What Would Help This Recession - VAT or FairTax

by: Howard Richman

Last week, President Obama and the Democratic Congress passed the third stimulus plan, continuing the Bush strategy of trying to stimulate the economy out of the recession:

  • 1. In February 2008 Congress passed President Bush's $150 billion stimulus package which consisted of tax cuts.
  • 2. In October 2008 Congress passed President Bush's $700 billion Wall Street bailout with an additional $100 billion in tax cuts tacked on.
  • 3. In February 2009 Congress passed President Obama's $800 billion recovery plan, a mixed bag of about $300 billion in tax cuts, $100 billion of infrastructure spending, and about $400 billion in other government spending and giveaways.

The only changes from Bush to Obama, other than the accelerating size of the plans, is that the Republican plans had a greater proportion of tax cuts while the Democratic plan has a greater proportion of government deficit spending. A few people in Washington are beginning to note that this strategy is not working. For example, Daniel Lambro wrote in the Washington Times:

The theory behind stimulus spending bills is that the injection of large amounts of additional federal funds into the economy will spur increased demand that will boost economic growth.

But its critics point to the size of the record-breaking budget deficit already projected in this fiscal year, even before Mr. Obama's plan was approved.

"If deficit spending were truly stimulative, then the current $1.2 trillion budget deficit would already be overheating the economy," said Brian Riedl, the Heritage Foundation's chief fiscal-policy analyst.


Everybody in Congress seems to think that if they could just come up with the right combination of government deficit spending and tax cuts or a large enough plan, then the stimulus plans would start to work. Nobody asks why none of the earlier plans worked.

The answer is simple. Just as you can't pump up a tire without patching the leak, Congress can't stimulate the American economy without patching the trade deficit. Whenever Congress borrows money from abroad to finance stimulus spending, that borrowing bids up the dollar which makes American goods and services less competitive in U.S. and world markets. This further depresses investment in U.S. production, increases imports and decreases exports. The result is that the stimulus leaks out.

Congress is proud that they are not patching the trade deficits through a repeat of the Smoot-Hawley tariffs, which led to counter-tariffs that cut into world trade in 1930 when the United States was the world's leading exporter. They conveniently forget that America had trade surpluses then, but huge trade deficits now. They also forget that the United States built its industries from 1787 to 1930 behind tariff barriers.

Now the United States has an enormous trade deficit, about 5% of our GDP. Many of our consumers and banks have been brought to the verge of bankruptcy because we can no longer pay our debts. Yet, every year we borrow another 5% of our GDP from foreigners just to pay for baubles and budget deficits. Congress' irresponsible borrowing and trade policies have turned America into the world's largest and most bankrupt debtor.




Congress could move our trade toward balance without producing counter-tariffs if they simply replaced our entire income tax system with a 23% Value-Added Tax (VAT) or its close cousin, the FairTax. Then all imports into America would pay a 23% VAT duty or sales tax and all exports from America would be exempt from our taxation. As shown in the chart above, we would be doing to our trading partners' products what they are already doing to our products.

But Congress prefers borrowing from abroad in order to finance giveaways. They are Trading Away Our Future.

Disclosure: no positions

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