{"id":486880,"date":"2010-03-29T12:49:40","date_gmt":"2010-03-29T16:49:40","guid":{"rendered":"tag:www.economist.com,21005683"},"modified":"2010-03-29T12:49:40","modified_gmt":"2010-03-29T16:49:40","slug":"a-messy-business","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/486880","title":{"rendered":"A messy business"},"content":{"rendered":"

AMERICA’S looming deficit challenge has put the idea of a value-added tax, a VAT, on the radar in Washington. Both of America’s neighbours have VAT (or VAT-like) taxes, and in Europe VATs at rates around 20% help fund social safety nets. The Economist<\/em> concluded<\/a> back in November that a 5% VAT could close about half of America’s 2014 budget deficit, which is a decent performance (see this<\/a> for a discussion of pros and cons).<\/p>\n

Experts generally praise the VAT because it’s relatively efficient and difficult to evade, but also because it’s simple\u2014nothing like the maze of deductions, credits, rules, and regulations that characterise America’s byzantine income tax system. But is this really the case? Pete Davis writes<\/a>:<\/p>\n

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Tax \treformers lambast the complexity of our income tax with good reason, \tbut somehow assume that the same people who legislated that \t complexity will legislate a clean VAT. Again, the U.K. \texperience is very instructive. Their VAT is notoriously \tcomplicated, and so would be ours.<\/span><\/p>\n<\/blockquote>\n

Mr Davis points out that a VAT would affect taxpayers and groups in an uneven fashion\u2014lower-income households, older manufacturing firms, and state governments would suffer more than others. These asymmetric effects would create pressure to carve out exemptions or credits, not unreasonably, but once the horse has left the barn, well, you can imagine how this will go. Particularly in a dysfunctional legislative system in which any senator can place a hold on a bill and prevent it from moving forward unless some constituency-oriented demand is met.<\/span><\/p>\n

The discussion is very similar to that for climate policy. Here<\/a> is Robert Stavins musing on the (possibly exaggerated) death of cap-and-trade:<\/span><\/p>\n

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[T]he most important factor<\/em> \u2014 by far \u2014 which led to the change from politically correct to politically anathema was the simple fact that cap-and-trade was the approach that was receiving the most serious consideration<\/em>, indeed the approach that had been passed by one of the houses of Congress.  This brought not only great scrutiny of the approach, but \u2014 more important \u2014 it meant that all of the hostility<\/em> to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour<\/em> \u2014 cap-and-trade.<\/p>\n

The same<\/em> fate would have befallen any front-running climate policy<\/em>.<\/p>\n

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right?  If there\u2019s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as \u201ccap-and-tax.\u201d<\/p>\n<\/blockquote>\n

Cap-and-trade became unpopular because it was being targeted by interests opposed to its enaction, and it became a target because its passage seemed feasible. But it was also an easier target because of the many complicating side-deals and special arrangements made to the regime, which were precisely the things allowing its passage to become feasible. A growing chorus of cap-and-trade critics railed against the allowances granted to industry groups and argued in favour of a “simple” carbon tax. But of course any carbon tax would face opposition from affected interest groups until their demands were met, in the form of side-deals and special arrangements. A passable carbon tax would be an extremely complicated carbon tax.<\/p>\n

And similar arguments have been made about alternate health care reform proposals, like Wyden-Bennett<\/a>. But of course, you don’t get actual reform that is clean and simple. To pass it, you have to buy off the industry groups and labour unions and so on.<\/p>\n

What does all of this suggest? Well, one point to take away is that it may often be a good idea to delegate reform responsibilities above or below the level of the sovereign state, in order to circumvent the authority of vested interests. But another point is this: contra Greg Mankiw<\/a>, the wonk who advocates for a policy based on an idealised and theoretical assessment of its merits relative to alternatives may be doing the world a disservice. Instead, more time should be spent thinking about how politics is likely to warp a policy and building a relatively resilient package of reforms.<\/p>\n

For instance, as Mr Stavins has pointed out<\/a> before, a properly designed cap-and-trade system will limit carbon emissions efficiently regardless of how carbon allowances are allocated. A carbon tax will not. Mr Mankiw derides cap-and-trade as a carbon tax plus corporate welfare, but he seems to miss that its properties make cap-and-trade more passable, and more effective despite the inevitable Congressional tinkering and weakening.<\/p>\n

It’s worth thinking about this in light of the ongoing debate on financial reform. Economists have debated, at length, which policies are most likely to reduce the problem of too-big-to-fail and which will do most to boost the resiliency of the system. But they should ask two things of every policy they consider: how will industry lobbying influence the structure of the bill, and how will industry lobbying influence the enforcement of the law. You can see these questions getting an increased<\/a> level<\/a> of attention among pundits, but it would be helpful to develop a more rigorous approach to them\u2014to model and test the resiliency of policy solutions. After all, it’s not like the political process is going to be going away any time soon.<\/p>\n","protected":false},"excerpt":{"rendered":"

AMERICA’S looming deficit challenge has put the idea of a value-added tax, a VAT, on the radar in Washington. Both of America’s neighbours have VAT (or VAT-like) taxes, and in Europe VATs at rates around 20% help fund social safety nets. The Economist concluded back in November that a 5% VAT could close about half […]<\/p>\n","protected":false},"author":4534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-486880","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/486880","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=486880"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/486880\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=486880"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=486880"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=486880"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}