Congress is, no surprise, talking budget and tax reform again.The 2001 and 2003 tax cuts are set to expire at the end of the year, and the federal debt is now equal to about 60% of GDP, the highest level since just after WWII.(These figures come from Donald Marron’s very well-balanced testimony on the topic, which you can find here.)
In discussion of tax reform, the idea of instituting a value-added tax (VAT) seems to be a perennial favorite of economists.Here is a quick overview of the difference between a VAT and a sales tax, and the reasons economists tend prefer the former:
A sales tax is based on a percent of the price of a product sold to a consumer.In contrast, a VAT is levied on the extra value that is added to a product at each stage in its development.For example, under a sales tax, an ice cream shop would collect and pay tax based on the final price of an ice cream sundae it sells.Under a VAT, the ice cream shop would only collect and pay tax on the difference between the final price of the sundae and the costs of the inputs required to make the sundae: cream, sugar, bananas, peanuts, etc. Both systems result in a tax burden that is eventually paid by the end consumer, but the VAT has several advantages:
VAT doesn’t double-tax.Double-taxation is broadly considered to be a bad thing in economics, because it means that some people have to pay a tax twice (or more times) on one economic activity.This creates extra distortions, in the form of disincentives to engage in these activities.In the case of VAT vs. sales tax, the sales tax would tax the cream based on its price, and then tax the ice cream based on its price—but the price of the ice cream includes the price of the cream, which was already taxed once.This means that goods that have gone through more stages of production—that are higher up the value-added chain-- are taxed more heavily than goods that have only one stage of production before being sold to the final consumer.While it is generally undesirable to have taxes that discriminate against certain types of products, this might be especially concerning if we want our economy to make high tech, high value products, which often go through many stages of manufacturing.
VAT doesn’t favor monopolies.Since sales tax must be paid each time something is sold, there is an advantage to being a large, vertically integrated firm that engages in all stages of production of a product.It is more expensive to be a small, specialized firm.VAT does not create this distortion, so it puts smaller firms on more even footing with large ones.
VAT has inherent checks on fraud.In a sales tax system, consumers have no incentive to make sure that producers are submitting the correct taxes for the good they purchase.However, in a VAT system, the consumers in the middle of the value-added chain have an incentive to make sure their suppliers are submitting the correct taxes.VATs are collected for each sale based on the price(like the sales tax), but each person paying the tax can deduct the price they paid for inputs from the total they owe.As a result, they will check that the person they bought the inputs from submitted the correct tax, because otherwise the tax they pay will be inconsistent with what their supplier submitted, and it would be obvious that one of them engaged in fraud.
VAT is easy to scale up or down to meet revenue needs.When sales taxes get too high—generally above 10%-- consumers start finding ways to circumvent it, such as buying online, etc.VAT is harder to circumvent, and harder to see, since it doesn’t hit all at once, so it is easier to raise the VAT rate without losing revenue to tax avoidance.(Note: Some conservatives, who one might think would support VAT, don’t like it for this reason—it makes it too easy for governments to raise taxes.)
VAT is not without problems: like the sales tax, VAT is regressive, falling most heavily on those whose consumption is the largest share of their income: the poor. One option for addressing this problem is providing off-setting payments from the government to low income individuals.
India has a new, attractively-designed symbol for the rupee.It’s a combination of the Latin letter “R” and the Devanagari “ra”. (It looks like this: र) I’m not sure yet what strokes I would use to write it: R-bar-bar, or bar-R-bar, but I approve.Now I think either China or Japan should come up with an alternative to ¥…
For those interested, Slate’s The Explainer has a quick article about the origin of common currency symbols here.
The Ghana cedi is noted with the symbol GH¢,or the ISO code GHS.(The ISO code for the rupee is INR; the U.S. dollar is USD, etc.) The name “cedi” comes from a word for cowry shell, which were once used in Ghana as currency.
Last week, I managed to get an infected scratched cornea in my right eye. I am now doing much better, and my doctors are predicting a full recovery, but the process I went through to obtain treatment offers a great deal of insight into medical care in Ghana.Here is the story:
On Sunday evening, what I had thought was typical contact lens irritation became very red and painful, to the point where I slept with an ice pack on my eye.By Monday morning, I realized that I likely had either a scratched cornea or an eye infection.I took a taxi to KABSAD Scientific Hospital, which is not actually a hospital, but rather a small clinic favored by ex-pats in Tamale because it is fairly clean, admits cash-and-carry patients with relatively little paperwork, has an actual MD on staff, and will let you do your own malaria tests.I arrived at KABSAD at 8am, and was informed that the doctor would be there any minute, and then he would decide whether they could help me, or whether to refer me to Tamale Teaching Hospital.
