Friday, January 6, 2023

Strassel insight, and cheers for a long speaker tussle

I'm a policy wonk, but I care very little about politics, who is up and who is down. The house speaker voting coverage has been largely the latter, with no more than the usual tropes about "normal Republicans" vs. "Radicals" suffused with Trump-loving election-denying fervor.  

The WSJ's Kim Strassel, whose fact-filled columns are always a delight, explains that there actually are important issues at stake here: 

Committees barely function. Members have no ability to debate or amend. Leaders disappear into back rooms to cook up mammoth bills that are dropped on the floor for last-minute take-it-or-leave it votes. Add Mrs. Pelosi’s Covid “proxy” voting rules, and most of the House didn’t even bother to clock in.

Under the proposed new rules package, committees are back in charge of legislation, with rules designed to ensure that bills address single subjects—rather than catch-all legislation. It similarly gives members new power to challenge amendments that aren’t related to the topic at hand. And it revives “Calendar Wednesday,” whereby any committee chairman can bring a bill straight to the floor.

It includes new provisions for accountability and transparency. Proxy voting is history, as are virtual committee meetings. It requires a 72-hour rule to give members time to read legislation. It ends Democrats’ wild experiment with staffer unionization, which threatened to tie the chamber up with crazy demands. 

And it makes it much harder for the House to tax and spend. It imposes a “cut go” rule—requiring any mandatory spending increases be offset with equal or greater mandatory spending cuts. A three-fifths supermajority vote will be required for tax increases. It revives what’s known as the “Holman rule,” allowing appropriations bills effectively to defund the salaries of specific executive-branch officials or specific programs. It also requires each committee to submit an oversight plan that lays out what action it intends to take on unauthorized or duplicative programs.

These changes will produce the first functioning House in years, even as they tie the hands of spenders.

This all sounds pretty good to me. Strassel goes on 

Take the win! Instead, the rebels continue to hold out for provisions that have the potential to negate this victory by plunging the House back into chaos. At the top of the list is the continued demand to allow any Republican member to call for a motion to “vacate the chair”—essentially a snap vote to oust the speaker.

 Eliza Collins also reports intriguingly:

The night before the first speaker vote, Reps. Lauren Boebert of Colorado, Scott Perry of Pennsylvania and Matt Gaetz of Florida went to Mr. McCarthy with a list of requests, which they said could get him to 218 votes if he committed to all.

That package included demands that Mr. McCarthy promise to hold a vote on a proposal to secure the border put forward by Texas Republicans, a vote to place congressional term limits, and a tax bill that would replace income, payroll and other taxes with a consumption tax. The group also asked for any "earmark," or funding projects specific to a members' district that get tacked onto legislation, to be approved with a two-thirds vote and that anytime an amendment to cut spending is proposed it be brought to the floor.

 "a tax bill that would replace income, payroll and other taxes with a consumption tax" is just the sort of thing that MSM portray as lunatic radical rightwingism. And is music to my ears. Real legislators in real Washington DC are really thinking about trashing our insane income tax and replacing it with something simple and much less distortionary.  Just a whiff of Trump's tax returns ought to convince you just how rotten our system is. 

(I've written about this many times before. Before you go nuts about inequality, a consumption tax can be as progressive as you like, and can fund all the transfers you like. We should split the tax code into a revenue raising code based on a consumption tax, a subsidy code with on-budget expenditures in place of hidden tax deductions, and a transfer code with on-budget checks written to whomever our democracy deems worthy.) 

I'm not in favor of term limits and probably not a fan of the Texas Republican's approach to immigration. But 9/10 is pretty good. And the point, serious political reform and policy discussion is going on here. 

There is a lot of handwringing about "dysfunction" but I'm not so sure. Parliamentary democracies -- Israel, most recently! -- go through long periods of negotiating to form a government. That's what's going on here. This is a moment where serious big changes are being discussed. Congress is dysfunctional. Going back to something like regular order, and contemplating the big policy changes that have been stymied for decades is important.  Once a speaker is in, we're likely on autopilot for two years as far as these big questions are concerned. Let the wrangling go on! 

And kudos to these two for actually listening and reporting on what is going on, rather than passing on the usual tropes. 


Update: The comments have gone off on a tangent involving consumption taxes. See here for how to structure a progressive VAT. Applying lower tax rates for tacos than for Lamborghinis is a terrible way to make consumption tax more progressive. The proposal shows how to do it with the same tax rate on every good, by exempting the first x thousand of consumption from the tax. 

