To VAT or not to VAT: More taxes in the offing?

posted at 3:35 pm on April 15, 2010 by Ed Morrissey

What will the Obama administration do to raise the revenues needed to fund its expansive, statist agenda and attempt to close the deficit over the next two years?   Almost two-thirds of Americans believe that Barack Obama and Congress will raise taxes, but by what mechanisms?   Paul Volcker tipped his hand about the VAT, and Dr. Allan Meltzer of Carnegie Mellon University sent a letter to John Boehner today warning about this approach.  My good friend Scott Johnson has it in full at Power Line, but Meltzer makes the key arguments here:

VAT is a common form of taxation in many countries. It raises large amounts of revenue. Estimates are that each 1 percent VAT tax in the United States yields $ 50 billion in revenue. A 5 percent VAT would add $250 billion to Federal tax receipts. To close the projected budget deficits, the tax rate would have to be substantially higher than 5 percent.

The VAT is a regressive tax; it takes a larger share of low incomes because it taxes spending and average spending declines as income rises. To compensate, many countries rebate income tax to low income earners. In the United States, low income earners pay little or no income tax.

Passing a VAT not only locks in place the current welfare state in place by financing the increased current and future share of government spending and transfers. The VAT would pay for part of the unfunded liability for health care including the large costs added by Obamacare. Passing a VAT would mean that the unfunded Federal liability would be paid mainly by tax increases with few or no reductions in spending.

European experience suggests that the VAT is a largely hidden tax that can increase with less political opposition than increases in the income tax. The European welfare state is a main reason that since about 1980 Europe’s growth rate has fallen below the U.S. growth rate, and reported European unemployment rates have been well above U.S. rates on average. The United States should avoid locking the country into a low growth future.

Meltzer’s point is a good one. Even if the administration pledged to keep the VAT rate low, say at 2% to start, it’s a classic case of getting the camel’s nose inside the tent. Once the tax gets established as a new normalcy, successive Congresses will have the temptation to keep increasing it to get more cash out of our wallets for their redistribution schemes. Increases in rates will not have nearly the political risk that establishing the VAT itself carries.

That’s also David Frum’s point in his latest column, in which he argues that the political cost of a VAT means even Democrats won’t dare propose it. Instead, Republicans should prepare for three kinds of tax increases that will likely fly under the radar:

Former Federal Reserve chairman Paul Volcker mused last week about a Value Added Tax. Volcker’s words excited speculation: Was this advance warning of Obama administration plans?

I doubt it.

After health-care reform (and don’t forget Afghanistan!), the administration is hardly likely to launch another big and controversial project. As a taxpayer, I’d worry more that the administration may be tempted by three much sneakier revenue squeezers.

Those “squeezers” include providing a revenue-boosting “fix” to the AMT, scaling back the mortgage interest deduction on larger mortgages, and keeping the new Medicare tax increase unindexed for inflation. The first would be especially tempting, as the lack of an index on AMT has been a fairly visible controversy for several years among tax protesters. Obama could claim credit for a “fix” that indexes only a portion of the AMT, preserving the inflationary bite of the tax for more and more Americans on a slower scale than exists presently. The mortgage deduction adjustment would also allow Obama to play class warrior, one of his favorite roles.

Finally, as a bit of a palate cleanser, let’s turn to another good friend, James Lileks, who envisions the kinds of pushback the GOP could muster:

No doubt some Republicans would push for such a law as a sop for passing the VAT, and content themselves that they’d done their part. These are the same guys who would vote for a bill that taxed soda, but attach a rider that declared Coke “part of our national heritage.” We got something, they got something. But canny Republicans will yell from the rooftops about the VAT, and force Democrats in squeaker elections to repudiate it — and hence admit there just maybe might be a limit to the number of millstones you can pile on the economy’s chest — or give it bland endorsements that make them sound like they really believe we can bring back jobs by making everything more expensive. No Democrat can say the VAT’s required to pay for ObamaCare, since we’ve been told it will lower costs to the point where MRIs will be so cheap they replace tanning-bed clubs in suburban strip malls.

