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Special Report
VAT’s Next?
The world’s greatest game of chicken.
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.”
About the Author
G. Tracy Mehan, III served at the U.S. Environmental Protection Agency in the administrations of both Presidents Bush. He is a consultant in Arlington, Virginia, and an adjunct professor at George Mason University School of Law.
Letter to the Editor View all comments (34) | Leave a comment
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Paevo| 5.18.10 @ 7:30AM
Having lived in Europe for several years, I can say that the sole reason the VAT is tolerated there is on account of their propensity for extreme frugality owing to their history (World Wars, etc.). Europeans simply do not consume anywhere near the level that Americans do. Indeed, decades of Marxist and socialist propaganda have made "consumption" a dirty word (cf. Jean Baudrillard, "The Society of Consumption"). There is nothing that would kill the American Dream faster than a VAT coupled with nationalized health care.
Curly Smith| 5.18.10 @ 8:21AM
Nope. They don't consume as much because they don't have any disposable income. As an example, I spent a good bit of time in London some years ago and was amazed by the prices. I could by an Iomega Zip drive at home for $100, it was 100 pounds, or $167 in London. I found the same pricing differential in grocery and department stores. It's hard to spend money if you don't have any money to spend.
Paevo| 5.18.10 @ 10:48AM
Right; everything is proportionally more expensive, so you consume less and hold on longer to stuff an American would jettison as useless junk. The psychological effect is to make a virtue of this frugality and a vice of consumption. Hence the widespread resentment of Americans in Western Europe...
Spike| 5.18.10 @ 11:05AM
Paevo / Curly,
Excellent points! I can grasp (and appreciate) a VAT's impact on consumption, which is a problem, here in America. As George Will has indicated, this tact might be viable, but not in conjunction with the oppressive "progressive" Income Tax. What is of [major] concern, which you've intimated, is the massive expansion of profligate spending by this government, essentially forcing the hand of government to expand taxes, and make our citizens subservient. As, by the way, are our European friends, and their Soviet friends before them.
Purpleguy| 5.18.10 @ 3:01PM
The VAT tax would be regressive, hurting the less well off disproportionately, unless it has provisions for food, drugs and a few other essentials to be exempt. But it could replace the antiquated income tax structure ... it should not be in addition to the current income tax.
If you spend, you are taxed. Simple as that.
Oldefarte| 5.18.10 @ 3:49PM
You are simply.....STUPID! The poor pay NO INCOME TAX [and are subsidized by the RICH, or as Obama/Democrats think.....ANYONE WITH INCOME]. The truly RICH 10% pays 50%+ of all income taxes collected, dummie. What should happen is that all WELFARE should be gradually eliminated, which would force the indigent poor to WORK FOR A LIVING instead of living off of THE AMERICAN TAXPAYER [and hopefully to stop having children that they (and we taxpayers) cannot afford]!!!!!!!!!!
Nick| 5.18.10 @ 6:02PM
Pay no attention to PurpleJackass, folks.
He has stupidly claimed that John Marshall was the FIRST chief justice of the Supreme Court. His knowledge of history, and the Constitution, stinks.
He also used the word "precedence", when he meant "precedents", like a twit.
He has claimed, falsely, that President Bush was in office for TEN months when the attacks of September 11th, 2001, occured.
He also didn't know that Virginia governors cannot run for a second consecutive term. Nor, did he check his own misspelling of "hypocrite", as he berated someone else for misspelling "hypocrisy", thus making him, in fact, a hypocrite.
He is an ignorant fool.
He is not worthy of debate with grown-ups.
LJones| 5.19.10 @ 1:10PM
"massive expansion of profligate spending by this government..." And where were you when George Bush doled out $1.3 TRILLION Unfunded dollars in tax 'cuts' and added an unnecessary & UNFUNDED war in Iraq? Do a google search on the National Debt since the Great Depression and/or National Debt by President...and see how beneficial to the country the tax cuts of Reagan ande Bush were. (They DID help the wealthiest - but then, that is another google search).
Ole Sarge| 5.20.10 @ 1:31AM
Does anyone think the libs will allow the canceling of the progressive tax before implementing the VAT tax?
Tic| 5.18.10 @ 7:09PM
@Curly Smith| 5.18.10 @ 8:21AM
"It's hard to spend money if you don't have any money to spend."
This hasn't stopped the federal government. The less money they have the more they spend.
Bill Hussein O'Stalin| 5.18.10 @ 7:41AM
The Dow Jones average has sent out a signal to the public and the professional political class that has gone ignored. The DJIA has languished around 10,000 points for over 10 years. As more Americans realize they are losing their wealth by investing in an overpriced commodity, you will soon see the DOW go down.
What's the message? The federal, state and local governments already take too much in taxes and fees. Ironically, all you see is greedy politicians who have no backbone who are always looking for more.
As these national attempts at central planning unfold, the economy will further deteriorate and unemployment will continue to grow.
You can bet on it.
Louis Jenkins| 5.18.10 @ 8:12AM
Who in their right mind would vote for a VAT? Unfortunately, the vote will be at the National level, not at a local level, and with the income tax hanging around it's a sure loser. The District of Crimminals want the money, but are afraid to say "Yea" because of the fallout. But it is still a possibility.
Mike Rogers| 5.18.10 @ 10:29AM
Unfortunately so, although it may (I hope) cause a revolt at the ballot box for all who supported it.
Under the constitution, the VAT is nearer to the kind of tariff that the founders had in mind, whereas national incomae and corporate taxes are not - the states should rise up and abolish the income tax (16th amendment), and snatch back their senators (abolisht the 17th) while they are at it.