An hour later, the doctor had still not arrived at KABSAD, so I took a cab to Tamale Teaching Hospital.I wandered around the hospital with one eye open until I found the eye clinic.They informed me that I needed to get a folder from the OPD before they could help me.I wandered around the hospital with one eye open until I found the OPD (which, by the way, I still do not know what stands for.)
The OPD appears to be the single biggest bottleneck in the Teaching Hospital’s services.Everyone who is there for anything must first go to the OPD.There, they must supply personal information, including name, age, phone number, address, and religion (which sounds completely irrelevant, but as you will find out, is not.)You must also tell them what services you will use—before you ever get a diagnosis—so you can pay for them.Luckily for me, I knew I needed a consultation at the eye clinic.Also luckily for me, I happened to befriend an off-duty male nurse named Awal. Awal helped me procure my folder and pay for my eye consultation.
Awal then took me back to the eye clinic.Before seeing the ophthalmologist, I had to first see the eye sight nurse, who made me read off letters on an eye chart, and tsk-tsked at my poor vision, apparently oblivious to the fact that my right eye was red as a tomato, barely open, and dripping tears all over her precious eye paddle.Next I got to visit the “eye open”, which quickly became my favorite stop, because an elderly nurse, exuding competence and humming church hymns, put soothing drops in my eye that made me feel considerably more comfortable.Finally I got to see the ophthalmologist, who looked in my eye, then sent me back to the “eye open”.Again I got soothing drops, but this time the humming nurse betrayed me by following them up by putting a stick in my eye.The stick must have had some type of dye on it, because after that, three nurses, Awal, and the ophthalmologist gathered around to look at my eye and make interested-sounding noises.They then bustled me out of the “eye open” and back to the ophthalmologist’s room.
The ophthalmologist explained that my eye was cut; that I had an ulcer in it.I interpreted this to mean that I had a scratched cornea, which I took to be good news, because although they are painful, they usually heal quickly and without complication. “Good,” I said, “so it is not infected?” “No,” said the ophthalmologist, “it is also infected.We will give you medicine.”
Of course, I then had to first pay for the medicine, and then go get the medicine, and then bring it back to the “eye open.”At the “eye open”, the humming nurse applied antibiotic drops and a soothing ointment, and then put an enormous bandage over my eye.The bandage didn’t quite succeed at keeping my eye completely shut; I do not think the nurse was used to working with people whose noses are quite as pointy as mine.I left feeling a bit better, but with limited vision, at 12:30pm.
I should note that, as long as these steps took, two things enabled me to care more quickly than the average Ghanaian would have.First, I was paying cash for the services, not using health insurance, which would have entailed more paperwork and longer lines.Second, Awal somehow managed to get me to the head of every line, from the eye sight clinic, to the “eye open”, to the ophthalmologist’s office, to the pharmacy.I felt a little bit guilty about this, but at the time my eye hurt badly enough that I didn’t really care.In retrospect, none of the other patients appeared to have conditions in need of immediate attention—the only person who objected to my speedy admission was a man concerned about missing the bus.I do wonder how someone with a true eye emergency would fare: would a guy with a stick stuck in his eye have to wait in line to read an eye chart before seeing a physician?
The first day after my eye was treated was generally miserable.I had been given pain medication, which turned out to be ibuprofen.I had been holding out hope for codeine.I seriously considered treating myself in the “traditional” way, and if I’d had some vodka on hand, I probably would have put away a few shots.Fortunately, my body was being cooperative after a stressful day, and I was able to sleep through the worst of it.The next morning, the pain had improved, the humming nurse changed my dressings at the hospital, and I shuffled back home to go back to sleep.My friend Kris brought me some groceries, and despite my reduced depth perception, I was able to cook a fine dinner of poached guinea fowl eggs, toast, cheese, and boiled carrots with no mishaps..
The next morning found me sitting back in the “eye open”, as the humming nurse removed the bandages from my eye.Again, two nurses, Awal, and the ophthalmologist peered at my eye, and made pleased-sounding noises.However, although my eye looked better, it wasn’t doing so well at seeing.When I closed my good eye, I found that looking through my right eye was like looking through a fogged glass—I could see light and some shapes, but little else.I asked the ophthalmologist why my vision was blurred.He peered at my eye, and declared I had some scarring.I asked if it would improve, and he said that it might, as it healed.I asked if anything could be done.The humming nurse flipped through my chart, and noted that I was Christian.“You can go to any church in Tamale,” she said, “and they will pray for your eye.”
