Income Taxes On A Postcard?

Texas Senator Ted Cruz has now officially declared that he is seeking to become the Republican Party’s nominee for President of the United States in 2016. Welcome to the race, Ted!

Thus, what better time than now to review some of his positions? One of his most popular stances, for instance, is his demand that the United States government abolish the Internal Revenue Service (IRS).

It’s a line that always attracts a wide round of applause. But oddly enough, Senator Cruz also demands that the income tax code of the United States be simplified to a level where Americans can file their annual tax returns on small postcards.

So that raises a very simple question: if we were to abolish the IRS and require American citizens to file their tax returns on postcards …

… where would they mail their postcards?

Without the IRS to process them, the federal government would then need to create a new agency to collect the postcards and confirm that the “amounts due” in taxes were previously withheld from wages or remitted through estimated tax payments.

And what would we call that new agency? The most appropriate name would undoubtedly be “the Internal Revenue Service of the United States.”

In other words, in order to process the very activity that Senator Cruz proposes to establish, we would need to recreate the very agency that the Senator proposes to abolish.

And how does Senator Cruz explain that irony? He hasn’t yet done so, but his advisor Rick Tyler recently suggested that the “Treasury (Department) could … assume the responsibility of collecting postcard tax forms. There would be a … division inside Treasury” that would perform the functions that are currently performed by the IRS.

But do you know where, within the structure of the federal government of the United States, the IRS currently resides? Yep, the IRS is a Bureau within the Department of the Treasury.

So Senator Cruz and his advisor are proposing: (1) to abolish a Bureau of the Treasury, (2) to create a new document that would have been processed by that Bureau, and then (3) to establish a new Bureau, in the very spot of the abolished Bureau, to process that very document.

If you understand that logic, congratulations! You undoubtedly possess an aptitude for Presidential politics.

But if you don’t, you are not alone.

Fiscal Gimmickry: Pensions For Highways

For many years, the federal government of the United States has utilized accounting gimmicks to finance payments for obligations like pension plans and highway funds. But can you believe that the government is now creating a gimmick to sacrifice one of these obligations to pay for the other?

It’s true. Last month, the federal highway trust fund was running out of money. Because members of Congress could not agree on a responsible approach for raising new funds, many critical transportation infrastructure projects were about to grind to a halt.

So how did our elected leaders resolve the problem? They decided to weaken our nation’s private pension plans in order to generate additional government funds. By authorizing a practice known as “smoothing,” the government permitted private corporations to reduce their current funding payments into their own employee retirement benefit plans.

The reduction in pension expenditures during the current period is producing greater corporate taxable income. That, in turn, is increasing income tax payments to the government this period, which are being added to the highway fund.

Of course, this maneuver will result in greater pension payment obligations during future period(s). Interestingly, though, it would not have affected the tax liability of the corporations at all if the accrual method of accounting had been mandated under American laws of taxation.

Under this method, an expense is an expense whether or not it is paid. Prior to each payment, a liability (and its corresponding expense) must be recorded to reflect the unpaid obligation. The subsequent payment eliminates the liability; it does not affect the expense.

Although Generally Accepted Accounting Principles (GAAP) usually requires that the accrual method be used for corporate financial statement reporting purposes, American tax laws permit the use of the cash method to calculate taxable income and deductible expenditures.

In other words, had all corporate plan sponsors been required to follow the accrual method of financial statement reporting for taxation purposes, they would not have benefited from the government’s permission to delay pension payments. But because many of them use the cash method for taxation purposes, such benefits can be claimed by taxpaying organizations.

Thus, in the end, the federal government opted to take advantage of its own accounting gimmickry to generate highway funds by explicitly encouraging corporations to weaken their pension plans. Although America’s drivers are benefiting from this practice in the present, its employees and retirees will undoubtedly pay the price in the future.

Pfizer’s Tax Inversion Strategy

How terribly dysfunctional is the corporate tax code of the United States? Last week, you could easily find an example of its deleterious nature on 42st Street in Manhattan, in the very heart of New York City.

That’s where the pharmaceutical giant Pfizer Inc. announced its pursuit of its British competitor Astra Zeneca. Although it cited several strategic and operational reasons for the proposed acquisition, it acknowledged that the transaction would yield attractive tax benefits as well.

