David R. Henderson  

What Leonhardt Leaves Out

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Curiosity and Humility... Scott Sumner, on One Foot...

In a positive article, almost a puff piece, on Bruce Bartlett, New York Times reporter David Leonhardt highlights Bruce's advocacy of a value-added tax for the United States. Leonhardt points out that many countries have such a tax and mentions Canada specifically. My guess is that Bruce was more careful than Leonhardt and probably did not claim that Canada has a VAT, because it doesn't. Rather, Canada has a federal GST, a goods and services tax.

You could argue that I'm quibbling over the difference between a GST and a VAT. And there would be something to that argument.

But here's what's not a quibble: what happened to the political fortunes of the Canadian government that imposed that tax, something that Leonhardt doesn't mention. Brian Mulroney, the Canadian prime minister at the time, imposed the tax at an initial whopping 7%. It's true that it replaced a narrower hidden 13.5% tax on manufacturing and that it was designed to be revenue-neutral. But precisely because the GST was visible, it generated enormous opposition. The Liberal Party made repeal of the GST one of its main issues in the 1993 election. By then, Mulroney's party, the Progressive Conservatives, had kicked him out and replaced him with Kim Campbell. Granted that Campbell ran one of the most incompetent campaigns in Canadian history and granted that there was a recession on at the time. But do you care to guess what happened to the number of seats in Parliament that the Progressive Conservatives won in that election? Let me give you a hint. They started with 169 out of 295 seats. And they ended with a number that can be counted on the fingers of one hand. To be precise, they ended with 2 seats, a 99% drop, and, a few years later, the Progressive Conservative Party disappeared via merger.

Whatever the merits of a VAT, the party that imposes it risks losing in the next election. Oh, and did the Liberal Party end up abolishing the GST? No, it broke that promise. Instead, the Prime Minister who cut it in stages from 7% to 5% is the current PM, Stephen Harper.

Note the irony. One reason conservatives advocate visible taxes rather than less-visible taxes is so that voters have a feel for the magnitude of the tax. But precisely because that's true, they'll punish the party that imposes it.

Update: I probably overstated in saying that Mulroney was kicked out. Let's just say that his Party was glad to see him go. A Gallup Poll in 1992 showed him with an 11% approval rating.


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CATEGORIES: Taxation



COMMENTS (11 to date)
Scott Sumner writes:

Great post. I have always thought that the VAT will be the decisive issue facing progressives in the next few decades. Their Waterloo. Many now live in a dream world where the welfare state they envision can be financed with taxes on the rich. The smarter ones know that it will take a heavy VAT. But you are right, and the opposition will be especially intense among the lower and middle classes.

This fact could cause the Republicans to return to their original position--deficits hawks. They see the unpleasant arithmetic facing the progressives. By harping on the deficits they will essentially be taunting the Dems to enact a big VAT. And they'll know that once they get returned to power as a result of voter dissatisfaction with the VAT, they can do a token cut in the VAT, combined with additional cuts in the income tax. They secretly prefer that sort of tax system anyway.

botogol writes:

in Europe we have the worst of both worlds - we have VAT (at a whopping 17.5% in UK) but it is pretty much invisible, as all goods are priced with the VAT included.

(as opposed to the common practice in the US where goods are priced on the shelves pre-tax, and the sales tax is added at the till)

Rich writes:

You might recall that the GST was originally going to be 9%, but was lowered to 7% to quell dissent.

I remember when it was introduced because there was an exemption for certain "staple" goods--the effect being that if I bought a small carton of chocolate milk I paid GST but if I bought white milk I didn't.

Yancey Ward writes:

If the American people are dumb enough to allow a VAT, we deserve what we get.

Greg Ransom writes:

Is Bruce Bartlett trying to make amends for giving us what turned out to be the economics and political disaster of "supply side economics"?

Hayek for the git-go pointed out that capitalism is a production goods based system -- and "supply side economics" as a program of "costless" government expansion via borrowing from the investment markets was a form of burning the kitchen chairs for heat -- i.e. eating the seed corn. (See Hayek's letter to the London Times on "supply side economics" from sometime in the early 1980s.)

I know all the theory. Bartlett is only now skimming the surface of the reality.

