A Deadly Scheme

Henry Aaron and Isabel Sawhill, of the Brookings Institute, provide a wonderful example of the insanity of allowing individuals to plan large segments of the economy:

So here is what we propose: Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public healthcare spending through a newly created healthcare trust fund. The trust fund would pay for all federal healthcare spending. This framework would mean that Americans would get the healthcare they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending.
By balancing revenue and healthcare spending, such a reform would help solve America’s long-term fiscal problems. In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the healthcare cost curve, because measures to slow the growth of healthcare spending would avoid unpopular future tax increases that would otherwise be necessary.

How is it possible that people who are paid, essentially, to think can argue that a looming tax increase equivalent to one-sixth of the U.S. economy will encourage consumers to splurge while the splurging’s good without making the parallel assessment that the huge taxes will suppress the economy once implemented? One of the reasons given in a previous paragraph for rejigging the healthcare system in a public direction is that, with ever-improving “medical interventions… [p]atients will insist on having them.” Well, if the government must thus bend to supply what patients demand, why won’t consumers learn the lesson and start demanding the things for which Aaron and Sawhill assume they’ll splurge?
This program — which one may suspect will be the end result of the Democrats’ healthcare path — would be a recipe for the hollowing and destruction of the United States of America, beginning with its entrepreneurial soul.

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14 years ago

I always wondered what Henry Aaron was up to.

Warrington Faust
Warrington Faust
14 years ago

Without denying that this would probably more tax than the economy can stand, it has one bright spot.
It is a “flat tax” in the sense that everyone pays the same (dependant on purchases). As it inevitably rose, it would bring home to everyone the cost of our government.
It would also probably encourage those with income to spare to invest rather than spend.

14 years ago

I support a VAT generally, but this proposal is a little weird. Bruce Bartlett, also of Brookings, proposed essentially the same thing about a month ago, although his was worse. His would have taken effect about 10 months after it was announced, so even if there were any spending growth it wouldn’t translate into jobs, since every employer would know that they would have to fire most or all of those new workers within a year.
This is stranger since, if it didn’t have any effect on jobs, the tax might not appear at all. It’s hard to say what the effect would be. I can imagine that the first few months would see some spending increase (assuming that Permanent Income Hypothesis is true, and that never seems to be the case), but no employment increase. This would lead to short-term shortages and increased inflation. After a few months, once everyone sees that no one else is hiring, most firms start hiring thinking that they are safe from a sudden tax increase. Unemployment starts falling quickly, then either the tax takes effect or the firms panic and start layoffs.
I suppose my best guess is that the unemployment figures would move erratically due to coordination problems. If the tax disappears when unemployment goes back above the cutoff point, that would probably be defined as the new employment ceiling, and the economy would be a permanent mess. If the tax stays in place once it is triggered, we’d just be right back where we are now, and the economy would recover from that just as slowly as it has been so far, with the extra burden of the new tax.

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