As a firm that is headquartered in the United States, Pfizer is subject to a top income tax bracket of 35%. But as a firm that is headquartered in Britain, Astra Zeneca is only subject to a top bracket of 21%, a rate that will fall to 20% next year.

Because of these differential tax rates, Pfizer acknowledged that it would complete its acquisition transaction by merging its 42nd Street corporate headquarters office into Astra’s London location.

Such a transaction, known as a tax inversion, would not actually require Pfizer’s executive management team or other New York based Pfizer employees to move to London. Only the “official” corporate headquarters location would need to shift to Britain, and a few legal corporate meetings each year would need to be held there as well.

Pfizer, of course, has been headquartered in the Big Apple since it was founded in Williamsburg, Brooklyn in 1849. If its acquisition and headquarters relocation strategies are executed as planned, Pfizer would follow in the footsteps of insurance giant Aon, which was founded in the American Midwest in 1919 but which moved its headquarters address from Chicago to London two years ago.

How is the public interest of the United States served by regulations that slash the tax rates of iconic American firms that shift their corporate headquarters overseas while maintaining their U.S. operations?

Economic Austerity, French Style!

Here we go again! The federal government of the United States, having repeatedly failed to meet its own self-imposed deadlines to balance its budget, is quickly approaching yet another deadline.

The names of the deadlines are becoming more exciting, though, aren’t they? First we experienced the tamely termed debt ceiling. Then we approached the more aggressively named fiscal cliff. And now we are encountered the inscrutable yet terrifying sequestration.

Meanwhile, on the other side of the Atlantic Ocean, French citizens are collectively engaged in their own unpleasant experiences with economic austerity. The nature of their experiences, in contrast to America’s, reveals quite a bit about the cultural differences between the two societies.

The So-Called Workers

The most recent controversy involved the blunt comments of an American business executive about a French tire factory. Titan International’s CEO Morry Taylor visited France in contemplation of an acquisition of the plant, but told the French Minister of Industry Arnaud Montebourg:

“The French work force gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three and work for three.” He continued: “Titan is going to buy a Chinese tire company or an Indian one, pay less than one Euro per hour wage and ship all the tires France needs. You can keep the so-called workers.”

Sacre Bleu! What outrageous insults! But the comments weren’t much harsher than the complaints that French citizens launched at their own President Francois Hollande after he attempted to modify the calendar of the public school system.

Hump Day Traditions

In the United States, the middle day of the working week (i.e Wednesday) is colloquially called Hump Day. That’s because we all require a fair amount of physical and mental stamina to make it “over the hump” and slide into the second half of the week.

But American society has never formalized any special traditions for Hump Day. Indeed, Wednesday has remained a standard work day, along with Monday, Tuesday, Thursday, and Friday. In France, however, Wednesday has been treated as a special day by the public school system.

How special? Well, most state schools are closed on that day. Indeed, each Wednesday is treated as a weekend day, albeit one that falls in the middle of the week.

And how have the citizens of France responded to President Hollande’s recent suggestion that children should attend schools on Wednesday mornings? One critic complained “This is the only country I know where the adults work 35 hours a week, but they expect their kids to work more.”


While the French have been debating issues like three hour work days and four day school weeks, the American people have begun to learn about an entirely different level of economic austerity.

What is it? Why, it’s sequestration! That’s a legal term that was originally coined to describe the seizure of property under dispute for safekeeping to prevent a party from obtaining or damaging it. But ever since the Gramm-Rudman-Hollings Deficit Reduction Act was signed into law in 1985, the term has come to mean something entirely different.

In essence, on certain arbitrary dates defined by law, the United States Treasury is required to sequester (i.e. not spend) any funds that would be borrowed under normal operating practices. This nullification of spending activities, in turn, eliminates any reason for the federal government to borrow more money and extend its deficit; it thus serves as a debt limitation tactic.

What happens to government operations that need those unborrowed and unspent funds in order to conduct their business activities? They are forced to implement devastating cutbacks, thereby depriving the American people of many necessary services.

Values and Expectations

So how do they do it? How does the French government manage to remain so far ahead of the American government in terms of its ability to help its people maintain a reasonable standard of living with relatively less work effort?

Well, the French government presides over a society that is willing to acquire less wealth for less work. While estimates of America’s Gross Domestic Product per capita range from $46,000 to $48,000, estimates of France’s GDP only range from $35,000 to $36,000.