I took that as my cue to go not to church, but to Accra.(Accra has taken on mythic proportions to me living in Tamale.In Accra, you can buy sushi, blue cheese, a new eye, and possibly baby unicorns.
Since the next-day flight to Accra was full, my boss arranged for me to drive to Accra with several of the PhD researchers who were visiting Tamale and were planning to drive back to Accra starting that afternoon.We stayed the night in Kumasi, at a very nice hotel.One night cost me the equivalent of one month’s rent in Tamale.I was actually fine with that, since it was still considerably less than the cost of an airplane ticket.However, I was a bit annoyed when the AC in my room didn’t work.I slept fine anyway, but in retaliation, I stole the soap.
I arrived the next day in Accra.By the time I was able to hire a taxi to take me to the well-reputed Emmanuel Eye Clinic, it was 2:30.To my surprise, the clinic was closed, except for a receptionist who booked me an appointment for the next day: the doctors only work in the morning.Since my eye sight had improved over the past day, I was not too concerned about the wait, but I made a note to tell my father that if he ever gets tired of being on call on holidays and weekends, he can come to Ghana, work half a day, five days a week, and drive a very swanky car.(Note: no one has ever had fewer ambitions to drive a swanky car than my father.Maybe a swanky bicycle.)
I returned to the clinic the next day at 10am.Emmanuel Eye Clinic is very efficient for those who make appointments, but appointments seem to make up only a small share of the clientele.Getting in to see the ophthalmologist, getting my eye dilated, and picking up my new medications took only a couple hours.The news was good: the ophthalmologist said that the scarring on my eye would not obscure my vision, and that in time all of my sight should return, although I might have some permanent light sensitivity.This news was a considerable relief.
I did have one further complication: my eye remained dilated for about 50 hours (3 to 4 is the norm). Apparently this happens to some people, and it is more common among those with light colored eyes like mine.Still, I wonder if the eye clinic uses a particularly strong dilator, since most of their clients have very dark eyes.
I returned home to Tamale after taking a day to relax in Accra.My vision in my right eye is still a bit blurry, but I am continuing with my medications, and it seems to be slowly improving.I seem to have been lucky in a number of things: the location of the scarring on my eye, the fact that I know a good deal about health care providers in Tamale as a result of my research, and not least of all, my coworkers, friends and family who provided support for me:Jessica for getting me to Accra, Lana for checking in with me each day, Kris for bringing me food, Ryan for hosting me in Accra, and my parents for taking my calls at ungodly hours of the night.Thanks for everything!
The U.S. trade deficit has been trending up over the past year, and the goods deficit is now at the highest level since November 2008. While a large and persistent trade deficit is not a good thing for the American economy, the recent trend should not itself be particularly alarming: at this point, we are merely retracing declines in the deficit that came as a result of the economic downturn. The recent increases in the deficit can be seen as symptoms of an improving U.S. economy that is consuming more goods and services, and importing more to meet that demand.
That said, we should consider how we are funding this increase in imports. The last two expansions in the trade deficit corresponded with asset bubbles: the tech bubble and the housing bubble. U.S. investment outpaced U.S. saving, and foreign investment made up the gap-- and the influx of money enabled the United States to buy more from abroad. Where are we getting the funds to increase our imports now? Part of the answer may be that households are consuming more and saving less (savings rose during the recession), but another source may be government debt. U.S. Treasuries fared well during the crisis, as investors turned to them in a flight to safety. If investment in U.S. government debt really is a driving force of the increase in the trade balance, this could be concerning, because, while we certainly don't want investment bubbles in any asset type, we should generally prefer to go into debt in order to increase future growth. Taking investment from abroad is great if it increases future growth in the tech sector; if it is fueling consumption that won't translate into future growth, it is concerning.
One could argue that the government stimulus policies are indeed an investment in future growth, because they have prevented a potentially devastating depression. However, as the economy starts to turn around, I think the United States will need to tackle the discrepancy between domestic saving and domestic investment and consumption.
To note, Ghana is doing its part to help the U.S. trade balance: the U.S. is currently running a surplus with Ghana. Main exports include petroleum products, mining equipment, and cars. If you all will send some more Parmesan cheese this way, we can do even better!
I have worked in economic policy in Washington, D.C., focusing on international finance and development. I am currently living and working in Ghana, where I manage evaluations of development projects. I like riding motorcycle, outdoor sports, foreign currencies, capybaras, and having opinions.