We won’t see a VAT soon, but progressives have patience. Ideally, they would like America to be as much like Europe as possible before continental drift brings the continents together, but if there are still some details to clear up as the land masses come within hailing distance, fine. But it’s important to have alternatives to propose — so what can the GOP push?

The Standard Operating Revenue Overall Seizure, or SOROS tax. This would take every penny George Soros has in exchange for Sen. Max Baucus’ 125,000 acre ranch. Advantages: deeply satisfying. Disadvantages: only works once.

The flat tax. Everyone pays the same amount. Advantages: everyone knows what they owe. Disadvantages: ridiculously unfair, unless you take gazillionares like Bill Gates and declare him to be, in legal terms, 350,000 people. At least that would boost sales of the Zune.

The flat-rate tax. That’s more like it: everyone pays the same percentage, with the poor getting a break. Right now we have different brackets — hand, arm, leg, torso; this would mean everyone would have to pay a finger, or ten percent. Some people have bigger finger than others, so they’d pay more. Advantages: simple. Disadvantages: confused people mailing severed fingers every April 15th. Defenders of the ever-hungry Jabba the Fed would note that the upper classes still have enough for diamond-tipped stick pins and ostrich-egg omelettes, but let them shriek.

Hey, a severed finger still beats the arm and a leg Democrats have in mind for the future.


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But… but I thought today’s Democrats were the biggest tax-cutters in history. They just told us so.

Edouard on April 15, 2010 at 3:41 PM

VAT of tar? Yes.

Bruce in NH on April 15, 2010 at 3:42 PM

When Texas Democrats in 1991 under Ann Richards started floating the idea of a state income tax, the plan was so warmly received that the Democratic Lt. Governor, Bob Bullock, ended up proposing a constitutional amendment to ban the Texas Legislature from ever imposing a state income tax without approval from voters.

The Legislature and voters easily approved the ban, and Bullock then survived the Republican tsunami that ousted Richards from office and replaced her with George W. Bush in 1994. National Republicans should consider a similar tactic with the VAT over the next six months, and not just let the Democrats get away with not proposing one until, say, December 2010, after the coast is clear for the midterm elections.

jon1979 on April 15, 2010 at 3:45 PM

The most egregious example is General Electric. Last year the conglomerate generated $10.3 billion in pretax income but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.

Why not tax GE income?

seven on April 15, 2010 at 3:46 PM

“The Standard Operating Revenue Overall Seizure, or SOROS tax.”

:O)

Seven Percent Solution on April 15, 2010 at 3:47 PM

one way or another, we’re getting more taxy and less waxy. and no, there’s NO happy ending with this administration.

search4truth on April 15, 2010 at 3:47 PM

Totally agree the VAT tax will punish the poor and the young that are just getting started. On top of having to support folks my age with fewer and fewer paying in to SS they will have the VAT to pay while they try to accumalate those things us older folks already have.

fourdeucer on April 15, 2010 at 3:49 PM

No cap on campaign contributions… just tax it like personal income. There’s a billion in revenues just from the obama re-election campaign.

rw on April 15, 2010 at 3:52 PM

“After health-care reform (and don’t forget Afghanistan!), the administration is hardly likely to launch another big and controversial project.”

What has Frum been drinking?!? This administration has *no* qualms about launching any number of new statist schemes & no doubt will. The future careers of all the Dems is a small price to pay for Obama to “fundamentally transform our nation”.

KS Rex on April 15, 2010 at 3:58 PM

A flat tax is not unfair. I don’t care if Bill Gates pays what SEEMS to be an unreasonably low amount if it’s the same percentage as everyone else.

Besides – does Gates pay any taxes now? Things may be a bit different now, but last I checked, Microsoft doesn’t pay any taxes at all.

Daggett on April 15, 2010 at 4:02 PM

Well, who knows? Maybe liberal Congressmen actually fall for the same “logic” they keep shoving down America’s throat.