And then there are taxes. The French people pay their federal government a Value Added Tax, a Wealth Tax, and an income tax with a top marginal rate of 75%. None of these taxes exist at such levels in the United States.

So the cultural differences between the societies are clearly defined. French citizens expect to generate and accumulate less wealth, and they bear the burden of higher taxes. In return, they value and expect a life style of limited work. American citizens, on the other hand, expect more wealth and lower taxes. In return, they value and expect a life style of significant work.

In other words, cultural values shape expectations, and expectations shape nations. The results, perhaps unsurprisingly, are self evident.

The Republican Party’s European Tax Policy

When was the last time an American political leader of the Republican Party embraced a European economic policy? Or a European policy of any kind, for that matter?

It’s difficult to recall such an event, isn’t it? You might need to go all the way back to President Dwight Eisenhower’s support of the New Look strategy, a policy that marked the apex of Euro-American cooperation against the Soviet Union. Or perhaps you could point to the fall of the Soviet Union during the 1980s and early 1990s, an era when U.S. Republican Presidents Reagan and Bush collaborated closely with European leaders like Margaret Thatcher, Helmut Kohl, and Francois Mitterrand.

More recently, though, Republican Party politicians have expressed far less friendly sentiments towards their European colleagues. Presidential candidate Mitt Romney, for instance, sharply critiqued Greek economic policy throughout his campaign. And anti-European sentiment during George W. Bush’s invasion of Iraq peaked with the banishment of french fries from the cafeteria of the U.S. Capitol, and the introduction of “freedom fries” in their place.

So why are conservative Republican politicians now embracing a quintessential European tax policy? And what does their embrace tell us about today’s political climate in the United States?

From Kansas to Louisiana

The policy in question involves an increased reliance on sales taxes to finance government operations. Conservative governors Sam Brownback of Kansas and Bobby Jindal of Louisiana have both recently advocated for increases in sales taxes.

Republican politicians advocating for tax increases? At first glance, that would appear to contradict the traditional conservative orthodoxy against tax increases of any kind. Ever since Republican President George H.W. Bush famously abandoned his read my lips, no new taxes pledge over twenty years ago, Republican lobbyists have stood firm against any form of tax increase.

But today, Governors Brownback and Jindal are making a more subtle argument. They are not simply advocating for increases in sales taxes; they are concurrently advocating for reductions in (or even an outright elimination of) income taxes. Thus, they are defining their proposals as modifications of existing systems of taxation, as opposed to increases in rates of taxation.

A more balanced system of taxation, one that more equally distributes taxes across earnings (i.e. income) and consumption (i.e. sales), strikes Brownback and Jindal as an improvement over the status quo. Unsurprisingly, however, neither one has acknowledged that such a modification would bring the system of American taxation into far closer alignment with the existing European system.

Value Added Taxes

Strictly speaking, the European tax on sales transactions isn’t really a “sales tax” in the American sense of the phrase. Instead, it is a tax on the incremental value added by each party to the development and sale of a product or service.

Imagine that a European farmer sells a bucket of milk that is worth five euros to an artisanal cheese producer. Then imagine that the cheese producer transforms the milk into an eight euro package of cheese. If the cheese is then sold to a retail store for twelve euros, the European farmer would pay taxes on five euros of value, the producer on three euros of value, and the retailer on four euros of value.

Within an American system of sales taxation, the retailer would pay sales taxes on the entire twelve euro purchase. Under either system, though, taxes would be calculated on a basis of the value of sales, purchase, or transfer transactions, as opposed to a basis of income or profit levels.

But why is this debate emerging now? What trends are occurring in the American political climate that would empower conservative Republican politicians to embrace such policies?

Bowing To Reality

Reality … What A Concept! That was the title of a 1979 stand-up comedy album by the American actor Robin Williams. Nevertheless, it could just as easily serve as the description of the current state of affairs in American politics.

After all, the federal government’s cumulative budget deficit now stands at $16.5 trillion, and it continues to grow by more than $1 trillion each year. Such worrisome numbers, considered in tandem with President Obama’s resounding electoral victory, are persuading Republican lawmakers to seek compromise. That is why America avoided a federal government shut-down during the fiscal cliff negotiations on New Year’s Day, as well as during the subsequent debt ceiling debate of early 2013.

