Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. Connect the dots:
1) The joint statement from the just-concluded G20 Summit in Pittsburgh called for balanced global growth — which means Americans must spend less and save more and reduce its budget deficit.
2) That same weekend, John Podesta, co-chairman of Obama’s presidential transition team and an outside White House adviser, tells a Bloomberg reporter that a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A VAT is a kind of consumption tax.
3) Yesterday, the Center for American Progress, the liberal think tank with close White House ties, holds a conference on the rising national debt. While speaker after speaker — Paul Krugman, Roger Altman, CAP President Podesta (again), Laura Tyson — admits entitlement spending must be reduced, they also agree that taxes must be raised. Altman suggests $400 billion in new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it. That’s $400 billion a year, by the way, not over ten years.
4) Also, yesterday was the first meeting of President Obama’s tax reform panel led by former Federal Reserve Chairman Paul Volcker. In a two-part interview with Charlie Rose airing yesterday and today, Volcker says 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.
5) 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.”
Obama’s campaign promise to not raise taxes on households making less than $250,000 a year was always considered a joke here inside the Beltway. It’s the economic “consensus” — and this was true even before the financial meltdown and recession — that rising entitlement costs would eventually mean a higher tax burden for the American people.
Maybe it was a joke inside the campaign, too. Since being elected, Obama has raised cigarette taxes and has advocated raising healthcare taxes, energy and small business taxes, in addition to corporate taxes. What’s more, economic advisers like Larry Summers seem eager to get rid of all the Bush tax cuts, not just those on so-called wealthy Americans.
And it’s also no secret that economists love the idea of a VAT. It promotes savings over consumption, and its hidden nature may mean it has less behavioral impact on taxpayers. Conservative economist Bruce Bartlet 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’s, well, so European — also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.
See, even after the recession, there might be a 6 percentage point difference between what Uncle Sam spends as a percentage of GDP and what it takes in. Liberals like Krugman have no problem with making up that difference purely through higher taxes, even though that translates into raising the national tax burden by at least a third. And that, even though such a massive hike might well have a crushing effect on growth.
Obama wants a VAT? First, it should be part of broader tax reform, including getting rid of capital gains and corporate taxes. Second, it should accompany an Economic Bill of Rights much like Ronald Reagan used to suggest. Its elements: a) a balanced budget amendment, b) a line-item veto, c) a spending limit such as inflation plus population growth, d) and a two-thirds vote in the House and Senate for any tax increases. (Reagan also wanted a prohibition on wage and price controls. That would likely kill ObamaCare.)
And come to think of it, let’s cut spending and streamline government before cash-strapped, wealth-reduced taxpayers are forced to pony up a penny more, OK?