David R. Henderson  

Karl Smith's Weak Critique of Veronique de Rugy

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Above is a picture of the late Bill Niskanen.

Karl Smith would not pass an Ideological Turing Test.

Karl Smith of the Niskanen Institute recently wrote a piece titled "Some Conservative Arguments against the Border Adjustment Tax are Pretty Weak."

In the first paragraph, I immediately saw a problem. His critique is solely of Veronique de Rugy's critique of the proposed border adjustment tax. Why is that a problem? Because, unless she has changed her political stripes since I last spoke to her, which was admittedly about 4 years ago, Vero is not a conservative; she's a libertarian. One would think that people at the Niskanen Institute, named after a former boss of mine, Bill Niskanen, who, as far as I know, never in the last 30 years of his life called himself a conservative, would see the problem with that headline. Apparently not.

This is the first indicator that Karl Smith would not pass an Ideological Turing Test. Of course, someone else might have chosen the headline. But Karl chose the text. Early in the piece, he quoted de Rugy:

They are preemptively capitulating to the Left's premise that pro-growth tax cuts are something that must {be} "paid for" through increases in other taxes instead of with spending cuts or by simply letting the economy grow and bring overall tax revenue up along with it.

Then Karl writes:
The idea here is that, since the left is inclined to support tax increases, conservatives and libertarians should oppose any and all tax increases on principle, only capitulating when they lack the political power to stop them.

So Karl Smith's view is that a major reason conservatives and libertarians oppose any and all tax increases is that "the left is inclined to support tax increases."

To test whether that is an important reason for Vero de Rugy's opposition to tax increases, we can do a simple conceptual experiment. Imagine that Vero wakes up tomorrow and reads that the New York Times, Brad de Long, Paul Krugman, Nancy Pelosi, and the various other people on the left who have generally favored tax increases have forsworn that belief. Now they oppose all tax increases and want actually to cut "any and all" taxes. Now ask yourself: do you think Vero would say "OMG, I must have been wrong. I now no longer oppose tax increases." It just doesn't ring true. Vero might be skeptical about their sincerity, given their past records, but if she did due diligence and became convinced that they were sincere, I would give really high odds that she would welcome then into a (newly constructed) big tent.

Now to an issue beyond the Ideological Turing Test, the issue of VAT.

Karl Smith quotes Vero as follows:

...if the power is in the hands of a future President Elizabeth Warren and her Democratic Congress, nothing will stop them from for resolving [a potential] WTO challenge by ending the wage deduction and turning the border-adjusted tax into a VAT. A VAT on top of our current individual income tax is a development that the Left and those dreaming of more revenue for the government have long fantasized about in order to finalize our transformation into a big-government European-like nation. When that happens we will have the Republicans to thank for it.

He then asks:
But where is the evidence that the growth of government is checked by tax revenue, or that the difference in the size of government spending in the United States vs Europe comes down to tax structure?

On the first, it's mixed. On the second, the evidence is very clear. I give some of it here. One excerpt:
Take Europe, where the VAT is a major source of government revenue. When Belgium, France, Germany, Ireland, Italy and the Netherlands adopted a VAT--all between 1968 and 1971--their stated revenue goal was neutrality: Gains in revenue from the VAT were to be fully offset by reduced taxes elsewhere. (France already had a VAT but needed to revise it to meet European Economic Community Standards.)

All failed. Government revenues--and spending--rose substantially as a percentage of GDP. In 1967 in France, the year before that country adopted its EEC-compliant VAT, total government revenues were 33.4% of GDP. In 1968, France adopted a VAT rate of 13.6%. By 2014, its VAT rate was 20% and government revenues were a whopping 45.2% of GDP. When Britain adopted a VAT, the government's stated goal was to reduce revenue. That failed, too.

Only one country, Denmark, adopted a VAT to increase revenues. It succeeded.


Of course, that's about taxes, but taxes and government spending typically track each other within a few percentage points of GDP. In the United States, for example, for the last more than 60 years, federal tax revenues as a percent of GDP have stayed within a narrow band--18 percent of GDP plus or minus two percentage points. And federal government spending has typically been 20 percent of GDP plus or minus two percentage points.


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CATEGORIES: Taxation




COMMENTS (6 to date)
Charlie writes:

The last bit is especially bad analysis. Smith is asking a question about causation and you presented a correlation. After Europe passed a VAT, spending and revenues rose, but of course they rose for all kinds of reasons, a huge one being an aging population and generous social benefits. A major argument for switching to the VAT was collecting revenue more efficiently to pay generous promises.

I carried my umbrella to work today, later it rained. Therefore, umbrellas must cause rain.

Andrew_FL writes:

I think one can be forgiven for assuming that someone writing in National Review is a conservative. It's a bit intellectually lazy but understable.

The rest however, not so much.

Karl W Smith writes:
Now they oppose all tax increases and want actually to cut "any and all" taxes. Now ask yourself: do you think Vero would say "OMG, I must have been wrong. I now no longer oppose tax increases." It just doesn't ring true. Vero might be skeptical about their sincerity, given their past records, but if she did due diligence and became convinced that they were sincere, I would give really high odds that she would welcome then into a (newly constructed) big tent.

I can imagine and indeed hope she might say: Now that the Left is taking a reasonable approach on taxes we can sit down and decide which taxes should go down and even yes which if any might go up. For generations this conversation wasn't feasible but now thankfully it is.

RPLong writes:

Charlie writes:

A major argument for switching to the VAT was collecting revenue more efficiently to pay generous promises.
If the government makes a generous promise it had not made in the past, and then utilizes a VAT to follow through on that promise, then this would seem to be exactly the kind of government growth fueled by value-added taxes that David had in mind. Maybe that doesn't prove causation, but it certainly sounds like David and Charlie agree both that the VAT was intended to fuel government growth, and that it succeeded in Europe.

Harry writes:

The Niskanen Center is composed of fake libertarian lefties

Their go to move is to confuse libertarianism and conservatism in a variety of ways. Or to write "the libertarian case for..." when echoing the leftist case.

Jerry Taylor - tell us where the libertarian touched you, and given you hate them, why you still want to pretend to be one?

Charlie writes:

RPLong,

In my example, the causation is exactly reversed from David's. The desire to increase government spending drove Europe to a more efficient form of taxation.

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