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    A VAT For Pretzels?

    Apr 18 • Government • 218 Views

    The Senate just said “No” to a VAT. Disagreeing, Paul Volcker sort of said “Yes” when he observed that a VAT is “not as toxic an idea” as we once believed. Suddenly everyone seems to be talking about a VAT.

    Here are some basic VAT facts:

    1. What is it?

    Most fundamentally, the VAT is a consumption tax, sort of a distant relative of the sales tax. Please think about a pretzel. A sales tax on a pretzel would be paid at the cash register. (Federal sales taxes now provide only 3% of federal tax revenue.) 

    The VAT, a value added tax, is also a consumption tax. If we levied a VAT, as with the sales tax, our pretzel would have a higher price.  However, the consumer does not pay the entire tax at the cash register. Instead, at each production stage, the value that is added to the product is taxed.

    With a 10% VAT, when $100 of wheat for pretzels leaves the farm, the flour maker who buys the wheat pays $100 for the wheat and a $10 tax. Then, when the pretzel factory buys the flour, it pays (very hypothetically) $1000 for the flour plus $100 VAT minus a credit for the taxes that were already paid. At each stage, the VAT is levied on buyers of the unfinished product; the consumer covers the final VAT payment. Piecemeal, through a sequence of tax forms, the federal government identifies and charges for “value added”. 

    2. Who uses the VAT?

    Close to 100 countries generate revenue through a VAT. In France, for example, more revenue is raised through their VAT than through income taxes. I checked the OECD website and saw that VAT rates vary. Denmark: 25%; Spain: 16%; Thailand 7%.

    But then I discovered that reality can be a lot more complex. In the U.K., for example, where food is tax free, they decided to exclude frozen yogurt that needs to be thawed. They faced similar dilemmas about children’s clothing, having to decide the whether small adult sizes are for children and even if flotation devices are clothing.

    3. Why is a VAT desirable?

    Many economists believe that a VAT can generate “a ton of revenue“. Also, as a consumption tax that elevates prices, a VAT can encourage saving. 

    4. What is wrong with a VAT?

    It is regressive. That is why the UK VAT, for example, excludes food. Also, a VAT can be complex.

    5. When was the VAT created?

    The VAT was invented in 1954 by Maurice Laure, a French tax official.

    You can see where all of this is heading. It’s complicated. The basic issue, though, is if we spend more, we need more revenue.

    The Economic Life 

    In the U.S., the personal income tax generates 44% of all tax revenue while social insurance taxes account for 42%. Corporate income taxes are a distant third at 7%.



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    Economic Geography or Location, Location

    Apr 16 • Demand, Supply, and Markets, Developing Economies, Thinking Economically • 164 Views

    Why, you may wonder, is an economist presenting a major address today at the Association of American Geographers? Looking back and looking forward, Paul Krugman’s speech provides the answer.

    Economic geography involves mathematical modeling and also costume jewelry in Providence, RI and detachable collars and cuffs in Troy, NY. A 2008 World Bank report says that it involves seeing the world through a 3D lens: density (cities), distance (migration), and division (barriers).

    Economic geography takes us at first to the regional specialization that characterized the growth of US manufacturing during the 19th century. But then, we need to go to Wenzhou, where 95% of the world’s cigarette lighters are now made, elsewhere in China, and to other developing nations.

    The point of all of this? Together, economics and geography create a synergy through which we can better understand regional specialization and economic growth in developing nations.

    The Economic Life

    The World Bank’s 3D’s involve the Density that we find in population centers, the Distance that people migrate to enjoy economic opportunity, and the Division that needs to be overcome when migration is blocked by political barriers.

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    Economic Facts About Dogs

    Apr 15 • Businesses, Demand, Supply, and Markets, Households, Innovation • 171 Views

    Have you ever thought about the connection between your dog and the economy? During an interview on NPR’s “Fresh Air”, Michael Schaffer, author of One Nation Under Dog, spoke about dogs’ lives. A lot of his stories relate to the onset of two career families:

    • In 2 worker households, dogs were increasingly left alone during the day and began to experience separation anxiety. The solution was an antidepressant.
    • According to Schaffer, pet antidepressants are beef flavored. Otherwise, they are chemically identical to human antidepressants.
    • Pet related goods and services are a part of a $43 billion industry.
    • Two career families typically need dog walkers. There are dog walking certification organizations. 
    • Manhattan has pet taxi drivers.
    • Pet grooming has become a major industry. Shaffer hypothesizes that the growth began when pets started sleeping with us instead of in the doghouse in the back yard. 
    • Dogs’ names have changed.  Decades ago, a dog might have been named Fido. Now the dog is Frank.
    • The pet hotel business is growing. (Shaffer visited the Wag Hotel in San Francisco.)
    • According to a recent Economist article, increasing numbers of pets have been abandoned because of the impact of the recession. 

    The Economic Life

    According to the Department of Labor, 90% of our spending typically is for “food, housing, apparel and services, transportation, healthcare, entertainment, and personal insurance and pensions.” I was not able to find a pets category.




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    Is It Over?

    Apr 14 • Macroeconomic Measurement • 212 Views

    Imagine a “u” attached to a slightly (or considerably) higher upside down “u” and you are looking at 2 business cycles. A business cycle includes a peak, a contraction, a trough, and an expansion. Most people think that this recession started during December, 2007 (the top of the first “u”) and ended during July, 2009 (the bottom of the first “u”). However, the definitive word will come from the National Bureau of Economic Research (NBER) and they are not quite sure yet.

    The NBER tells us when recessions start and when they end. While primarily, they base their decision on the GDP, other data is considered: 

    1. Real GDP: the dollar value of  goods and services produced in the U.S.; measured quarterly by the Bureau of Economic Analysis (BEA).
    2. Real Personal Income: the amount we earn excluding transfer payments (such as social security, welfare, and other government paychecks that do not pay for a good or service); measured monthly.
    3. Employment: the percent of the labor force that is unemployed and looking for a job; measured monthly.
    4. Industrial Production: manufacturing production; measured monthly.
    5. Sales volume: from manufacturers and retailers; measured monthly.

    The Economic Lesson

    A recession is the period between a peak and a trough. Thinking back to our “u”, it is the left side, the trip downward. In economic terms, as we travel down the left side of the “u”, the GDP is either growing more slowly or actually diminishing. While most of us say that a recession is defined as two consecutive quarters of declining GDP, the NBER says that the quarters do not have to be next to each other.



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    More on the Movies

    Apr 13 • Businesses, Entertainment, Thinking Economically • 193 Views

    Following up on yesterday’s post, I discovered how important product placement can be. Sometimes movie makers decide the products beforehand, before they even complete the script and select the stars. Fees for a “starring” product can total millions.

    Up in the Air? Including Hilton HHonors Diamond V.I.P. meant free rooms. But meanwhile, Hilton oversaw accuracy for their uniforms, service, details. For its participation, American Airlines helped to market the film.

    The 28th Amendment?  Movie makers were contemplating where to insert a fast food scene before the scene was written. (Film has not been completed.)

    Wearing economic glasses as you watch your next movie or TV show, you might get some extra insight if you watch for product placement.

    The Economic Lesson

    If profit equals total revenue minus total cost, then product placement certainly helps the bottom line. Also though, we should not forget the opportunity cost of these profit generating decisions. Is artistic quality influenced?


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