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.