Stirring up a VAT

October 2, 2009

“I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

That was President Barack Obama during the 2008 campaign. Yet given huge federal budget deficits — perhaps as much as a 6 percentage point gap for the foreseeable future between what the government spends as a percentage of GDP versus what it takes in — it seems likely that American taxes will instead be heading higher.

And not on just the wealthy. Indeed, there have been recent signs that point to a broadly applied value-added tax in America’s future:

– The communique from the G20 summit meeting in Pittsburgh called for balanced global growth, which means Americans must spend less and save more and reduce its budget deficit. No one thinks that can come just from spending cuts.

– That same weekend, John Podesta, co-chairman of Obama’s presidential transition team and an outside White House adviser, told a reporter that a value-added tax is “more plausible today” than ever.

– Earlier this week, the Center for American Progress, the liberal think tank with close White House ties, held a conference on the rising national debt. While speaker after speaker — Paul Krugman, Roger Altman, CAP President Podesta (again), Laura Tyson — conceded that entitlement spending must be reduced, they also agreed that taxes must be raised. Altman, deputy Treasury Secretary under President Clinton, suggested $400 billion in annual new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it.

– This week also saw the first meeting of President Obama’s tax reform panel led by former Federal Reserve Chairman Paul Volcker. In a television interview, Volcker said that if Washington can’t get spending under control, either a VAT or a carbon tax would be effective revenue raisers. “Those are two big ones,” he says.

– At a symposium today in Washington, Alan Greenspan predicted taxes would be headed higher and thought a VAT would be the “least worst” way of doing it.

As they used to say in the Soviet Union: “It’s no coincidence.”

This is also the conclusion of one Washington insider with ties to the White House economic team: “Does this all add up to a trial balloon? Of course, it’s a trial balloon. And I expect the administration will propose major tax reform, including a VAT.”

It’s also no secret that many economists love the idea of a VAT. It promotes savings over consumption, and its hidden, embedded nature may mean it has less behavioral impact on taxpayers. Conservative economist Bruce Bartlett puts it this way: “As a broad-based tax on consumption, it creates less economic distortion per dollar of revenue than any other tax — certainly much less than the income tax.”

Indeed, a VAT is part of cash-strapped California’s newly proposed tax reform.

Liberals love the idea of a VAT because it does raise tons of revenue to expand government. Indeed, as my colleague Christopher Swann has written, the VAT is an an extraordinarily effective mechanism to raise money easily.

But without some crisis, like a dollar crash, instituting a VAT would be a tough sell to an American public that thinks the government wastes at least half of the money it takes in. The White House would first have to demonstrate it is getting tough on spending.

One way to do it would be an Economic Bill of Rights, in addition to entitlement reform. Among its possible elements: a) a balanced budget amendment, b) a line-item veto, c) a hard spending limit such as inflation plus population growth, and d) a two-thirds vote in the House and Senate for any tax increases.

A VAT should also accompany other tax reform measures like simplification, lower marginal rates and reductions in investment and corporate taxes.

If there is going to be a major change in how America taxes itself, it will have to accompany a major change in how it spends those taxes.

One comment

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James, I’m a liberal and I hate VAT. I have no idea where you get the idea that liberals love VAT. VAT is a regressive form of taxation that hurts the working poor. VAT is the exact opposite of liberal policy. Interestingly enough, VAT is more in line with conservative policy which trends towards flat taxes or any other tax that makes the middle class and poor pay a greater percentage of their income than the wealthy.

The president has never suggested introducing VAT. The current president simply wants the last president’s tax cuts to the wealthy to expire. That is because the current president believes in progressive taxation – a category that VAT does not fall into.

Perhaps you confuse liberals with libertarians. I have heard plenty of libertarians suggest introducing VAT, only they tend to just call it a consumption tax.

Posted by Kirk | Report as abusive