Wednesday, April 5, 2017

Jim Rickards Talks about the Potential for a VAT in the US

Jim Rickards latest web interview is here. Below is summary of the topics covered. Not a lot of new ground in this interview, but he does respond to a question about why Trump and Congress might turn to a VAT tax later on as they work on tax reform.


Topics Include:
*Commentary on FOMC and Rate Hike
*How VAT may enable a revenue neutral solution to allow Trumps fiscal and tax cuts plan
*One of the dangers to VAT is that it is prone to a creeping rise in the tax rate
*Scenarios for consumer reactions to VAT perceived as price inflation
*How increasingly fragile markets combined with highly leveraged financial services institutions are leading to amplified risk levels for the entire financial system
*Market fragility from Jim’s view is a function of system scale – if you double the size of the system the risk increases exponentially
*The system has not deleveraged since 2008, but has increased leverage and concentrated in an even fewer number of banks
*The derivatives market is approaching one quadrillion dollars in size, approximately ten times the size of global GDP
*Nation debt levels, debt ceiling, comments on the math of servicing the increasing debt burden in consideration of the debt to GDP ratio
*The first $20T of US Government debt is treasury debt, with a debt to GDP ratio of about 105%, and it does not include contingent liabilities such as social security and Medicare
*If counting contingent liabilities, it brings the US debt number to more than $100T, and the debt to GDP ratio closer to 1000%
*The most likely path out of the current debt for the US is inflation, which means inflation is ultimately required and likely

Here is an example Q&A from the interview transcript text:

Alex:  I have a follow-up question to the VAT topic. Instead of consumers looking at it and thinking it is additional tax, is there a scenario where VAT could be perceived by consumers as prices of things going up? Could this be some sort of psychological trigger that could accelerate the velocity of money or an inflationary-inducing kind of effect?
Jim:  It could be, and that’s a very good question. In fact, prices will go up. I’ll leave it to the people at the Commerce Department to sort out how they want to define inflation, but if you have something that’s $100 and you slap on 5% VAT, suddenly it’s $105.
The talking heads and people on financial television will tell you, “Oh, don’t worry about it. It’s not inflation; it’s only a tax,” but I’m not sure the average consumer would think of it that way. If they’re paying $105, that’s 5% inflation overnight.
There are other weird consequences such as we’ve seen in Japan, which is if they announce an effective date, you might actually get a short-term boost in consumption. That would be good short-term for the economy, because everyone will run out and buy stuff before the effective date. If they said “This is in the bill that’s going to pass Congress with an effective date of September 1st,” you might see everyone at the end of August shopping like crazy to beat the sales tax or value-added tax.
That did happen in Japan, but it’s only a Kool-Aid high. It’s a short-term boost, because the day the tax comes into effect, the economy falls off a cliff. All you did was bring the entire aggregate demand forward to get ahead of the deadline.
It’s still early days since this bill has to wind its way through Congress, but I know the value-added tax is getting a lot of consideration and always has.
I spoke to top people at the tax section of the American Bar Association. These people are career professionals, they’re lawyers who talk to the Treasury on a regular basis about policy. One of those top people said to me a couple of years ago during the Obama administration, “The Treasury has given up reforming the internal revenue code. It’s just too much of a mess. The only way they see that we can keep the U.S. from going broke and raise revenue is with a value-added tax, with a VAT.” That’s the default position.
With the Trump administration and Congress saying you have to be revenue neutral and Trump committed to income tax cuts, there’s no way to square that circle without a big revenue raiser, and VAT is the biggest thing out there. We have to keep an eye on it. It may be coming, but it can have these weird effects of bumping inflation.
There are offsetting forces, and that’s what makes it tricky. On the one hand, sticker shock at the counter might give you an inflationary mindset. On the other hand, if everyone is running around spending before the tax and then not spending after the tax, that can actually be deflationary if aggregate demand drops and the economy runs into a brick wall.
The problem with all this is it’s not difficult to define theoretical outcomes based on what we know, but because these things are behavioral and psychological – what I call emerging properties of complex dynamic systems – basically we’re manipulating behavior and shouldn’t be surprised if we get some very bad results.

Added comment: Jim talks in some detail about topics we have covered here in depth such as the risk derivatives pose to the financial system and also the inability of the US to grow its way out of its debt problems. Trump will have exposure to all these problems over his four years so no one is going to be too shocked if one or more of them blow up during that time. The key if that does happen is what his response to the situation is. That seems up in the air at this time. 

Here is one little clue though. Notice how when the GOP health care bill failed, Trump quickly pivoted to the idea of turning to Democrats to move forward on the problem. This shows you that Trump is NOT married to ideology and will go where he thinks he can get something done. Keep that in mind if we do get a huge financial crisis during his term. Trump might be more willing to work with the IMF using the SDR than most people would suspect right now even if he also might be willing to consider pro gold advocates at a time like that. I don't think we will know until it happens what Trump would actually do.

Added notes: Links to other recent interviews with Jim Rickards

Wealth Research Group 

Dan Popescu

Wall Street for Main Street

Greg Hunter - Watchdog USA - in this interview Jim briefly mentions the Tim Geithner solution to a new crisis he tweeted about earlier. Here he describes it as the government "insuring" everything, but predicts it would not work. He also says that he is not sure if the public would accept the SDR as a US dollar replacement despite his long standing prediction this solution would be tried in a new major crisis.

Also, here is a link to a recent blog article by Dr. Warren Coats in which he talks about his views on US tax reform and briefly mentions the VAT. In this more in depth article on taxes, he supports the idea of a VAT (but only as a full replacement of existing income taxes).

Added news note 4-9-17: AP news confirms a VAT is under consideration by the Trump Administration in this article. Here is the key quote:

"One circulating this past week would change the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security.

The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady's plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $1.2 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place."

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