| Economics

Orrin Hatch on higher taxes and the VAT

by Michael Bindner

In Politico last Friday, Senator Orrin Hatch (or some of his aides) wrote about the prospects of tax increases, including expiration of the Bush tax cuts and the enactment of a Value Added Tax (VAT). I, and I think the President, agree with the Senator that the 10% tax bracket and the $1000 child tax credit should be permanent (I actually believe the child credit should be increased by a multiple of six). Where Obama and I part with Hatch and the GOP is in their belief that raising tax cuts on the wealthy will hurt small business. They won't.

Unincorporated small businesses pay income tax on what the owners pay themselves through either salary or profit. When business owners pay other people, those people pay their own income taxes - although the business owner does collect the funds and mails them to the IRS to pay their tax liability. This is why raising taxes are not a job killer - just the opposite. If a business owner wants to minimize tax liability, they can hire someone to help with the work, presumably at a lower tax bracket than they themselves pay. Under that scenario, higher tax rates would actually encourage more employment, at least if you assume that taxation has anything to do with the decision to hire more people - rather than the standard reason - which is the amount of work to be done in order to meet customer demand. Indeed, if customer demand is key, taxing the rich, who are more likely to save than spend, would be best for small businesses because in the aggregate it increases consumption. Taxing speculation also would increase demand, since it takes away the incentive to invest in land and stock bubbles - neither of which expand the economy (stocks are a secondary market - firms rarely use stock sales to finance expansion).

Regarding the VAT, Hatch attacks it because the debate on establishing it creates uncertainty and that it would lead to European style social spending. I would counter that ever increasing deficits are producing much more economic uncertainty. One need only look to Greece and to last week's market hiccup to see this (although to be fair, much of the problem last week was a typo and the way automated trading systems reacted to it). I am also not sure what kind of additional social spending the Senator is referring to. We have already passed health insurance reform and his own party enacted a Medicare Drug Benefit with protections against price bargaining for big PhARMA. Is there anything left to do (aside from paying for these reforms)?

I guess the one thing we could do is pass gauranteed income provisions, however the Senator talked about preserving the $1000 child tax credit, which is a form of income gaurantee. We could use tax reform to increase the credit - but this would help growth, consumption and small business overall, not hurt it.

Ironically, the Senator calls for tax simplification, "to make it easier, more competitive on a global basis and friendlier to economic growth." Someone needs to tell the Senator and his staff that this is exactly what a VAT would do if it is used to replace income taxation at the lower rates and provide a simpler vehicle, such as an expanded VAT prebate paid with wages, to distribute tax credits to families.