The Fed Can't Solve Our Economic Woes - WSJ.com

WHAT'S WRONG WITH A VAT TAX: The Fed Can't Solve Our Economic Woes - WSJ.com: "- Sent using Google Toolbar"

Several fatal flaws with consumption taxes:

1) They raise the cost of items and shift economic utility functions. The result is people may opt for less efficient, less productive solutions because the cost-benefit trade-off has been shifted. (This is broadly evident in Europe). As a result, the overall productive capacity declines and erodes.

2) The first might not be so malign if the funds raised from the consumption tax did things that increased even more the productivity of the society.

One might think of things like a smart grid to support the development of renewable energy. But an example here would be a country like Portugal where the VAT rate is 21%. When the country decided to build a smart grid to support the current (per the New York Times this month) 40% of electricity demand coming from wind and hydro, the country set up a private company.

Thus, taking more money out of the economy in any way that distorts the normal supply and demand balance of incentives and restraints would seem wrong. Clearly the extra 25% increase in the last 2 years under Obama (from 19% to 25% of GDP) has pushed the development of the economy and jobs in exactly the wrong direction (unless you are a socialist of course).