Tuesday, April 20, 2010

The VAT. Be very worried.

It’s looking more and more like a European-type value-added tax (VAT) is headed our way. Health care reform will cost $1 trillion over the next decade, and we know Europeans couldn’t pay for national health insurance without the VAT. NPR’s Mara Liasson has found (end of video) that Obama no longer promises to refrain from raising taxes on people making less than $250,000 a year. He now says he won’t raise our income taxes, which the VAT isn’t, meaning Obama could be readying us for the VAT (the White House denies this, but so what?).

We earlier covered Donald Marron’s essay on how to combat debt. Marron says we have to stop the growth of spending, but he also favors consumption taxes, which the VAT is, because they help the economy grow better than income taxes do.

Writing in Newsweek, Robert Samuelson says the VAT, in contrast to what advocates including Marron and former Fed chair Paul Volcker advertise, wiil cause us lots of pain:
Applied to all consumption spending -- about 70% of GDP -- the required VAT rate would equal about 8%. But the actual increase might be closer to 16% because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. Together, they account for nearly half of $10 trillion of consumer spending.

But Samuelson thinks simplistic VAT advocacy poses a problem bigger than high rates. Since any VAT will take pressure off spending cuts, the VAT deemphasizes what we most need:
The consequences [of too much spending] would be unnecessarily high taxes that would weaken the economy and discriminate against the young. It would become harder for families to raise children.

I worry Samuelson is right. The VAT won’t be used in a revenue-neutral fashion, raised while income taxes go down by the same amount. If we pass a VAT, it will be to increase spending and avoid the tough decisions we must sooner or later make to reduce debt.

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