classical economics
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Federal Econ Train Wreck

Nearing IMF’s Grasp; Loving a VAT
By Wayne Jett © January 26, 2010
    The Train Wreck Conference on the federal fiscal crisis is now online. Viewing the slides, if not listening to oral remarks, of the morning panels will inform you the academic presenters are convinced beyond doubt the U. S. Treasury will default on its debt. The remaining question is whether default will occur mid-term (within ten years) or near-term (any day now), which depends upon whether policy execution provokes a run on the dollar.
Spending Beats Revenues by KO
    Alan Auerbach, of University of California at Berkeley, says (first speaker) inflationary monetary policy can wipe out only about $5 trillion of $53 trillion in federal debt incurred by 2085, so inflation is no solution. Elizabeth Garrett (second panel) says U. S. default will happen, perhaps sooner than later, and the U. S. will have to seek financial assistance from the International Monetary Fund. Since the IMF always imposes a Value Added Tax upon every debtor government, Garrett advises academic and political leaders to get busy educating Americans on the need for a VAT.
    These views appear to be academic consensus, but also more than that. Garrett was President Obama’s nominee for assistant secretary (tax policy) of the Treasury in March, 2009, until she withdrew her name two months later. She is likely in sync with Treasury thinking. At least she was until last Tuesday’s election of Scott (“Downtown”) Brown as the new U. S. senator for Massachusetts. With Obama still pushing for a “bipartisan commission to tackle the budget deficit,” you may be sure a VAT is central to his purpose in seeking the commission. The objective is to raise a significantly larger percentage of GDP as tax revenues than the 20.5% when George W. Bush left the presidency. Even with the top income tax rate at 91%, revenues fall short of their aspirations.
No Fair Look at Fair Tax Act
    During Q&A after the second panel (at 3 hrs, 12 mins), I commented that the income tax attacks earned income and the VAT attacks production. Production and earned income are middle class paths to prosperity. Had the panel considered a broad-based consumption tax to replace the income tax, payroll taxes and estate & gift taxes, as the Fair Tax Act (HR 25) would do? My analysis concludes the Fair Tax would collect the same total revenues as the repealed taxes while saving existing federal taxpayers at least $1 trillion annually.
    Professor Garrett responded by stating the 2005 report issued by the tax reform commission (on which she was a commissioner) appointed by President Bush reported on the Fair Tax and found that my conclusions are incorrect. I replied that the 2005 report, in fact, did not consider the Fair Tax, but described a sales tax of its own design which replaced only the income tax. This was, indeed, the case. 
    The 2005 report, in chapter nine, referred to a national sales tax to replace only the income tax – not payroll taxes or estate & gift taxes. The tax base is described as “broad-based” but is otherwise unspecified. No “prebate” makes its effective rates more progressive than the present tax system as under the Fair Tax. The report found its own defective sales tax design would not raise enough revenue and would not be fair to the poor. Being fair to the poor, it said, would require a new “entitlement” program which would be too costly. Instead, the panel recommended – guess what – a VAT. See chapter eight.
     This was and is sophistry. The 2005 commission heard more public support for the Fair Tax Act than for any other design of tax reform, but chose to inflict a hatchet job on the best tax reform design in U. S. history. Every such national commission is assuredly agent for the dominant elite whose vast capital pools control federal policy. The Fair Tax Act would tax the elite’s consumption spending at the upper end of its effective rates, and they much prefer the present tax system’s targeting of middle and lower classes.
Running into Bankers’ Arms
    International bankers learned their lesson from the Great Depression better than Ben Bernanke did. They learned the U. S. got out of depression because they failed to run up public debt high enough to keep future generations impoverished, and they are not making that mistake again this time. The primary purpose of the bailouts, the stimulus spending, the new entitlements is to create debt, thereby placing more leverage in the hands of international bankers – those William Gladstone called the Money Power. Secondary is the graft sucked out of public funds by their functionaries and servants. Economic recovery – job creation – is no part of their motivation. To the contrary.
    Salvation of the middle class, if it is to come, requires legislators and regulators with courage and wisdom to demand facts and accountability for the monumental financial crimes committed by the Money Power during the past ten years. Scott Brown and the middle class of Massachusetts showed that the unimaginable can be accomplished – even in the den of the dominant elite. Many more victories, investigative and judicial as well as electoral, will be necessary if this is to turn out well. ~