All of their “stimulus” thus far has failed catastrophically. Ergo the only solution is more of the same.

Dingy Harry’s promise to his ilk was that passing a wildly unpopular bill would (somehow) increase Democrats’ poll numbers.

That failed catastrophically. Ergo, the only possibly solution is more of the same.

logis on April 15, 2010 at 4:02 PM

Is it November yet?

Akzed on April 15, 2010 at 4:04 PM

Scaling back the mortgage deduction for larger mortgages would be a bit uncomfortable as well – the largest mortgages on average are to be found where the real estate is the most expensive, and the first several places that come to mind are liberal strongholds, eh?

California, New York, etc…

?

Midas on April 15, 2010 at 4:06 PM

Not that this matters anymore, but Wilson had to have a Constitutional amendment to create an income tax. Is there any language in the Constitution that alllows for a VAT? I think, maybe , the clauses which mention imposts and excise duties, but I’m not sure.

xkaydet65 on April 15, 2010 at 4:06 PM

Did you know the government gets all the gravy?
Did you know the citizens pay all the taxes?
Oh, a citizen’s unpatriotic if the government doesn’t strip his pay check clean
Oh, a citizen’s unpatriotic if his bank account is not left lean

You can grab a Timothy Geithner or a Charlie Rangle and you show him a tax lien
He says: “What does it mean, that I never have seen!”
So you grab a Kennedy, with his money in an offshore tax haven, and not one in a million can identify
So I say to you: “Why do we got to have so much taxes?”
Multiple taxes, income taxes, sales taxes, carbon taxes, property taxes, VAT taxes???
Taxes, sucking taxes!!
Nothing but taxes!!!

(Taxes, taxes, taxes, taxes, taxes, taxes, taxes,
taxes, taxes, taxes, taxes, taxes, taxes)

MB4 on April 15, 2010 at 4:07 PM

I read somewhere that BHO is now saying that he is keeping his promise to not raise the income tax of those who make less than $250,000.

d1carter on April 15, 2010 at 4:09 PM

Disadvantages: ridiculously unfair, unless you take gazillionares like Bill Gates and declare him to be, in legal terms, 350,000 people. At least that would boost sales of the Zune.

Bill Gates is one person and the flat tax should apply to him like everyone else. If taxing him 350,000 times is fair there will be no more Bill Gates. We need more Bill Gates not less.

fourdeucer on April 15, 2010 at 4:11 PM

Ok..wait… I know I’m weak at math, especially with big numbers but check my calculations and tell me I’m wrong.

1 percent = 50 billion
1400 billion annual budget deficit so we need a VAT of
30 percent just to fix the budget deficit with only a tiny bit left over for the debt….

Skandia Recluse on April 15, 2010 at 4:12 PM

Ideally, they would like America to be as much like Europe as possible before continental drift brings the continents together…

Minor quibble in some otherwise excellent snark: continental drift goes in the other direction. The Atlantic is widening as the Pacific gradually shrinks. We’re moving toward Japan and China. On the other hand, the political drift is certainly in the European direction and very alarmingly so.

jwolf on April 15, 2010 at 4:17 PM

U.S. to Join European Union

Mervis Winter on April 15, 2010 at 4:20 PM

jwolf on April 15, 2010 at 4:17 PM

Pangea redux?

cmsinaz on April 15, 2010 at 4:22 PM

The GOP needs to hammer this from August to November.

Kafir on April 15, 2010 at 4:32 PM

We’ve gone from having the government being a parasitic appendage of a mostly free economy, to the free economy being a shrinking appendage of an elephantine government. The main purpose of our lives is now to deliver money to the ravenous beast.

Cicero43 on April 15, 2010 at 4:32 PM

How cheerfully the Obama Regime seems to grin
How far it spreads it’s claws
To lure little fishes in
With gently smiling jaws!