Better, we can also stop trying to do two things with one tool. Have a flat VAT, and use the money to send checks to whomever you want to send checks too. Each separate instrument need not be progressive, what counts is the progressively of the whole tax and transfer system. 


  1. Federal government receipts as a fraction of nominal GDP ranges around 16.5%. Personal consumption expenditures as a fraction of nominal GDP ranges around 67%. To replace all federal receipts by a ad valorum transaction tax and raise the same quantity of nominal dollars would require a VAT of around 24% with no zero-tax rated commodity exceptions.

    A practical VAT regime would have the VAT rate closer to 30% with zero-rated exceptions and administrative costs. State and local sales and use taxes would levied separately.

    For example, in the State of Washington, the state and local sales and use tax rate is around 10.8% (varies from locale to locale within the state). A federal VAT of 30%, say, and a state and local sales and use tax of 10.8%, would add 40.8% to the consumer's cost of goods and services (excepting zero-rated goods and services).

    Even at those tax rates, the budget would not be balanced. If FICA Medicare/Medicaid premiums are to be collected via the federal VAT regime, the VAT rate would be higher still. Possibly as high as 35%, for a total tax at the point of sale of 45.8% in Washington state, say.

    Such a change would greatly advantage high-income households and disadvantage middle-income and low-income households, especially the latter.

    Nations that have VAT regimes seldom attempt to replace their income tax revenues with VAT revenues.

    Expound on the advantages of the Republican proposal. Perhaps a business case can be made for it.

    1. You can tax different rates on different goods and services for consumption tax, usually the lower for the more necessary. So this wouldn’t really hurt the middle and lower income classes. Consumption tax is goos because it forces people to save more and more incentive for business to produce the necessities but not so much into luxury or unnecessary goods

    2. V.A.T. (value-added tax) is usually set at one rate and applies to all products and services, except for essentials such as groceries. The way most V.A.T. schemes work is that at each production level the V.A.T. is applied to selling price. The V.A.T. is collected from the purchaser at point of sale by the seller. The seller paid the V.A.T. on the inputs (other than labor) used to produce the goods and/or services, and deducts the V.A.T. paid on those inputs from the V.A.T. seller collected from the purchaser at the point of sale. The difference is the tax on the value-added by the seller. The seller remits this difference to the government. V.A.T. applies to services as well as to goods and commodities. Exports are generally zero-rated for V.A.T.; the exporter recovers the V.A.T. he paid domestically for the export goods by a remittance application to the government of the V.A.T. paid. V.A.T. applies to goods imported, and is remitted by the importer to the government.

      V.A.T. systems are found in Canada, U.K., and the E.U. The rates range from 5% in Canada to 20+% in the U.K. and E.U. I am not aware of any V.A.T. system that has different tax rates for different goods or services, other than 0% for exported products and exemptions for groceries, and (in Canada, real estate) other than new construction real estate where the V.A.T. is graduated, i.e., progressive, based on the selling price of the property.

      There is no evidence that a V.A.T. "forces people to save more" or instill "more incentive for business to produce the necessities but not so much into luxury or unnecessary goods." Businesses pass the V.A.T. through to end consumer by the virtue of the mechanism of "value-added". Certain administrative exceptions are provided for, such as in Canada where a small business that does not exceed a specified threshold in terms of annual dollar-volume revenue is exempt from registration with the Canada Revenue Agency. This reduces the administrative burden on imposed by the V.A.T. scheme on small business owners, typically proprietorships or small partnerships. But, the non-registered business cannot recover the V.A.T. that it pays for the inputs used to make the products or deliver the services that the non-registered business sells to its customers.

      The U.S., if it adopts a V.A.T., would likely follow the established practices prevalent elsewhere around the globe where V.A.T. systems are in effect, for administrative convenience and efficiency.

    3. Otavio Augusto MazzaroloJanuary 9, 2023 at 2:15 PM

      The VAT system in Brazil is notoriously complicated, involving several different tax bases and tax rates. The idea, in general, would be that products such as food pay a lower rate than alcoholic beverages. And even within food items, bread might have a lower rate than ice-cream.
      But this is a rabbit hole, and things get way too complicated in the real world. What is the difference between "normal" bread and a croissant, for example? Brazilian courts are packed with these fights between companies and the revenue service.
      Tax reform is always top of mind when it comes to the political debate, but alas so far at least the country may present a guide on how not to implement a VAT scheme.

  2. We are going to get a consumption tax. That has already been decided. But, it will be in addition to, not in lieu of, the income tax.

