Mitch Daniels’s Baffling VAT Remarks

by Ramesh Ponnuru

A few folks here have discussed Gov. Daniels’s remarks about a VAT last week. To review, here’s what Politico reports:

Daniels recited from [Herman] Kahn’s book: “It would be most useful to redesign the tax system to discourage consumption and encourage savings and investment. One obvious possibility is a value added tax and flat income tax, with the only exception being a lower standard deduction.”

“That might suit our current situation pretty well,” said Daniels, who served as George W. Bush’s Office of Management and Budget director and was a senior adviser in Ronald Reagan’s White House. “It also might fit Bill Simon’s line in the late ‘70s that the nation should have a tax system that looks like someone designed it on purpose.”

I haven’t read Kahn’s book, but I’m left a little puzzled about why one would want both a flat income tax and a VAT. It seems redundant, since the VAT includes a flat tax on personal consumption. (Most proposals for a flat “income” tax are also taxes on personal consumption, since they exempt savings.)

Perhaps what Daniels has in mind is a modified VAT. Under a modified plan, businesses could deduct the cost of wages when calculating the tax they owe, and then employees could pay a separate tax on their income. (Tax-reform aficionados will recognize this idea as the “Bradford X tax.”) This modified version of the VAT would not be open to the objection conservatives usually lodge at the VAT: that it hides taxes on workers and thus becomes a money machine for the government. It would also have other advantages over a VAT, as I discussed in an article for NR a few months ago.

But it’s really not possible to evaluate Daniels’s comments without knowing more about what he has in mind.