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Economic Reality Check
Critiquing three popular claims about housing, spending, and taxes.


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Graetz has designed his plan to be “distributionally neutral,” which means it would not make the tax system more or less progressive, despite shifting a good chunk of the burden from income to consumption. That is worth repeating: Washington could cut and simplify income-tax rates, dramatically reduce the corporate rate, implement a VAT, and establish a more growth-friendly tax code, all without sacrificing progressivity.

If you don’t like Graetz’s debit-card idea, there are other ways to offset a VAT. Tax Policy Center economists William Gale and Benjamin Harris note that tax credits or rebates are a better tool than complicated product exemptions. In addition, U.S. lawmakers could — and should — scrap or limit most of the tax preferences that disproportionately benefit the wealthy and use some of the revenue to expand the EITC and the child tax credit, both of which have reduced poverty and improved social mobility. (According to GOP senator Tom Coburn, millionaires claim an average of $28.5 billion in federal tax breaks each year.) As Brookings Institution scholars Ron Haskins and Isabel Sawhill wrote in their 2009 book, Creating an Opportunity Society, the EITC and the child credit “are the backbone of the nation’s work support system because they constitute a work incentive for most families and provide a major boost to the income of low-income workers.”

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While many liberals feel that the U.S. tax system is already too regressive, especially given the country’s relatively high level of income inequality, a 2008 OECD study controlled for income inequality and found that household taxes were still more progressive in America than in Australia, Canada, Japan, New Zealand, South Korea, or any major Western European country, with the exception of Ireland. Yes, the top federal tax rate on individual income is much lower today (35 percent) than it was when Ronald Reagan first took office (70 percent). But according to a new CBO report, the individual income tax became either “slightly” or “notably” more progressive between 1979 and 2007, depending on how we measure progressivity.

Of course, concerns with the VAT go well beyond its potential impact on the poor and the middle class. Many conservatives fear it would be a “hidden tax” that would inevitably pump up the size of government. Yet University of Chicago economist Casey Mulligan reminds us that “government spending is no lower in countries with more visible taxes.” For that matter, an American VAT could be made fully transparent, like the Canadian VAT. Speaking of our northern neighbor, the Canadian federal government taxes and spends relatively less today (as a share of GDP) than it did when the VAT took effect in 1991, and the VAT rate has fallen from 7 percent to 5 percent.

Canada ranks ahead of America in the 2011 Index of Economic Freedom (compiled by the Wall Street Journal and the Heritage Foundation), as do Denmark, Ireland, Switzerland, New Zealand, Australia, Singapore, and Hong Kong. Apart from the famously market-oriented Chinese territory, all of those places have a national VAT. Switzerland and Singapore also occupy the top two spots in the World Economic Forum’s 2011–12 Global Competitiveness Index. America places fifth, behind Sweden, where the standard VAT rate is 25 percent, and Finland, where it is 23 percent.



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