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?
