Yang’s plan for a VAT “takes us right away to European levels of government spending,” David R. Henderson, an economics professor at the Naval Postgraduate School and a research fellow at the conservative Hoover Institution, told the NewsHour. “A VAT to fund UBI (universal basic income) then gets rid of our degrees of freedom to deal with the deficit.”
This is from Dan Cooney, “How would Andrew Yang give Americans $1,000 per month? With this tax,” PBS Newshour, September 9, 2019. I said a lot of things in my 15-minute phone interview that Dan could have used. But, and this is rare in my experience with media people, I think he used the most important thing I said. I would definitely talk to him again. Nice going, Dan.
One little correction: I’m an Emeritus Professor. I think he went with the bio he found on the Wall Street Journal piece I wrote in 2016 that led him to me.
READER COMMENTS
Scott Provost
Sep 9 2019 at 9:31pm
If I take some % of money out of 200 million buckets and then evenly distribute all that same money into those same buckets. It is revenue neutral. Nothing lost. Life is just a little bit more fair. Andrew Yang will win by understanding the problem and providing a fix. No blame just fix.
Phil
Sep 10 2019 at 2:25pm
Scott – Yes, something is lost. First, such a massive redistribution is not free. There is a significant transaction cost associated with this. For every $1.00 confiscated, only about $0.85 will be redistributed, so there is a net loss of 15%. Second, the distribution is not X% from 200 million buckets into the same buckets. It is more like X% from 100 million buckets to a different 100 million buckets. What is lost is that 100 million people had their property confiscated and forcibly given to someone else. What’s proper about that? Why should person A benefit from the efforts of person B without person B’s permission?
nobody.really
Sep 10 2019 at 4:12pm
Citation? For example, Social Security reports that they consume 0.7% of FICA tax revenues in administrative costs. And since the UBI would be larger, I’d expect economies of scale to push the share of overhead costs down further. What basis is there to think it would balloon to 15%?
Perhaps you mean that higher taxes will generate deadweight loss—that is, deterring voluntary transactions that would otherwise have occurred. Fair enough. But classical deadweight loss analysis presumes that the resources collected are just flushed down a toilet (a/k/a “considered exogenous to the model”)—a rather glaring shortcoming to the analysis. If, instead, you assume that the money is transferred to others and spent—that is, generating voluntary transactions that would not have occurred but for the transfers—then you offset the deadweight loss with “deadweight gain.”
I know of no theoretical reason to expect that the loss should exceed the gain, or vice versa. If anyone knows otherwise, please advise.
People were drafted into the armed forces to fight fascism during WWII. We all benefited as a result. But that’s just the tip of the iceberg. We are all the beneficiaries of a vast wealth of benefits accruing from people’s prior efforts.
Admittedly, it would be a great injustice if wealth transfers deprived you of the benefit that you had relied upon to your detriment when making the investment-backed decision to be born. But until you can demonstrate such detrimental reliance, I’m not crying any big tears here.
Ricardo
Sep 10 2019 at 5:42pm
“People were drafted into the armed forces to fight fascism during WWII. We all benefited as a result.”
So… therefore, if we take $1000 from Joe, and give $1 to a thousand other people, and we do it all with magical zero transaction costs, it’s just like fighting the Nazis? Because maybe Joe was actually going to spend that $1000 implementing the Final Solution? Do I follow your logic correctly?
nobody.really
Sep 10 2019 at 6:09pm
Uh … no.
Phil suggests that there’s something unusual about one person benefiting from another person’s efforts without that person’s permission. This reflects a libertarian mindset, imagining that we live in hermetically sealed bubbles of autonomy.
But in fact, we live in a world awash with externalities. Fortunately, they are mostly positive externalities.
People are free to like or dislike any specific example of intrusion on our autonomy. But we shouldn’t imagine that these intrusions are somehow rare. They’re omnipresent–and, as I say, mostly beneficial. The libertarian model has analytical uses, but we should not confuse it with an especially accurate model of the world. That’s all.
