Mitch Daniels and That Pesky VAT

In a previous entry in support of Mitch Daniels, there was considerable blow back and one critcism was his alleged support of a value added tax (VAT).  The single mention of the VAT as concerns Daniels is in a speech he gave at the Hudson Institute in October, 2010 while receiving the Herman Kahn Award.  Herman Kahn, for those unaware, was a founder of the Hudson Institute after leaving the RAND Institute, both of which are conservative think tanks.  Kahn had written a book called The Coming Boomin which he noted that a tax on oil imports would be a great incentive to decrease American reliance on oil imports, especially from dubious allies.  Kahn also endorsed a VAT coupled with a flat income tax.  The purpose of the VAT was to decrease American consumption and encourage savings and investment.  For example, there would be no need for a capital gains tax, thus greater investment.  This is a central tenet of conservative, Republican economic policy.  To understand the criticisms of Daniels, one has to read the entire and actual transcript of his speech that night to put his alleged support of a VAT into its proper perspective.

It is one thing to stand before a conservative think tank audience and advocate a VAT and tax on imported oil and quite another thing to stand before that same audience and discuss a VAT while quoting a Herman Kahn book.  A sober reading of  that transcript of that speech did not lead me to believe Daniels was advocating VAT or calling for one.  His comments later, when pressed on the issue, indicated that he was backing off an open endorsement of VAT, but leaving the possibility open under some hypothetical set of “right conditions.”  One can surmise that a flat tax would be part and parcel of those “right conditions.”  in other words, VAT in and of itself, was never endorsed by Daniels.  The Indiana Governor does, on occasion, have the habit of sticking his foot in his political mouth when it comes to these things.  Perhaps this stems from his “everything on the table” approach to solving problems.  While this may very well alienate some of the staunchest conservatives out there, his approach is politically more realistic and pragmatic.  Daniels does not live and govern in the political vacuum that people like Grover Norquist, Rush Limbaugh abnd Glenn Beck enjoy.  Furthermore, it is POLITICO which “broke” this story yet in the same article described Daniels as “more theoretical than an average politician.”  The key word here is “theoretical.”

Whatever the actual mechanisms- the tax on imported oil or VAT- it is one thing to speculate about these things while giving a speech to a conservative think tank and quite another to actually govern as if VAT or a tax on imported oil is an inevitability.  Incidentally, a tax on imported oil would absolutely increase prices and thus decrease demand and thus decrease reliance on imported oil.  That is not to say I am advocating one however.  To the best of my knowledge, other than him quoting about VAT from a book, Daniels has never publicly called for VAT or a tax on imported oil.

Likewise, Daniels has not governed as if he supports a VAT.  While Governor of Indiana, he has increased taxes on cigarettes to cover the cost of his market-based health insurance reform- a far cry from Obamacare or even Romneycare in Massachusetts.  And some have mentioned that he has raised or attempted to raise taxes on those making over $100,000.  Despite this, unlike New jersey, Daniels has actually attracted businesses to Indiana than he has driven out of the state.  And the overall business climate, from the best I can discern, is better today than it was before he took office.  I confess to not knowing the tax rates on those in Indiana making more than $100,000.  However, according to the February 2011 report of the Federation of Tax Administrators, Indiana has a flat tax of 3.4% with a single tax bracket.  Only Pennsylvania at 3.07% has a lower tax rate.  However, Indiana’s rates are lower than the top rate of any state with more than one tax bracket (that is, a progressive tax system).

Getting back to VAT, it is interesting to note that not too long ago, it was a centerpiece of conservative economic thinking.  Norman True, a godfather of supply side economics, along with Murray Weidenbaum, chairman of Reagan’s Council of Economic Advisors, were huge supporters of VAT.  Amidst the uproar over the Daniels comments among the alleged Republican/conservative economic intelligentsia, no less a figure in the Reagan Administration than Arthur Laffer, in a speech to the Show Me Institute in St. Louis one week after the speech at the Hudson Institute, was encouraging Missouri to abandon their income tax and adopt VAT.  Paul Ryan’s “Roadmap for America” actually endorses and calls for a business consumption tax- a type of VAT, yet Ryan today is considered an icon among conservatives when it comes to tax and entitlement reform.  In short, even if it was the case, Daniels was not the first noted Republican or first conservative to float the idea of VAT.  True, Weidenbaum and Laffer were very much important players in the formation of Reagan’s economic policies.  One cannot call themselves a “Reagan conservative” while ignoring these facts.  You cannot have selective amnesia regarding Reagan officials and their support of VAT while railing against a possible Republican candidate making reference to it in a speech as part of n academic musing to illustrate the forward thinking of the institute’s founder.  Put another way, if this is the best a Daniels detractor can do, then they fail miserably at worst and are exposed as hypocritical at best.

Of course, most of these detractors are most likely acolytes of people like Grover Norquist who become apoplectic when the word “tax” is even mentioned.  To them, tax reform is no taxes.  Once again, those living in this no-tax utopia are very much detached from reality.  Ironically, they are showing an ignorance of the facts since the notion of VAT or a flat tax drives liberals and Democrats absolutely nutty because of its progressive nature.  In fact, the flat tax derives from VAT which is why liberals oppose it.  incidentally, and this is no endorsement of VAT on my part, but it would have advantages in international trade.  As Bruce Bartlett explains in Forbes: “Also, it means that taxes can be rebated at the border on exports.  That is, exporters get credit for all the taxes embedded in the goods they sell but do not have to collect taxes on sales themselves.  Similarly, VAT is assessed on the full value of imports.  World trade law prohibits taxes from being rebated at the border unless the precise amount of tax embedded in a good is known.  Since there is no certainty on who bears the burden of corporate tax, it may not be rebated.  Replacing the corporate tax with a VAT would unquestionably improve the competitiveness of all US exports.”  This sounds more logical and sane than the Donald Trump solution of sitting the leaders of OPEC and China down and telling them how it was going to be.

Between Reagan and now, VAT has become a dirty word in the conservative and Republican lexicon for one reason- Europe.  Most European countries have a VAT and most of those countries are rightfully associated with economic stagnation.  It is also worth noting that these countries instituted VAT during a period of particularly high inflation.  Regardless of the causes of its European failure, the damage is done and today, VAT is considered “too European.”

Getting back to the subject at hand, whether Mitch Daniels or the deity himself proposed VAT today, the political reality is that it will never happen.  Democrats and liberals would never abandon progressive taxation for a flat tax and the only way VAT could even be seriously considered is in conjunction with a flat tax.  Hence, the entire notion and resulting hullabaloo about Daniels is a moot point.  At best, it is left to the academic musings of would-be candidates in speeches at conservative think tank dinners.  At worst, it is a vehicle to illustrate the ignorance and hypocrisy of that speech giver’s detractors.