Jim O'Brien| 5.18.10 @ 8:46AM
Liberals watch the drunken Euro states and learn absolutely nothing, just as they learned nothing from the collapse of the USSR. In fact, Obama and the rest of the Demo-Socialists in Washington are copying the Soviet-Greek models. They are conducting a war against capitalism and freedom.
Mike Rogers| 5.18.10 @ 10:33AM
The states will go first, because they, like European nations cannot print their own money - California leading the way over the cliff. After that, it will largely depend how fast the Fed inflates the dollar to monetize the portion of spending that the government dare not tax directly, and when/if another currency becomes more stable.
Stop spending and declare a gold standard!
Lu Dumak| 5.18.10 @ 9:01AM
CUT spending. Start with welfare and all school breakfast and lunch programs.
Ken (Old Texican)| 5.18.10 @ 10:57AM
Folks,
Don't miss this article over at American Thinker. It is the very best I've seen to describe our situation.
http://www.americanthinker.com.....pital.html
Pete| 5.18.10 @ 11:16AM
MI is messed up. Who does that?
Purpleguy| 5.18.10 @ 4:48PM
"Economies aren't based on building things, destroying them, and starting over again from scratch, time and time again. Economies are based on continued growth. " - and what happens when growth stops. Continual growth is impossible, there is a limit. Then what?
Maddox| 5.18.10 @ 12:18PM
"Who in their right mind would vote for a VAT?"
Who in their right mind would vote for Obamacare?
Democrats may be willing to kill what is left of the economy on their way out after November 2nd.
Mark MacInnis| 5.18.10 @ 12:41PM
Any Congressperson or Senator with any guts (okay, an oxymoron....) would find a member of the other party who agrees, and they would both step up to the microphone and say to the American public what most of us already know....the emperor has no clothes. Follow that by saying it is time to end the welfare state, that it is the responsibility of people to feed their own children, that administrator to teacher rations of 1+:1 are unreasonable, that no lawyers should be getting rich as a result of health-care legislation, et cetera, et cetera....and then have them JOINTLY touch the political thired rail that is SSI and entitlements....
Jim O'Brien| 5.18.10 @ 1:00PM
We should Call for the Resignation of Obama, his entire cabinet, and most members of congress. They are destroying the United States. They have brought our entire economy and freedom to the brink of collapse. I am reminded of Robert Kennedy's book, "The Enemy Within", except he was talking about the Mafia.
LJones| 5.19.10 @ 1:22PM
AGAIN - Where were you people when George Bush destroyed the economy? Look at histroical data on the deficit. Look at the 30-minute non-partisan documentary, IOUSA. Look at the jobs numbers which dropped like a rock under Bush but are slowly recovering under Obama. And the economy is improving. Bush started TARP after you gave him 8 years of failure & yet you haven't given Obam 1.5 years yet to make the correction...
Dean| 5.18.10 @ 1:25PM
In their lust for money, many states are trying to force catalog and Internet retailers to collect sales taxes for items sold to residents of the respective state. Michigan figures that it is "owed" use taxes of some $300 million. However, when individuals voluntarily report it on their income tax forms, the state has ended up collecting about $3 million.
I buy many items on the Internet. Do I pay the use tax? I chose to exericse my constitutional rights under the Fifth Amendment . . .
L Jones| 5.18.10 @ 2:23PM
It might be a good idea for those Republicans signing a Resolution against a VAT to read their Republican "Roadmap for America". It includes a value-added-tax of 8.5% but is called a Business-Consumption-Tax...same thing. It will be assessed on consumers for every sale or service. The Roadmap uses their "VAT" to eliminate ALL Corporate tax - that's a relief to the Billion Dollar Corporations who won't have to pay expensive accountants to find ways around taxes which contribute to the roads, services, etc. that they benefit from in this Country.
Derek Leaberry| 5.18.10 @ 2:32PM
A two-headed answer here.
First, the political establishment wants a VAT tax. Alan Simpson, the Republican co-chairman of the deficit commission, is going to be the cover for the tax revolution. By extension, Simpson will hook in Bob Dole, James Baker, Poppy Bush and a few other fellow travellers in the Republican establishment to force this through despite the objections of their own party members.
Second, the PBS travel host Rick Steves assures us that things are just dandy in Europe as the maternal government is the wave of the future. We will love Big Brother just as the Europeans do.
BA Cyclone| 5.19.10 @ 10:41AM
"If ye love wealth better than liberty,
the tranquility of servitude
better than the animating contest of freedom,
go home from us in peace.
We ask not your counsels or your arms.
Crouch down and lick the hands which feed you.
May your chains set lightly upon you,
and may posterity forget that you were our countrymen." -- Samuel Adams, 1776
Curtis| 5.18.10 @ 8:19PM
Raising taxes on items produced and assembled in the US seems kind of dumb, seeing as how we've been losing production, manufacturing, and assembly jobs in the US for a good thirty years now.
Right now alot of our products that are "Made in America" are assembled from foreign parts shipped into the country. Taxing the "Value Added" by assembling in the US will ensure that those assemblies are assembled in the foreign country where the individual components are manufactured.
I may be overly dramatic, but VAT strikes me as the final nail in the American Industrial coffin, for both large and small manufacturers.
Darin Gobel| 5.19.10 @ 2:32PM
VAT is the final nail, period. In fact, all the nails are in the coffin of the entire global economy and it is already being covered with dirt. Does anyone really think anything can be done about this or anything else for that matter? It is a waste of time talking when no one in authority is listening, which they're not, have not and emphatically will not do. Chills of catastrophic proportion should be rippling down the back of the necks of everyone observing the willful dismantling of an entire economic infrastructure; which has been going on for decades. It's all over! In the coming months everyone, to their horror, will realize this as human society melts into a boiling cauldron of acid that is poised to spill over into the streets. How terrifying things will become then....
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