VAT’s Next?

A European-style value-added tax, or VAT, seems to be heading nowhere fast, notwithstanding Delphic pronouncements by Obama administration officials, including the President himself, which seem to keep it open as a real possibility.

The U.S. Senate voted, overwhelmingly (85-13), for a resolution offered by John McCain (R-AZ) which stated that “It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.”

The VAT is a national sales tax imposed at various stages from production to final consumer purchase.

VAT’s next? Higher taxes on income and productivity? Or massive cuts in spending and entitlement benefits? Both? Neither? Maybe it will be a fiscal meltdown of Grecian, that is to say hellish, proportions.

The full range of responses to our crisis, with or without VAT, can be seen in recent proposals, such as those offered by Congressman Paul Ryan (R-WI), a conservative, and Steven Pearlstein, of the Washington Post.

In his “Roadmap for America’s Future,” discussed in TAS by Philip Klein and elsewhere, Ryan does not propose VAT or any other kinds of new taxes. On the contrary, he aims to balance the federal budget by 2063 and reduce Medicare’s share of the economy from a projected 14.3 percent in 2080 to 4 percent. He would use vouchers to empower individuals over Medicare bureaucracy and drive down spending.

As an orthodox and optimistic supply-sider, Ryan would simplify the tax code and replace corporate income taxes with an 8 percent business consumption tax.

As Klein notes, Ryan’s proposal is intended to change the tax code in a direction that would promote more economic growth, by creating an optional, flatter tax system with just two individual rates (10 percent and 25 percent) and without any deductions other than a tax credit for health insurance. He gets rid of double taxation on interest, capital gains, and dividends.

The Congressional Budget Office (CBO) has certified that Ryan’s plan will do what he says it will.

Steven Pearlstein, a left-of-center business columnist for the Washington Post, proposed a nine-bullet plan to address the current fiscal and entitlement crisis which featured “a new broad-based value-added tax of 6 percent, with rebates to low-income households.” He also argues for holding spending on Medicare and Medicaid to GDP growth plus 1 percentage point a year, less than the GDP plus 2.5 percent which has been the norm.

Pearlstein also wants to raise the eligibility age of Social Security and Medicare by one month for each two-month increase in the average life expectancy while reducing the cost-of-living increases for wealthy seniors and raising premiums. He would limit discretionary spending (including defense) to the rate of inflation except in wartime, natural disasters, and recessions. He wants to reduce the corporate tax rate from 35 to 25 percent, limit its applicability only to profits in the U.S. and “close enough loopholes to increase corporate tax revenues by 5 percent.”

For individual income taxes, Pearlstein proposes to increase the standard deduction and personal exemptions so that no tax is paid by a family of four with income under $50,000. Beyond that, wages, salaries and short-term capital gains taxes would be set at three rates: 17 percent for income from $50,000 to $150,000; 27 percent for income between $150,000 and $250,000; and 37 percent for income over $250,000. However, he would tax interest, dividends and long-term capital gains at 20 percent, up from the current 15 percent.

Back to the VAT, Bruce Bartlett, a former Jack Kemp staffer and supply-sider, has argued that taxes are going up and a VAT is better than, say, raising marginal income tax rates or the capital gains tax. However, he remains an outlier on the right side of the political spectrum.

Former Federal Reserve Chairman, Paul Volcker, is another. He has raised the possibility of both VAT and energy taxes as part of any solution to the nation’s fiscal imbalances.

George F. Will, conceding that a VAT would address the problem that “Americans consume too much and save too little,” nevertheless put a hex on liberal advocates of the VAT. The conservative response should be: “Taxing consumption has merits, so we will consider it-after the 16th amendment is repealed.”

“A VAT will be rationalized as a necessary to restore fiscal equilibrium,” said Will. “But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government.”

Will cautions that a VAT would most likely be piled high on top of ever-rising income taxes as born out by the European experience.

The Wall Street Journal has observed that “the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate.” The top individual income tax rate remains “very high” in Europe, despite the VAT, averaging about 46 percent among nations on the continent.

The centrist economics columnist, Robert J. Samuelson, points out that “Europe’s widespread VATs aren’t models of simplicity.” There are many preferential rates and exemptions. The Irish tax food at three different rates. Just imagine the bumper crop of VAT lobbyists seeking various carve-outs and breaks for an infinite number of clients which would accompany any such tax in the U.S.

Meanwhile, back in Washington, the fiscal situation continues to deteriorate, promising a financial suffering across generations. Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, has opined that “we are about to embark on the most massive transfer of wealth from the younger taxpayers to older ones in American history.”

“It will be not just unprecedented but unfair: Our children will have to pay for the decisions we make today.” Or, I might add, fail to make.

This past week the Treasury Department reported that the U.S. posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall last year. This was more than double the $40 billion deficit forecasted by a posse of Wall Street journalists surveyed by Reuters.

David M. Walker, former U.S. Comptroller General and presently president and CEO of the Peter G. Peterson Foundation, penned an op-ed in USA Today, entitled, “We’re not yet Greece, but are we still America?”

“Over the past 40 years, the U.S. government spending has grown by almost 300% net of inflation, and our revenues haven’t kept place,” wrote Walker. “The result is that our current deficits, when adjusted for inflation, are the highest percentage of our economy since World War II.”

“In this respect, we sure look a lot like Greece, or at least we will in the near future,” warns the former Comptroller General, hoping that he is not a modern-day Cassandra from Greek mythology but a modern-day Paul Revere. Sure, our economy is bigger and the U.S. dollar is still 60 percent of the world’s reserve currency. Still, already total U.S. federal, state and local public debt exceeds levels in Spain and are comparable to Ireland and Great Britain.

“We will reach Portugal’s levels within two years and Greece’s levels within 10 years on our present course,” notes Walker.

As I say, VAT’s next?

Ryan and de Rugy want America to go cold turkey, make the cuts, reforms and adjustments without tax increases. “We need to reform entitlement spending, put both military and domestic spending on the chopping block, and start selling off federal assets,” argues de Rugy. “Better to do it now than during a fire sale later.”

Democrats do not want to cut spending (excepting defense), reform entitlements or impose a VAT for that matter. They seem to have an infinite number of ideas for more, not less, federal spending and debt. They have shown limitless ingenuity for raising a myriad of taxes, fees and other revenue-enhancers in their recent health care legislation, no matter the economic illogic of the levies. They would love to impose new tariffs, using carbon reduction as an excuse.

Republicans are for cutting discretionary spending (excepting defense) but are still mum on reforming the Great Beast of entitlements, having already supported the gigantic senior drug benefit, the largest expansion of entitlements in a generation, when they were in power.

Congressman Ryan’s plan for reforming entitlements and reducing marginal tax rates is praised by policy wonks, even President Obama in a feint at bipartisan bonhomie. Although Ryan has recruited a dozen co-sponsors on his proposal, few other sitting Republicans have spoken up in favor of it.

GOP congressional Members generally oppose a VAT, income and corporate taxes, user fees, gas taxes, carbon taxes, revenue-neutral or otherwise, and reductions in farm and ethanol subsidies or corporate tax breaks. Where they will come down on entitlement reform is something of a mystery.

We are witnessing what must be the greatest game of chicken ever played in the history of the world, fiscally speaking that is.

VAT’s next?

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