Conservative Political Commentary

...anti-socialist, anti-globalist, and usually with an attempt at historical and economic context

Friday, April 16, 2010

Senate Shows Some Sense about VAT; Will Obama?

“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 and the Senate opposes a Value Added Tax.”
– Non-binding Senate Amendment of 04/15/2010 by John McCain, passed 85-13, with 12 Democrats and one Republican voting against it. [1]


The Value-Added Tax (VAT) taxes almost all items at each stage of production or handling (where “value” is added). Manufacturers, distributors, and retailers will each have to pay some of it, but, of course, it all must end up being paid by the consumer or final user.

Paul Volcker, former Federal Reserve Board Chairman and current Obama advisor has mentioned the Value-Added Tax as an idea worth considering. President Obama will likely find this additional tax irresistible. As Charles Krauthammer explains, Obama will want this tax to help pay for Obamacare.

For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude -- if you exempt food, for example, the yield would be more like $900 billion).

It's the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent. [2]

And of course, Obama will want it all the more since it’s the fashion in Europe, which is Obama’s example for economic policy. Soon, we’ll be more like Greece, which has a substantial VAT and is still facing bankruptcy, except for a proposed Eurozone bailout.

It is encouraging, even admirable, that the Senate voted so overwhelmingly for the anti-VAT resolution, but when Obama and his minions start applying the pressure, one has to wonder if this resolve can hold up.

Liberals see this as the panacea for the endless and, as everyone admits, “unsustainable” spending, which goes right on, unsustainable or not, with no letup in sight. VAT would look like such a tax blessing, liberals (some, hopefully not all) seem to think that adoption of it would somehow lead to reduced spending. Actually, it would reduce consumer spending, but not government spending.

Here is a sample of some of their thinking. From Alain Sherter at a BNET finance blog:

My colleague (and stalwart editor) Cait Murphy says the U.S. urgently needs to reduce the federal deficit, and she argues in favor of a value-added tax as a good way to rein in spending. Exhibit A in that argument is that the national debt is spiraling out of control; Exhibit B is that rich people and corporations can’t afford to share more of the economic burden…

Here’s why I disagree. First, as the N.Y. Times’s David Leonhardt has noted, the nation’s total nonfinancial debt isn’t growing especially fast by historical standards. And that’s counting the recent growth in federal expenditures. Not that rising budget deficits aren’t a concern — they are. Just not immediately.

Besides, during the recession U.S. households and businesses have slashed spending. If Keynes is right (and recent history emphatically suggests he is), then the only way to fill in the resulting hole in the economy is for government to boost outlays in order to stimulate growth. Of course, there’s precedent for doing the opposite — it’s called the Great Depression. [3]

To me, both sides of this argument are wrong. First, the VAT would not slow spending. If more revenue were coming in, there would be even faster growth of spending. As long as liberals are in charge, there will be constant spending growth, no matter what is said.

Second, Keynes is wrong and has always been wrong. Keynesian spending grows government and little else. Has all the current spending brought the economy back to normal? Also, unprecedented government (Keynesian) spending characterized and prolonged the Depression years. But that is a topic that takes good Austrian School economics to really deal with. (See Mises.org.) Whatever recovery we have will be in spite of liberal policies, not because of them.

What could we expect if we got a VAT? What about Europe? As The Wall Street Journal points out,


One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD [Organisation for Economic Co-operation and Development] nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. From the 1980s through 2005, deficits were by and large higher in Europe than in the U.S. By 2005, debt averaged 50% of GDP in Europe, according to OECD data, compared to under 40% in the U.S. [4]

Whatever VAT we might get would be in addition to the income tax and state and local sales taxes that we already pay. Those and other taxes drive our average “Tax Freedom Day” to April 9. [5]

Caroline Baum at Business Week quotes Dan Mitchell, of Cato Institute as follows:

“There is no way to finance all this new spending without an additional broad-based tax,” says Dan Mitchell, senior fellow at the Libertarian Cato Institute in Washington.

Which is exactly why a VAT should be avoided, he says. “It’s akin to giving the keys to the liquor store to a bunch of alcoholics.” [6]

She goes on to point out the regressive nature of the VAT, which hits lower-income people substantially harder than others. [7] (Emphasis added)

On top of the economic slowdown we’ve been experiencing for the past two years or so, the economy would take another hit with a VAT. It would definitely slow things down a lot. Since people would have even less disposable income, economic activity would be significantly diminished. Whatever rate the VAT started at would fairly soon be increased. If anyone thinks that a VAT would reduce either spending or the deficit, they would be mistaken. It would push us even closer to the edge of the cliff.

In other words, we would soon be much more like European countries economically: facing ever-increasing deficits, very high taxes, constantly ballooning spending, permanent double-digit unemployment, and no letup in entitlements until we face financial collapse.

The only way to get the economy back on track is to encourage private sector economic growth: Forget VAT, cut spending, phase out entitlement programs, cut taxes (thereby increasing revenue to the government), and pull back on regulation. This, of course, assumes abandonment of any cap and trade program and repeal of Obamacare and perhaps the remainder of the stimulus.

The path we are on, which VAT would accelerate, leads to socialist decline, inflation caused by the Fed monetizing the debt, and widespread poverty with much of the middle class moving down a few notches to join a perpetual government-dependent underclass. This seems to be what the Administration wants: A more-needy populace looking to ever-growing government for more and more help. Not getting much, but supposedly filled with “hope.” Welcome to the “change.”


[1] “US Senate Registers Strong Opposition to Value-Added Tax,” 04/15/2010, Dow Jones, at NASDAQ.com.


[2] Charles Krauthammer, “The VAT Cometh,” 03/26/2010, Real Clear Politics.


[3] Alain Sherter, “Debt and Taxes: This is No Time to Cut Federal Spending,” 04/12/2010, Industry.BNET.com.


[4] Editorial, “Europe’s VAT Lessons,” 04/15/2010, Wall Street Journal online.

[5] Caroline Baum, “U.S. Consumption Tax Is Tempting VAT of Poison: Caaroline Baum,” 04/15/2010, Business Week online.


[6] and [7] Ibid.

Photo: Dreamstime.com

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