Thursday, August 26, 2010

Depressing reading?

Susan Morse's newly posted short piece, How Australia Got a VAT, makes depressing reading if you keep the U.S. in the back of your mind while going through it. She offers a nice description of how Australia ended up adding a VAT in 2000, absent any of the usual causal elements (severe fiscal crisis, World Bank or IMF pressure, etc.).

What makes the story so positively bizarre, from a very jaded U.S. perspective, is how well the Australian political process worked compared to ours. Rationality, attempts to make good policy, willingness to work together to bridge differences based on not entirely irreconcilable preferences, etcetera. It would almost remind me of Sunday school if I had ever attended one.

You start with a conservative Prime Minister (John Howard) who actually believes a VAT is good tax policy due to its relative efficiency. He apparently decides to promote enactment at least in part for this reason. Opponents raise concerns about its regressivity (they apparently didn't have in mind the transition effect, since at enactment a VAT may function as a one-time wealth tax.) So what happens? They compromise, and put the VAT in a package that has significant progressivity offsets. Concerns of Australia's states are also addressed. Moreover, academics are consulted and play a role in designing and evaluating the package, which I hope readers will forgive me for thinking is a good thing. (Much less likely to happen in the U.S., where we might testify at a Congressional hearing but generally do not get to play inside the process to the same degree as in many other Western countries.)

OK, this isn't a Hollywood fairy tale. For example, Howard initially got elected in part by denying that he had any interest in enacting a VAT, then promptly reversed course (although he did then end up seeking and narrowly getting voter approval). And some of the details seem clearly wrong and driven by optics and poor understanding of the issues - e.g., one important mechanism for addressing progressivity was excluding food from the VAT, whereas what Morse calls a "Michael Graetz-like plan" with higher transfer payments would likely have been far preferable. (Food exclusions are inefficient, poorly targeted as they apply to Whole Foods-type consumers way up the income scale, and create administrative complexity if the boundaries of the exclusion are unclear or in the presence of mixed food plus non-food goods or inputs.)

Still, in the words of Sinclair Lewis, "it can't happen here." (Though Lewis had a bad "it" in mind, the rise of fascism, and was saying that it actually could happen here - whereas I mean that a good thing actually can't.)

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