Consumption Tax: Coming to the USA

One of the key problems facing the United States economy is a massive fiscal budget deficit. The federal deficit is now estimated to be more than 11% of GDP, the highest since the second world war. Spending on the wars in Iraq and Afghanistan, and a propensity to cut income taxes by the previous administration are key causes of the blowout in the deficit. A wide range of government expenditure programs, including government stimulus programs, and bailouts to combat the financial crisis, have resulted in significant additional expenditure, and proposed new programs such as health care will require further expenditure. This will only add to the federal deficit, unless new forms of revenue are found.

The only solution is to increase taxes. Unfortunately many Americans, particularly those on the right of the political spectrum, resist tax increases. However, a tax levied on consumption rather than income would likely be more palatable to those opposing tax increases. A tax on expenditure rather than income encourages savings, and leaves the tax payer with the option of reducing tax by reducing expenditure.

A tax on all consumption  without exemptions, such as the goods and services (GST) tax in Australia is the best option. All expenditure is taxed, and existing taxes  on consumption (such as sales tax on fuel), which distort consumer behavior can be eliminated, and rolled into the expenditure tax system. The downside of this tax is that it is regressive, and tends to tax lower income earners at a higher proportion of their income. However, targeted expenditure programs and income tax exemptions at the lower end, combined with increased marginal income taxes at the upper end, can offset the regressive nature of the tax.

Consumption taxes are used very effectively to raise revenue in Australia, Canada, Europe, and Japan and would likely be a very appropriate tax given the size of the current federal deficit in the United States. There is no reason that some of the states such as California with significant budget deficits could not also institute a consumption tax to reduce the deficit.

Watch this one, a consumption tax is coming to the USA.

The Politics of "Hell No", Patriotism and Partisanship

The United States, with a new "centrist" administration eager to work across party lines and with a wide range of interests across the globe has a golden opportunity to get it's house in order on the domestic policy front, as well as on the international policy front. The economy, health care, and public finances are key domestic issues that can easily be solved across party lines, as can issues such as poverty, global warming, nuclear disarmament, terrorism, and the ongoing wars in Iraq and Afghanistan.

Unfortunately the extreme right of the Republican Party, which claims to represent the conservative movement in the United States, seems more interested in playing partisan politics, than solving the major problems facing their country and the world.  The focus is on dishonestly using the "communist" and "socialist" bogey to try to discredit a new administration that is centrist and by international standards  "conservative", in order to preserve entrenched interests, rather than to propose solutions to very serious problems. One observer of the recent "tea party" in Washington proudly pointed to his favorite sign which boasted "I'm not with the party of no, I'm with the party of "hell no". Another claimed to be delighted to be with so many American patriots. Others claimed "they" want "their" country back. Some wondered why the press was not covering this momentous event, Fox excepted.

Unfortunately many supporters of the Republican party who claim to be conservative in the United States are not conservative at all. They are right wing extremists, divisive, and destructive. They claim to be patriots, but are partisan. They claim to want freedom and individualism, and to protect their country from terrorists, but in fact their "hell no" attitude creates anarchy and a breeding ground for the Timothy McVeagh's of this world, just as the extreme right wing Taliban in Afghanistan creates a breeding ground for Al Qaeda.

If the conservative movement in the United States wants to again be a powerful political movement, it will need to engage with the serious issues facing their country and the world. It will need to propose solutions, work with, and debate with the current administration, rather than resort to partisanship while claiming to be patriotic, sponsor tea parties that divide, and display signs that glorify their "hell no" attitude. To claim that "they" want "their" country back is a euphemism for claiming "they" want "their" entrenched privileges back, and "to hell" with those who don't have those privileges. They should know that the American people have already taken their country back through the democratic process.

Republican conservatives need to have a "hell yes we can too" attitude, move to the center and propose solutions to serious issues or they will remain at the margin as far as the people, the press and the world community are concerned.

Australia: On top of the Economic World

Australians take great pride in their sporting achievements, and have punched well above their weight in a wide range of sports beyond their inherent world dominance of cricket and rugby. Less noticed is the outstanding "world best" economic performance over the past seventeen (yes 17) years. Since 1992 Australia has not had a recession, even as Asia was gripped by the Asian financial crisis in 1998 and as North America, Europe and most of the industrialized world teetered on the edge of collapse as the United States generated financial crisis hit the world in late 2008.

It is a remarkable achievement, which as the Australian Financial Review points out, has it's genesis in luck and good economic management by both labour (left of centre) and liberal (right of centre) governments. With significant forsight, the labour Hawke-Keating governments reformed the banking sector, liberalized trade and the labour market, and established a compulsory superannuation system in the 1980's. These reforms, as well as very effective countercyclical fiscal and monetary economic management provided the structural basis for withstanding the negative effects of the Asian financial crisis in 1998, and the United States generated world financial and economic crisis that followed a decade later in 2008.

The Howard liberal government in the late 1990's  until the mid 2000's under Treasurer Peter Costello managed to gradually build a huge budget surplus, despite a significant level of spending, thanks in part to minerals trade with China. The surplus was critical to implementing the massive fiscal stimulus program that prevented the economy from sliding into recession in late 2008, when the rest of the world was hit by the United States generated financial and economic crisis. The Rudd labour government acted swiftly with a massive fiscal stimulus program in late 2008, to fight the global crisis, and was instrumental in encouraging China and other countries to follow suite with coordinated fiscal stimulus programs. It worked. Australia avoided a recession, thanks to the quick action of a newly elected liberal democratic government.

Australia is now in the enviable position of having a sound financial and economic basis for continuing it's record of uninterupted economic growth for the foreseeable future. China is Australia's largest trading partner,will likely become the dominant economy in the world in a decade, and will rely on Australia's rich resources to underwrite it's growth.

Luck or good economic management. It doesn't matter. Australia in economics, as in sport, is punching well above it's weight.