Cheshire Cat on April 15, 2010 at 4:38 PM

Those “squeezers” include providing a revenue-boosting “fix” to the AMT, scaling back the mortgage interest deduction on larger mortgages, and keeping the new Medicare tax increase unindexed for inflation.

Oh, great! Since 1999, Democrats were forcing banks to lend to insolvent borrowers to increase home ownership, then the system came crashing down in September 2008 when people couldn’t afford the interest on their McMansions, with massive foreclosures. Now the same Democrats want to reduce the mortgage interest deduction, increasing taxes on homeowners, and forcing MORE people out of their homes!

It’s the alternate ending to “It’s a Wonderful Life”–George Bailey has been run out of town, and all America is Pottersville, land of Hope and Change. But ain’t His Majesty Hussein the First the coolest, most jivin’ king we evah had?

Steve Z on April 15, 2010 at 4:39 PM

We’ve gone from having the government being a parasitic appendage of a mostly free economy, to the free economy being a shrinking appendage of an elephantine government. The main purpose of our lives is now to deliver money to the ravenous beast.
Cicero43 on April 15, 2010 at 4:32 PM

The federal government is more of a parasite than it’s ever been: it’s just a really, really big one.

Some people might think a parasite’s life is a pathetic one – and they are right about that. But it is also a very very SIMPLE one. A parasite has only one interest. As long as the blood keeps coming, nothing its host says or does could possibly matter to it. When the blood flow is interrupted, the parasite knows only one possible response: suck harder.

Liberals care about taxpayers the same way every other parasite cares about its host. The parasite only resorts to violence when its host rebels. And, as painful as that might be, it is ALWAYS better for that to happen sooner than later.

logis on April 15, 2010 at 4:46 PM

I dare them to try it before November!

CCRWM on April 15, 2010 at 4:50 PM

A flat tax is not unfair. I don’t care if Bill Gates pays what SEEMS to be an unreasonably low amount if it’s the same percentage as everyone else.

Besides – does Gates pay any taxes now? Things may be a bit different now, but last I checked, Microsoft doesn’t pay any taxes at all.

Daggett on April 15, 2010 at 4:02 PM

You’re confusing the Flat Tax for the Flat Rate Tax. The Flat Tax is definitely unfair… $10K from everyone really isn’t a fair way of doing it. 10 percent from everyone (wishful thinking, I know) is a great approach.

BeantownModerate on April 15, 2010 at 4:52 PM

And the deficit committee will bring forth their recommendation in December for higher taxes to give the ONE cover for raising them on everyone! I hope to hell voters see thru that farce!

JAM on April 15, 2010 at 4:56 PM

Obama now characterizes his tax pledge as applying only to income taxes. Thus, in his weekly radio address of April 10, 2010, Obama said: “And one thing we have not done is raise income taxes on families making less than $250,000; that’s another promise we’ve kept.”

But Obama’s claim about what he promised is false. Speaking in Dover, New Hampshire on September 12, 2008, Obama said this:

“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.”

Powerline. The original statement? Down the Memory Hole. He hopes.

Wethal on April 15, 2010 at 4:59 PM

But ain’t His Majesty Hussein the First the coolest, most jivin’ king we evah had?

Steve Z on April 15, 2010 at 4:39 PM

And humble, too. Don’t forget humble…

Wethal on April 15, 2010 at 5:00 PM

One strong reason for VAT: It sinks all boats equally.

With that thought, the cost of Government would come home to everyone, even if low income earners eventually get the VAT rebated. They would be reminded with every purchase what they are paying for the magnificent ediface we call the Government.

unclesmrgol on April 15, 2010 at 5:06 PM

A VAT is not only a money maker, but it makes the shop keepers the revenue agents for the government, forcing them to do the paperwork necessary to collect and report on it. When the VAT first came into Canada the shop keepers were glad to see someone they could avoid putting the VAT on… needless to say that ‘loophole’ was closed by the government so the shopkeeper had to collect the VAT and the tourist had to send a voucher in to get a refund… thus tying up more resources in the hopes tourists wouldn’t try to get it back.

