shift them around. Although the government awarded handouts to businesses, the carbon dioxide reduction targets are still there, and the way they will be met is by raising the price of energy and thereby inflicting more economic pain. Prices have to go up enough to force people to use less energy, and so if anyone is bought off with free allowances, the costs for everyone else are that much higher.
When there is money on the table with big government programs, lobbying by special interests is inevitable. Politics governed by special interests typically makes things worse for the consumer, and cap and trade is no exception. Approximately 2,340 energy lobbyists worked on the cap-and-trade bill to lower costs for their clients–i.e., utilities and other industries. That leaves consumers to bear the entire cost of the price increases required to meet CO2 targets; meanwhile, industry gets a free windfall.
More times than not, government regulations reduce economic efficiency so it shouldn’t be a surprise massively complex carbon dioxide regulations will do the same.