Mike Hammock
Sep 11 2019 at 8:49am
The issue is not so much administrative cost (though that does matter) but the Deadweight Loss of taxation. Every student of Econ 101 ought to be familiar with it.
nobody.really
Sep 11 2019 at 9:36am
Indeed, every student of econ should be acquainted with the deadweight loss of taxation. Which is why I address that point expressly, and point out that the loss is offset (partially? entirely?) by a “deadweight gain.”
David Henderson
Sep 11 2019 at 1:58pm
Thanks, Mike, for clearing this up. I got busy yesterday on a deadline. Oh, and nobody.really, that particular proposal does not lead to a “deadweight gain.”
Finally, although the transactions costs of collections are well below the 15% that Phil hypothesized above, deadweight loss from pretty much any tax, given the level of taxation we’re at, tends to be well above 15%.
nobody.really
Sep 11 2019 at 4:03pm
Could you elaborate?
As far as I can tell, the “deadweight cost” models give no weight to the stimulative effects of spending/transfer payments whatsoever. The model does not distinguish between the consequences of gathering food to distribute to starving people and gathering food to burn in a giant bonfire. This strikes me as patently absurd.
Yes, we acknowledge that a tax would shift the supply curve. But why would we not ALSO acknowledge that the transfer payments would shift the demand curve due to wealth effects? To treat one aspect of the transaction as endogenous, while treating the other part as exogenous, seems like a dead-bang way to produce a biased result.
Admittedly, I’d expect the results to be sector-specific. Demand for things the affluent spend money on (perhaps including investment?) might decline, while demand for things poorer people spend money on might increase. But (1) if poor people have a higher propensity to consume, and (2) if lack of demand rather than like of capital is the chief impediment to business formation and financing, then I’d expect a UBI to both increase prices AND increase spending–so the net effect on output would be indeterminate.
If you disagree, please advise.
Mike Hammock
Sep 12 2019 at 5:11pm
Sorry, for some reason I could not see anything about deadweight losses in your post when I replied. I don’t think this site has any kind of editing feature, so I can’t explain what happened.
The alternative uses of resources is built into the model; it’s in the supply curve. There’s no need to hypothesize a “deadweight gain”.
nobody.really
Sep 12 2019 at 6:38pm
How is it reflected in the supply curve? Sorry to belabor this point, but it comes up frequently.
Let’s imagine two scenarios. In Scenario 1, government taxes people and transfers the funds to the poorer half of the population (for the sake of simplicity), enabling them to consume more than in the past. The richer half become correspondingly poorer–but since they had a lower marginal propensity to consume, the aggregate effect of the transfer is stimulative.
In Scenario 2, government taxes people, buys a bunch of resources, and burns it in a big bonfire, producing no value for anyone. Everyone is rendered poorer.
Would these two scenarios produce different results? If so, how would these differences be reflected in the graph? And why wouldn’t the changes (altering people’s wealth and consumption) be reflected in DEMAND curve?
Now let me offer my answer to these questions: The use of tax revenues play no role in the graph. The graph reflects nothing more than the magnitude of the tax and slope of the supply and demand curves.
Indeed, it’s not obvious how the graph COULD take account of the use of the tax revenues–because the economic consequences of those uses could vary greatly as illustrated by the differences between Scenario 1 and Scenario 2. To imagine that the graph did reflect the economic consequences of government spending, you’d have to assume that those consequences were uniform, regardless of what the government spent the money on. And that’s clearly false.
Bottom line: The deadweight loss graph is perfectly useful as a pedagogical exercise. But it’s perfectly biases as a policy analysis, because it recognizes the costs of taxation (which really occur) but never any benefits from things financed with those taxes (which also occur). If we wanted to use the deadweight cost graph as policy analysis, we’d need to somehow fill in those benefits–benefits I call “deadweight gains.” But whereas the graph provides simple, systemic way to model the costs, I know of no comparable adjustment to model the gains.
Rather, those gains are treated as exogenous to the model. Again, there’s no harm in that, provided you use the model solely as a pedagogical exercise. There’s obvious harm if you use the model as policy analysis.