Some commentators believe that demographic trends in American society are pushing the political parties towards the center too. An agreement regarding America’s illegal immigrant population is expected to occur within the next six months, in contrast to the outcome of a similar but ill-fated bipartisan policy initiative by the Bush administration in 2006.

An immigration reform bill that offers a path to citizenship to individuals who have entered the United States illegally? And a system of taxation that emphasizes the very features that have been implemented throughout the European Union? These may appear to be highly unusual positions by Republican politicians, and yet they may have been necessitated by the unique realities of the contemporary era.

Income Taxation in France: The 75% Rate!

If you’ve got a business … you didn’t build that!

It was one of the most frequently quoted statements of the 2012 American Presidential campaign, and one of the most controversial as well. President Obama made the comment while describing how entrepreneurs rely on “this unbelievable American system” to build their businesses.

But presidential candidate Mitt Romney retorted that Obama’s comment was “insulting to every entrepreneur, every innovator in America.” He then dedicated an entire day of the Republican National Convention to the theme “We Built It.”

Although President Obama won his re-election campaign, this debate rages on across the globe. Just two weeks ago, for instance, the iconic French actor Gérard Depardieu protested his nation’s new 75% income tax rate by charging that politicians “think success, creation, talent and anything different should be punished.”

Then he turned in his French passport and Social Security card. And then he moved his residence to Belgium.

Trans Atlantic Similarities

Depardieu’s bombastic emigration decision triggered a wave of derision across France. Prime Minister Jean-Marc Ayrault, for instance, referred to him as “pathetic.” And the newspaper Liberation called him a “drunken, obese petit-bourgeois reactionary.”

The son of an alcoholic metal worker, Depardieu represents the very type of self-made entrepreneur that attracted the commentary of Obama and Romney, except for his French (and not American) lineage. Depardieu first arrived in Paris as a destitute teenager, and subsequently achieved prosperity as an actor, director, writer, restauranteur, vineyard owner, and global investor.

Has anything like Depardieu’s emigration decision ever occurred in the United States? On a far smaller scale, bombastic Republican radio personality Rush Limbaugh recently decamped from his New York City home to Florida, a state with no individual income tax.

Mr. Limbaugh claimed that New York’s taxation system was “punishing the achievers for the mistakes and the lack of discipline on the part of a bunch of corrupt politicians.” Governor David Paterson, though, retorted with the quip ““if I knew that (Limbaugh’s departure) would be the result … I would’ve thought about the taxes earlier.”

Trans Pacific Similarities, Too

This debate about our government’s ability to impose financial burdens on affluent citizens appears to bind societies on both sides of the Atlantic Ocean. Interestingly, it is increasingly binding societies on both sides of the Pacific Ocean as well.

This past week, for instance, China’s national legislature passed a bill that punishes children who fail to support their needy parents. The law mandates that adult children must visit their aging parents “often,” and explicitly empowers seniors to sue their children for parental neglect.

The alternative to mandated parental care, of course, is a government managed social safety net that is financed by heightened levels of taxation. But China has recently experienced its own taxation inspired protests, and thus its drive for greater parental support by children has been construed as an attempt to avoid the type of tax policy that has driven Depardieu to Belgium and Limbaugh to Florida.

The Fiscal Cliff

At the present time, American government leaders in Washington DC are spending the New Year’s holiday in a tense dispute over taxation policy. Facing a budgetary deadline of midnight on December 31st, they are striving to find a compromise that would enable American citizens to avoid the expiration of President George W. Bush’s income taxation levels and a reversion to the higher levels that were in place during the Clinton Administration.

The rancorous debate has brought the apparatus of the federal government to a standstill, and is being described as a “fiscal cliff.” But what is the primary nature of the dispute?

Well, the Democratic Party proposes to impose increases in income tax rates on individuals earning over $450,000 per year. But the Republican Party proposes to limit such increases to those earning over $360,000 per year … not very much different than the Democratic Party’s proposal!

And if they should fail to reach an agreement? What happens if America hurtles over the fiscal cliff? Well, the taxation rate on the wealthiest Americans will increase from 35.0% to 39.6%, an amount that is roughly only half of France’s 75% top rate.

