Fareed Zakaria’s first idea towards “Defusing the Debt Crisis” in the March 8 Newsweek was to institute a value added tax. While I supported his other two ideas (see previous two posts), I am at best uncertain on a value added tax.
Just because it is common in many other countries does not mean it will be acceptable here. It would seem an effective means to avoid underground workers, which may be less of a problem here than many other comparable economies.
Adding another layer of tax to existing taxes also misses a critical point: after a point the damage is less from the means of collecting the taxes than the percent and amount of the economy the government controls. Any dollar extracted from the private sector for control by the government sector, limits economic growth and real job creation. Government capital requirements will squeeze out private sector needs.
While I agree with Fareed’s other two proposals which serve more to restore some sense of balance and fairness and to reduce social tinkering, they are also revenue enhancers.
But the value added tax is much more complicated and does not address the real problem which is the relative size of the government, and its risk at smothering the wealth creation machine that made America the most prosperous country in the world in a very short period of time.
In the March 8th Newsweek columnist Fareed Zakaria proposes three solutions to the debt crisis in “Defusing the Debt Bomb.”
His second proposal was to “end the massive , distorting subsidies for homeownership, healthcare, and agriculture.” I agree with him.
Canada and Britain have no home mortgage deduction and they have a higher rate of home ownership. Our mortgage tax deduction was the result of using the tax code for social tinkering, in this case to encourage home ownership. The home mortgage deduction is regressive, giving a bigger tax deduction to the wealthier with more expensive housing.
Health care is also distorted by the tax deduction. We are actually encouraged to have too much first dollar coverage. Obama tried to address this is in some limited way with the tax on Cadillac plans and this was one of the few parts of the bill I liked. Removing the tax preference for employer controlled coverage would be a critical step toward restoring control of health insurance to the individual and get the employer out of it completely.
Farm subsidies are just ridiculous relics from the Great Depression. Obama spoke of eliminating such programs, but he lacks the ability to sell it after the poor way he handled health care.
Elimination of these tax subsidies may have to be gradual. Such radical shifts especially in this market would cause pain but the end objective should be to eliminate them. According to Zakaria these deductions cost the government $250 billion a year. But the pain they have cost in distorting the markets has been even worse.
We should see a reduction in the tax rates to offset some of the lost benefits. Congress is certainly capable of spending every dollar they can find a new way to raise, and we still need to insist on spending prudence even though that almost seems laughable today. I wonder if the populists and tea baggers who are truly concerned with the deficits will be ready to restore some common sense to these subsidies. Will they remain committed even if it affects their pocketbooks?