Mike Hammock
Sep 12 2019 at 9:00pm
The standard model is neutral with regard to the use of tax revenue. It assumes that taxes are spent in a way that is no more or less valuable than the way they would have been spent without the tax.
One might argue that this is a pessimistic conclusion, and that government knows better how to spend that revenue. I think it is also pretty easy to imagine the government spends the money more poorly than people would if there had been no tax. It is an open question, and so the model is neutral with regards to uses of tax revenue.
I can’t tell if you’re clear on this or not, but for the sake of other readers: The deadweight loss comes not from the tax revenue, which is merely a transfer from one party to another. The deadweight loss is the lost consumer and producer surplus that results from a reduction in the quantity bought and sold. That is, some people were going to benefit from buying the good, and others were going to benefit from selling it, but the tax drives a wedge between them, preventing some sales. Their losses–lost income, lost enjoyment–are the deadweight loss.
In the Wikipedia link you provided, the graphs pretty clearly show this: The deadweight loss is a triangle, and the tax revenue is a rectangle. They’re two different things.
Seth Delbridge
Sep 10 2019 at 2:40pm
The goal of Yang’s UBI plan is to accomplish it without increasing the deficit. That is the point of the VAT: to have a more efficient tax collection system that our largest companies can’t wiggle out of. So no, it doesn’t guarantee we’ll have “less degrees of freedom” for tackling the deficit.
john hare
Sep 10 2019 at 6:35pm
Taxes they can’t wiggle out of equals higher cost of doing business equals higher prices to the consumer.
nobody.really
Sep 10 2019 at 9:21pm
Yup. And a Universal Basic Income means more spending power for the consumer–at least, for the bottom 66(?) percent of consumers. In short, this should shift spending power down the income ladder.
David Henderson
Sep 11 2019 at 2:04pm
You wrote:
So no, it doesn’t guarantee we’ll have “less [sic] degrees of freedom” for tackling the deficit.
On the contrary, it does guarantee fewer degrees of freedom for tackling the deficit. Even if the proposed VAT did fund the whole of the increase in government spending (and my piece on UBI for Hoover shows that the VAT would have to be at least 19.5 percent and not Yang’s 10 percent), that’s a VAT that can’t be used to fund the deficit.
Whatever my personal preferences (I want the deficit to be reduced entirely by spending cuts), the odds that I’ll get my way are close to zero. So any “grand bargain” to reduce the deficit will consist of cuts in the growth of spending and increases in tax rates (hopefully way more of the former.) So if you already have a high VAT, then you can’t reduce the deficit by implementing a low VAT.
Thaomas
Sep 13 2019 at 6:30am
When you do discuss taxation, I hope you will compare VAT to a progressive consumption tax.
nobody.really
Sep 13 2019 at 5:09pm
A progressive consumption tax such as David Bradford’s X Tax.
nobody.really
Sep 13 2019 at 5:13pm
Milton Friedman famously said “We’re all Keynesians now.”
But wouldn’t we rather say, “We’re all X Men now”?
Joseph E Munson
Sep 17 2019 at 7:41pm
As far as I know every candidates’ plan’s is based on lies ( which is to say,their platform is either super general or doesn’t really add up), and
What I like about Yang, and why I’ll probably vote for him (except not really, cause I don’t vote in national elections) is because I suspect his UBI will turn into something more mild. Basically more income transfers to poorer people.
Wishful thinking perhaps, but one must be wishful to support *anyone*. I mean they all act nuts and have nutty rhetoric, and must continue to act nuts to have a chance of winning and changing anything, due to the ignorant state of the electorate.
Sharon Byron
Sep 22 2019 at 2:44am
Can someone explain Yang’s claim that under a VAT a large portion would come from companies like Amazon. The way I understand a VAT to work is that it is ultimately the final purchaser/consumer of an item or service who pays the VAT with each previous level of production and purchase being credited for any tax they incurred. Thus I only see companies like Amazon incurring tax on their own final purchases ie pens, computers, desks. I don’t see how Amazon will have to fork over a portion of the revenue they receive “from each transaction” as Yang puts it. I see this happening with the digital services tax that France recently imposed but most certainly not with a VAT.
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