Sorry, middle class: The VAT may be inevitable

Charting the path of future spending and revenues points to four conclusions. First, over the next several years, the numbers that are now so troubling, including deficits, debt and spending as a share of GDP, may substantially improve. That’s by no means certain, since it depends on a convergence of low interest rates, a strong economy, and other unpredictable factors. But it’s highly possible, or even likely. …

Third, the budget-blowup scenario can only be averted by starting to reform Medicare and Social Security soon, since waiting eight or ten years would require lowering a hammer on a new bulge of baby boomers who will by then either be receiving benefits, or getting close to eligibility. So the longer our politicians wait, the more politically difficult, and more unlikely, entitlement reform becomes.

Fourth, if America fails to enact historic, structural reforms in spending, an entirely new source of revenue will be needed. And it’s likely to be enacted in haste and near-panic, as the only option to forestalling a crisis. “The gap between revenues and outlays will be simply too large,” says J.D. Foster, an economist at the conservative Heritage Foundation and a former budget official under President George W. Bush. “Three points of GDP need to be closed to make budgets sustainable. Either government spending gets back near where it used to be, or we’ll need an completely new type of tax.”

The new levy will need to be big, so big that the most probable choice is a European-style value-added tax or VAT. That looming revenue machine is the phantom in the room, the tax that’s still invisible to most Americans, but that threatens precisely the group that’s supposed to emerge from all the deal-making as the Great Unthreatened, our middle class.