The Debate Continues

There is very little chance that this global debate about the role of government will be settled in the near future. The French 75% tax rate, for instance, was recently invalidated on technical grounds, and most American pundits are predicting that any agreement reached on New Year’s Eve will be a “small deal” that fails to resolve the mammoth fiscal imbalances that threaten America’s future.

Nevertheless, there are clearly striking similarities in the public debates that are sweeping across European, North American, and Asian nations. As these debates continue into 2013, governmental leaders from the three societies may come to realize that similar challenges may necessitate common approaches.

After all, common problems are often most effectively addressed through the implementation of common solutions. As we turn the page on the new year, we may hope that our leaders will come to appreciate this message of policy solidarity.

Gasoline Prices: Driving Economic Prosperity?

The American economy has been stuck in a rut for a very, very long time. The unemployment rate, for instance, has been lodged above 8% since February 2009; it has remained there throughout President Obama’s term of office. And the Dow Jones Industrial Average has yet to surpass the 14,000 point level that it first reached in the pre-crash days of July 2007.

At first glance, last week’s news of a retail sales increase appeared to represent a rare signal of hope. But then it was reported that the increase was attributable, in large part, to a recent surge in the retail price of commercial gasoline.

The rise in the price of gas is particularly surprising, occurring in the post-Labor Day period when prices customarily decline as Americans return to work from their summer driving vacations. But is it possible that higher gasoline prices might actually help lift the United States out of its economic rut?

An Addiction To Imported Fuel

Traditionally, high gasoline prices have been detrimental to the American economy. The spike in energy costs during the 1970s, for instance, wreaked havoc on the financial security of the United States; it led President Jimmy Carter to declare that the development of a national energy policy represented the moral equivalent of war.

But that was a time when the American energy industry was focused on the importation of fossil fuels from foreign sources. Under such circumstances, any increase in the price of fuel would inevitably draw funds away from alternative domestic uses and fuel the profits of foreign providers.

For a while, America’s domestic nuclear power industry appeared to offer a home-grown solution to the nation’s addiction to foreign fuels. But the specter of nuclear disaster that was imposed on the nation’s psyche by the Three Mile Island crisis in 1979, stoked by films such as The China Syndrome that year, locked the American energy industry into a strategy of importation.

Energy Independence

So how has the American economy evolved during the past few decades? Why might higher fuel prices actually trigger an increase in domestic energy output, and ultimately lead to economic prosperity, today?

A primary reason, first and foremost, is that the United States is now producing a significant amount of energy resources to meet its own domestic needs. North Dakota has surged past Alaska to become the nation’s second largest energy provider, trailing only Texas. Pennsylvania, a major producer of crude oil in the late 1800s, is again producing energy resources with the use of fracking technologies and methods. And soon, the southern tier of New York State may begin doing so as well.

Furthermore, the Canadian province of Alberta has also recently become a major producer of fossil fuels. Given the extensive integration of the national economies of the United States and Canada, additional upstream energy activity in the Albertan region inevitably stimulates the economies of the northern American states too.

These developments have prompted Republican Presidential candidate Mitt Romney to declare that North America would achieve “energy independence” by his prospective eighth year in office, i.e. by the year 2020. Although some analysts believe that full energy independence may not necessarily represent an achievable (or perhaps even a desirable) goal, most do acknowledge that the emerging domestic energy industry is strengthened by higher energy prices.

A Gas Tax For The Deficit

High fuel prices generate indirect benefits as well. When the costs of fossil fuels are very high, the (generally always high) costs of renewable energy begin to represent competitive alternatives in comparative terms, and American consumers and businesses shift to these new “green” technologies.

The demand for solar panels, for instance, has increased in tandem with the recent spike in the costs of oil and gasoline. Although American panel manufacturers like the ill-fated Solyndra have yielded market share to Chinese producers lately, all panels (even those manufactured in Asia) require installation and maintenance in the United States, necessitating new jobs for the American economy.

Some well known commentators are actually advocating for higher retail taxes if the cost of gasoline drops back towards historical norms. Thomas Friedman, a global columnist for the New York Times and the author of the book The World Is Flat, has repeatedly called for an American taxation policy that imposes a retail gasoline surcharge of $1.00 and then applies all government revenues to reductions in the federal budget deficit. The United States, interestingly, has never paid a tax that is explicitly designed to reduce its accumulated debt.

