It's true that Larry Kudlow has never seen a tax cut he didn't like, but I know that's not true of Jack Kemp. When I worked for him, he would berate me if I ever said we were trying to cut "taxes." He patiently explained that there were any number of ways of doing that, some good, some bad. Our interest was in cutting marginal tax rates. So he insisted that I always use the term "tax rates" and never just say "taxes."
In my view, the tax debate we should be having is how to raise a fairly substantial amount of revenue over the next few years--on the order of several percentage points of GDP--in such a way that we pay for the spending that is in the pipeline without killing the goose that lays the golden eggs. Without such a debate, there is a great danger, when the crunch comes, that Congress will raise taxes in ways that will be very harmful to growth--soaking the rich and things of that sort.
I know there are people on the Democratic side who understand this. They know that those on the left in Europe figured out in the 1960s that the price of a welfare state is a broad-based tax on consumption. Those on the left in this country haven't figured this out yet so they will probably make a lot of mistakes when they move to raise taxes. If the left tries to do something really stupid like jacking up the capital gains rate, the economy will tank.
Conservatives will capitalize on this to get back in power, but they will quickly discover that there is no public support for the magnitude of spending cuts in entitlement programs, especially Medicare, that would be necessary to allow for the tax increases to be reversed. At this point, I think they will finally come to appreciate the wisdom of a VAT and implement it as a tax reform so that income tax rates and taxes on capital can be cut.
To put the issue more succinctly, let me quote Larry Summers, who once said something to this effect. We don't have a VAT because liberals think it is regressive--it takes more in percentage terms from the incomes of the poor--and conservatives think it is a money machine. We will have a VAT, Summers went on, when liberals figure out that it is a money machine and conservatives realize that it is regressive.
Wiser words were never spoken on this topic.
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