Alan writes:

What's the nature of your quibble regarding the difference between our GST and a VAT? I am curious because we also have a provincial SALES tax, and the Ontario and BC governments are planning to harmonize their sales taxes with the GST, which threatens to become a political issue provincially and federally. One implication is that some things not now subject to provincial sales taxes will become taxable under the harmonized tax (called HST, I think misleadingly). A less visible implication is that the provincial tax will actually use the GST structure, which I have always thought of as a value-added structure. And this seems to me an improvement.
Your story is a telling one, though. Mulroney is one of our few prime ministers to achieve much of anything to be proud of; one of those was replacing the manufacturing tax by the GST, the other of course being NAFTA. And neither of them made him especially popular.

David R. Henderson writes:

Alan asks, "What's the nature of your quibble regarding the difference between our GST and a VAT?"
I'm glad I stated it as only a quibble. According to Wikipedia, I'm wrong: the Canadian GST really is a VAT. See: http://en.wikipedia.org/wiki/Value_added_tax

Greg Ranson asks, "Is Bruce Bartlett trying to make amends for giving us what turned out to be the economics and political disaster of "supply side economics"?"
I think this is unfair to Bruce. As he has said countless times, there's a huge difference between cutting the top marginal tax rate from 70% to 50% and seeing cuts in marginal tax rates as the solution to almost every economic problem. Moreover, I think the tax cuts in 1981 were, other than supporting Volcker in reducing inflation, the best part of Ronald Reagan's program. I don't think it was a disaster.

Greg Ransom writes:

David writes:

"I think this is unfair to Bruce. As he has said countless times, there's a huge difference between cutting the top marginal tax rate from 70% to 50% and seeing cuts in marginal tax rates as the solution to almost every economic problem. Moreover, I think the tax cuts in 1981 were, other than supporting Volcker in reducing inflation, the best part of Ronald Reagan's program. I don't think it was a disaster."

IN a blog comment it's hard to be fair in the sense of taking everything into account.

Yes tax cuts were called for, esp. on capital gains, and the very highest end of the income scale. And yes the pathological progressivity of the tax code needed to be hammered flatter.

But even BEFORE Reagan was elected it was obvious that Reagan's original plan would produce government spending well beyond tax revenue as far as the eye could see. I identified this problem at the time, as did others.

The best part of Reagan's program was his restraint on regulations and on the growth of domestic government spending.

And the best part of Reagan was his ability to communicate the agenda of liberty to the great mass of the American people. (He didn't do such a great job speaking to the tenured class or the media class or the Hollywood cohort.)

Bruce did yeoman work working to get the tax code in better shape. But the "supply side economics" thing as an overall political program was half-baked at best. The emphasis on production was right -- but how it allowed government to consume an ever expanding chunk of the seed corn was problematic ... as Bartlett is now saying.

Hayek saw this in the early 1980s. Welcome to the party, Bruce.

Stephen Dawson writes:

One example probably doesn't prove the point. In (I think) 2000 the conservative Australia government introduced a GST at 10%, over the opposition of the other main party. It was watered down with an exemption for basic food items, enormously increasing complexity. As with Canada, it replaced very well hidden wholesale sales taxes. But it is somewhat hidden itself, since it is routinely included in the marked sale price of nearly all items.

Still, the government won the next two or three elections.

David R. Henderson writes:

Stephen,
Good point.
David

Liam writes:

I never thought I would be defending a tax but here goes. When PM Harper lowered the GST from 7% to 5% I think he made a error. Most purchases fall somewhere between $10 and $50 (I am guessing) Which means that you save on average $0.25 on your normal purchases which is negligible. I am guessing that it's due to the same reason that when you quit smoking and give up your $10 a day habit you don't really seem to see much more in disposable income (at least I never did). It's too diffuse.
However, the amount of revenue generated for the Federal Government by that 2% was quite a bit and one of the things it was used for was paying down the National Debt. And I am hugely in favour of paying down the National Debt.
Oddly enough, the PM prior to Harper had an agenda of paying down the debt and did indeed make large decreases over the years as the Minister of Finance. (He was brought down by a political funds scandal called "the sponsorship scandal")
Canadians, in general, approve of paying off debt. When there were large yearly surpluses of billions of dollars people started demanding extra funding and in a lot of cases were told no. One of my favorite analogies at the time was that if Dad has 5 maxed credit cards and got a huge bonus at work the last thing he would do would be raise all the kids allowances.

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