Considering the aversion of America’s Republican Party to any new streams of taxation, it is unlikely that Americans will experience a national $1.00 per gallon gasoline tax at any time in the foreseeable future. Nevertheless, they shouldn’t be surprised if the recent surge in retail gasoline prices eventually produces some unexpected (and yet quite welcome) benefits for the American economy.

Return Of The 75% Tax Rate

Have you noticed the streak of contrarian philosophy that occasionally runs through France’s political leadership?

In March 1966, for instance, President Charles de Gaulle withdrew his military forces from NATO, an alliance that was created to protect the European democracies from a Soviet invasion. Although Soviet army tanks rolled into Czechoslovakia just two years later to crush a pro-democracy movement, the French army remained independent and clung to a go it alone strategy.

Conversely, France assumed a leading role last year in persuading a hesitant NATO to employ military force to support protestors in Libya. Although the British joined the French in leading the campaign, other nations were content to remain in secondary roles, with the American military adopting the role of leading from behind.

Last week, the French tendency towards contrarian philosophy emerged in the field of taxation policy as well. At a time when nations from America to Singapore are competing for global business by maintaining low rates of taxation, France’s leading candidate for President announced a policy that favored a 75% income tax rate.

“A Patriotic Act”

Socialist Presidential candidate Francois Hollande, who has been leading in the polls to topple current President Nicolas Sarkozy, surprised many of his own advisers by advocating a 75% top marginal rate on personal income taxes. He explained his position by noting that it is patriotic to agree to pay a supplementary tax to get the country back on its feet.

Regardless of our position on tax policy, we can all certainly agree that the French economy could use a boost. Some believe that its persistent weakness in the wake of the recent global recession, particularly in comparison with the economic strength of Germany, has destabilized the European Union.

Germany’s current economic strength is usually attributed to its decision, codified in its Agenda 2010 legislation, to reduce the constraints that its government had placed on the private sector and to permit its labor market to adopt a more free market oriented model. The implementation of a 75% rate of taxation in France, though, would appear to shift the French economy in the opposite direction.

The American Experience

It’s safe to say that the top marginal tax rate in the United States will remain below 40% for the foreseeable future. It has remained at 35% since the Bush administration modified the Clinton era rate of 39.6% in 2003; more recently, Republican Presidential candidates have advocated for rates as low as 9%.

Throughout the decades of American prosperity in the 1950s and 1960s, though, the top tax rate never dropped below 70%. And even when the Tax Reform Act of 1986 briefly arranged for the top rate to drop to 28% during the final years of the Reagan administration, the Act offset the historically low rate by eliminating many tax deductions and establishing a complementary capital gains rate at a relatively high “matching” level of 28%.

Advocates of low marginal rates in the United States, though, repeatedly point to the Reagan era to support their case. On the other hand, advocates of high rates point to the prosperous decades after World War Two, as well as the Clinton era, to justify their own positions. Clearly, they cannot both be correct …

… or can they?

A Question of Proportion

Let’s take a closer look at the history of America’s top marginal tax rates from the time of the initial imposition of the income tax in 1913 to the current day. But instead of looking at the top rates in absolute terms, let’s look at annual swings in proportional terms.

The increase in tax rates from 31% in 1992 to 39.6% in 1993, for instance, increased the rate by a bit more than a quarter of its 1992 value. That was the only time, subsequent to the Great Depression, that the top rate had increased by such a large proportion.  Even though the change in absolute terms was “only” 8.6%, the 1992 rate was so relatively low that the proportional increase was arithmetically very large.

Conversely, although the reduction in tax rates from 38.5% in 1987 to 28% in 1988 may have “only” represented a 10.5% decrease in absolute terms, it represented a decrease of more than a quarter of its 1987 value in proportional terms. And it followed similar proportional drops of over a quarter in 1982 (i.e. from 69.13% to 50%) and almost a quarter (i.e. from 50% to 38.5%) in 1987.

A Quarter At A Time

In other words, both President Reagan and President Clinton appeared to opt for incremental changes of roughly a quarter (proportionately speaking) per annum. Even though the two political leaders shifted the rate in opposite directions, their modifications each helped trigger periods of great prosperity.

