VAT attack! More on Obama, Pelosi and the value-added tax

October 7, 2009

When you start looking for signs of the VAT virus, you start seeing them everywhere. Here are some excerpts from Howard Gleckman over at TaxVox, the blog of the Tax Policy Center:

I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.. … Urban’s Bob Reischauer and Rudy Penner (both former CBO directors), American Enterprise Institute Congress-watcher Norm Ornstein, TPC co-founder Len Burman, and international economist Mike Mussa agreed that the depths of the medium and long-term problem can’t be overestimated. …

Mussa, who spent a decade at the International Monetary Fund and is currently a senior fellow at the Peterson Institute for International Economics, figures it could be years before overseas investors turn bearish on the U.S. In part, he says, that’s because net foreign lending has actually fallen in the past two years—their huge increases in investments in Treasury paper have been more than offset by shrinking portfolios of private debt.

But that won’t last. Once the economy begins to get back on track, private capital and government will again compete for the same foreign money—bad news for everyone seeking funds.

Is there any way out? Ornstein sees little chance that a hyper-partisan Congress will confront the budget crisis in the absence of a financial market crisis, or even in the face of one. Interestingly, Burman, Mussa, and Penner think that when the fix finally comes, it will include a Value-Added Tax. Penner calls it “almost inevitable.”

Then there is this analysis by Heritage of the costs:

Just a 1 percent VAT on all goods and services in the economy would raise $63 billion for Congress to spend each year. Some suggest the VAT rate should be set as high as 20 percent. At that rate, a VAT that covers all goods and services in the economy – including food, clothing, housing, and health care – would collect an additional $1,260 billion a year and cost every U.S. household $10,680 annually.

Even if Congress passes a VAT that has a rate of just a few percentage points, it would likely lead to higher rates in the future. Evidence from other countries that already have VATs show once it is on the books the rate tends to rise over time.

3 comments

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In 1909, the Fed budget was $0.9 Billion. Over the last 100 years, Fed spending has increased 4,000 times. The population nor has inflation increased by 4,000 times, nor has anyone’s paycheck.

Posted by TaxMeAgain | Report as abusive

You are right, James. Once the VAT is established, it will be depended on for revenue, and will only go up. Europe & Canada are good examples of this. While it seems to be inevitable, and may offer the benefit of reduced reliance on consumption, it will hamper growth and business. We are witnessing the twilight of the Golden Age of American consumption.

Posted by Greg | Report as abusive

Question. How does the VAT affect the states Sales Taxes? Is it part of the states sales tax or a different tax all toghether?

Posted by Jamie | Report as abusive