The petty ‘crimes’ of avoiding the VAT via barter and other exchanges is such a lovely wonder to behold as people are put under the scrutiny of the government to ensure they aren’t ‘cheating’ the ‘system’. You get to be presumed guilty until you can prove your innocence… just like in US tax court! Why those cases aren’t put into the normal federal system is beyond me… probably find the IRS in violation of a number of laws and the constitution here and there…

A flat tax rate is very good, and, yes, as it is regressive you WANT the poor in it: this discourages politicians from taking money from the poor for ‘nice’ things for government to do. If you want to help the poor, you cut government and taxes… exempt the destitute, but the working poor are doing two major things: 1) working, 2) making their own way via achieving self-sufficiency which is being a productive citizen. People take an interest when government dips its fingers in their wallets, and the working poor should feel those fingers just like the rest of us do. It will give them an interest in politics like you wouldn’t believe, possibly demand better representation and lower taxes…

I can give to charity being barely self-sufficient.

I could do a lot more if there was a lot less of government around. Letting me exercise liberty so that I can build society with my fellow citizens is a good thing… and we all need to pay for the upkeep of the place around us. Spartan upkeep works very well and shows where the place is falling apart… the mess we have makes us miss the fact the foundations are crumbling.

ajacksonian on April 15, 2010 at 5:07 PM

VAT of tar? Yes.

Bruce in NH on April 15, 2010 at 3:42 PM

Seeing the grief that KFC has gotten from liberal weenie groups, we could probably get them to donate the feathers.

jimmy2shoes on April 15, 2010 at 5:26 PM

A good feature of either the VAT or a flat rate tax is that, in their simple forms, at least those 48% of the public not paying any federal income tax would finally have some skin in the game! (yeah, yeah – regressive – I know!)

But this, “might” make some of them actually think about who they are voting for instead of just voting for the politician that promises them the most goodies.

Fatal on April 15, 2010 at 5:48 PM

VAT of tar – I love it! These truly are the times that try men’s souls.

The whole “cap and trade” fiasco reminded me of the Stamp Act – licenses to ensure compliance. Did they not realize that this entire country was based on resistance to taxation?

I’ll keep my tricornered hat, musket and powder, and my fife by the door just in case the Greencoats come.

KillerKane on April 15, 2010 at 6:05 PM

No “flat rate” or “fair” tax will ever be passed… any politician opposed will simply state that people will lose their home mortgage deduction and (stupid) people will outright reject it before they even learn how much less they might pay in taxes.

Of the two, the “fair tax” is my preference. Also, only if the 16th Am. to the US Constitution is repealed.

And, finally: The VAT will be marketed as a solution to our incredible debt problem, but if the VAT is put in then they’ll just ratchet up the spending even more!!

electric-rascal on April 16, 2010 at 12:38 AM

Turn on Israel? Oh noooo, they’ll never do that!

Socialized medicine? Oh noooo, they’ll never do that!

VAT? Oh noooo, they’ll never do that!

Cap and Trade? Oh noooo, they’ll never do that!

Hey, Brown got elected in Massachusetts and Romney, Paul and Huckabee are all out there.

We’ll be fine. Relax.

Dr. ZhivBlago on April 16, 2010 at 1:13 AM

Reid is crafting the bill behind closed doors…His usefulness is at an end. His time as destroyer is over in November.
They use the last of him up.

Army Brat on April 16, 2010 at 1:33 AM

More taxes in the offing?
Is that really a question?

Obama now characterizes his tax pledge as applying only to income taxes. Thus, in his weekly radio address of April 10, 2010, Obama said: “And one thing we have not done is raise income taxes on families making less than $250,000; that’s another promise we’ve kept.”

But Obama’s claim about what he promised is false. Speaking in Dover, New Hampshire on September 12, 2008, Obama said this:

“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 would include the VAT or any other of the BS he’s about to poke down our cake holes.

Army Brat on April 16, 2010 at 6:31 AM