What should Francois Hollande conclude about the American experience? Considering France’s current marginal tax rate of 40%, an increase of a quarter of its proportional value may prove effective, but it would leave the rate at a level below 50%. In other words, a leap to a rate of 75% in a single year would be unprecedented in scope, at least by modern American standards.

A National VAT: A Socialist Republican Solution?

The United States certainly isn’t the only nation to struggle with sluggish economic growth and a daunting government deficit. Most of its fellow G-8 countries, including Japan, Britain, and the nations of the Euro currency zone, are doing so as well.

Among these countries, though, the federal governments of the United States and France might have the most in common. Both President Obama and President Sarkozy are preparing to fight grueling re-election campaigns, appealing to voters who have grown weary of years of grinding austerity. And Sarkozy is struggling to save his nation’s sterling AAA credit rating, a battle that Obama fought and lost during the American federal budget battles last summer.

Last week, the French President pushed through a sizable increase in his government’s Value Added Tax (VAT) burden, in an effort to finance his country’s social “safety net” programs without increasing the federal deficit. Considering how often Republican presidential candidate Mitt Romney labels Obama a “European socialist,” one might have assumed that the American President would support a similar policy.

Interestingly, though, only one American presidential candidate espoused the establishment of a new tax resembling a VAT. President Obama, ironically, was not that candidate.

Nine, Nine, Nine!

Republican Herman Cain was actually the candidate who called for the imposition of a 9% sales tax, accompanied by drastic reductions in the individual and corporate income tax rates to 9% as well. Although he was originally considered a minor candidate, the astonishing popularity of his tax plan briefly sent him skyrocketing to the very top of the polls before other considerations compelled him to quit the race.

Nevertheless, he was briefly perceived as the champion of conservative Republican politics, even though he espoused the adoption of a taxation policy that was far more similar to contemporary European taxation systems than to the traditional American system. By dropping out of the race well before the first contest in Iowa, though, his policy escaped the harsh scrutiny that it likely would have received eventually.

Because Mr. Cain modified his explanation of the “nine, nine, nine” policy from time to time, it is unclear whether his sales tax would have only been levied on consumer retail purchases, or whether it also would have been levied on business-to-business wholesale transactions. A retail levy would resemble a traditional American local sales tax, while a wholesale one would more closely reflect the style of a European social VAT.

Economic Theory

Placing politics aside, one may wonder how the choice of taxation methodology would impact economic health. To put it simply, would most economists prefer to see the American government rely overwhelmingly on a national income tax (as it does now) to finance its activities? Or would they prefer to see it shift towards a sales, VAT, or other consumption based tax?

Most economists are generally in favor of higher taxes on undesirable activities and lower taxes on desirable activities. Before the global markets crashed in 2008, Americans appeared to be spending far too much, and saving (and earning) far too little. Thus, the concept of a national consumption tax appealed to many economists at the time.

Now that recessionary declines in American consumption patterns have threatened the economic recovery, though, many of these same economists now believe that a national consumption tax would crimp consumer spending and thus deter economic growth. And many conservative politicians are loathe to approve any new taxes at all, fearing that the imposition of even minor new taxes will inevitably evolve into major new levies over time.

Simplicity and Fairness

Perhaps the most baffling aspect of Cain’s popularity, though, involves the reason(s) why conservative Republican voters embraced the “nine, nine, nine” policy at all. Considering that longstanding Republican policy advocates the rejection of any increase in taxation levels, why did those voters embrace the establishment of a new system of VAT taxation along with the maintenance of the existing system of income taxation (albeit at a lower 9% level)?

One reason might have been the attractiveness of simplicity itself. In an era when a majority of Americans are compelled to use terribly complex computer programs to compute and file income taxes, the sheer simplicity of a flat 9% tax rate must have been highly desirable to many voters.

Another reason might have been the ostensible fairness of a single rate that could be applied to all Americans. After all, Warren Buffet himself famously noted that he pays lower rates of income taxation than do his secretaries. Because the contemporary American system of income taxation is actually regressive in certain respects, a flat rate tax must have been highly desirable as well.

Regardless of the reason for its attractiveness, the sight of a conservative Republican candidate embracing a European styled VAT tax with the enthusiastic support of his “base” undoubtedly represented one of the stranger moments of a highly unusual political campaign season. At times of such high levels of voter discontent, we may well experience more such unusual moments in the days ahead.