Wednesday, October 24, 2012

Bruce Bartlett's The New American Economy 6: Entitlements, Deficits, and the VAT

My latest reading of Bruce Bartlett's The New American Economy: The Failure of Reaganomics and a New Way Forward scared me, to tell you the truth.

I usually get scared when I think about the ballooning of federal entitlements.  Bartlett, like others, contends that, in the future, in order to take care of the increasing number of people who will be receiving Medicare and Social Security, payroll taxes will have to go up----and that will affect all sorts of people, including the middle class.  Or we can borrow or print the money to help pay for the entitlements, in which case we'd probably have to put up with inflation and higher interest rates.  (And, whereas I have read economists set high interest rates against inflation, as if high interest rates cure inflation or an abundant money supply keeps interest rates low, Bartlett actually makes the point that inflation can lead to high interest rates.  If I lend you money, and I realize that the money that I will get back from you when you pay me back will be worth less than what I loaned you, I may just increase interest rates so that I can get a decent amount.)  

We have a deficit, and we have debt.  Bartlett argues that we're in a worse situation now because other countries own a sizable amount of our Treasury securities, and Bartlett contends that this situation makes Americans less wealthy and could increase the trade deficit.  Moreover, other countries will be reluctant to buy our securities, which are a significant source of our government's revenue, if they think that we won't pay them back. 

How can we solve this problem?  Bartlett says that even going so far as to eliminate every domestic discretionary program would not have been sufficient in 2008 to get rid of the deficit.  Regarding entitlements, Bartlett talks about raising the retirement age so that people could qualify for Social Security and Medicare later in life, but he doesn't appear to think that even that would be enough.

I haven't finished this chapter, but, in what I have read so far, Bartlett supports the Value Added Tax as a way to bring in a lot of government revenue.  On page 179, he explains what that tax is by telling a story about the making of bread.  Suppose that you have a farmer who sells his wheat to a miller.  The farmer pays a tax on the wheat's sale price, and that tax is a part of the wheat's price, presumably because the farmer is passing the cost of the tax on to the miller who's buying the wheat.  The miller then makes flour out of that wheat and sells it to the baker.  There is a tax on that sale, too, but the miller "subtracts the tax he paid when he bought the wheat."  And yet, the baker in buying the flour from the miller is paying the tax that was "included by the miller, which also includes the tax paid by the farmer."  The baker then makes bread and sells it, and in selling the bread he "gets credit for all the previous taxes paid."  But, ultimately, the tax's "full burden...falls on the final purchaser, the consumer."

I'm a little confused here.  Why would the full burden fall on the consumer, if the baker was able to get a credit for the previous taxes that he paid (in the form of higher prices)?  The baker wouldn't have to pass on to the consumer the tax paid by the farmer, and the tax paid by the miller, for the baker is getting credit for those taxes, right?

Another point that Bartlett makes is that a tax on consumption----such as the Value Added Tax----has less of an impact on the economy than the income tax because the VAT does nothing to savings, which Bartlett calls "the wellspring of growth" (page 177).  Bartlett also says that consumption taxes are "less burdensome because people can usually choose to reduce their consumption to avoid the tax" (page 177).  But, earlier in the book, Bartlett criticizes the tax rebates during George W. Bush's Administration because people saved them rather than spending them (page 138).  Doesn't that imply that spending----consumption----is important when it comes to stimulating the economy?  And would a VAT discourage consumption? 

On the issue of entitlements and the deficit, I hope that there's a way for us to keep our commitments to people and not throw them out into the cold, while also avoiding a lot of the financial burdens that would negatively impact so many of us.  Is this possible?  I don't know.  One thing that comes to my mind is the argument that a single-payer system is less costly than what the U.S. has.

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