    We have already spent the money. The tax will be paid. The only issue is what form it will take.

  3. A storm knows what it is doing. While it topples old growth, it also makes way for new roots, and ultimately new blossoms. The roiling seas of Liberty work the same way.
    Your observations, and those of whom you cite, are the most insightful I have come across regarding the Speakership vote and Israeli governance.

  4. a consumption tax is terrible. How about a 5% tax on gross value all wall street financial transactions...stocks, bonds, options, derivatives....make wall street transactions about INVESTING....not churn!

  5. so Warren Buffett who spends .00000001% of wealth per year on cheap meals and frugal ways on consumption is going to pay less taxes than average family of 4 making $100,000? Or are businesses going to pay a consumption tax....since COMPANIES are allowed to MAKE political donations like any individual?

    1. If the money he doesn't spend in consumption ends up in savings, just why is that a bad thing?

    2. Two comments:

      First, Berkshire isn't just a stock trading company. It wholly owns and operates some of America's most successful companies, including BNSF, See's Candies, GEICO, Duracell, Fruit of the Loom and dozens of others. Buffet and his team actively manage these companies.

      Second, the "what-buffet-bezos-musk-pay-in-taxes" fetish is flat out weird. People who indulge in this fetish seem to believe that there's only so much money and buffet-bezos-musk are hording it. Reality is the opposite: buffet-bezos-musk's companies are literally creating billions of dollars and pumping it out to ordinary Americans even *before* they pay a cent in taxes.

      1) All of these companies operate in dozens of countries and much of that revenue flows back into the US via the salaries of their professional staffs who work here.

      2) the reason they operate in dozens of countries is because they provide some of the best products and services in the world, and they do so with unusual efficiency. They're making consumers wealthier by providing better products and services than the companies that came before them.

      That's how buffet-bezos-musk got rich. By creating wealth, not by hording it. The products and services of the companies they lead or led enrich others. IOW, they have **already shared a massive proportion of the wealth they created**.

      So while it makes sense that they share in the national tax burden, there's no reason they should have to share disproportionately from the profits generated by products and services which are *already sharing* substantial wealth with almost everyone in the world.

  6. How about we TAX all non-profits where ANYONE gets $100k+ Hospitals, colleges, non-profits giving millions to SINGLE individuals are VERY PROFITABLE...they should pay taxes. Also NO more tax deferral or tax get pay your taxes! No Generation skipping or $100 Million Dollar IRA, 529, trusts, etc Then we lower the rate and remove 98% of deductions.

  7. “ I'm a policy wonk, but I care very little about politics, who is up and who is down.”

    You could have fooled me, John. : )

  8. To tax what we consume as opposed to what we earn (income) or have saved and invested (wealth) is not so different on average, since we earn and save in order to consume (or to help heirs do that). The issue is all about minimizing tax-induced disincentives for lifetime effort, savings, business formation and risky creativity (entrepreneurship). Marginal decisions depend on marginal tax rates almost regardless of the tax base (like a consumption tax, our income tax already exempts a lot of retirement savings, unrealized capital gains and other non-labor income). The bigger advantage of a pure (New Zealand style) VAT is that the tax rate is flat and fairly low. The political propensity to put super-high marginal tax rates on those with proven ability to add to their future income is well-designed to discourage additions to national income - real GDP.

    1. N.Z. collects a goods & services tax on purchases (with some exceptions) and an income tax at graduated rates on N.Z. residents' world-wide income. N.Z.'s top income tax rate is 39%. N.Z.'s goods and services tax rate is 15%. Thus, N.Z. has both a consumption tax and an income tax that are paid by residents of that country.

  9. I am curious why, John, you are against term limits? It strikes me as yet another pearl of wisdom originating from our founding fathers, who did not believe politics should be a career profession.

    If you subscribe to the view that our system relies on expert politicians to succeed, then that runs counter to Milton Friedman's desire for a designed system that is meant to be idiot proof.

    1. Given that the administrative state is already out of control, term limits on elected officials would only make the problem worse.

  10. J. Powell has explicitly ruled out an expanded role for the Federal Reserve Bank system: “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals,” he said. “We are not, and will not be, a ‘climate policy maker.’” quoted in The Wall Street Journal article titled "Jerome Powell Says Bringing Down Inflation Could Fuel Political Opposition -- Fed chair highlights importance of central-bank independence", by Nick Timiraos, January 10, 2023.

    Time to revisit the role of the FRB in the federal government?


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