Wednesday, May 27, 2009

The VAT Cat Is Out of the Bag

Everyone should closely read today’s Washington Post story on the value-added tax, or VAT. The cat is now out of the bag. For months I have argued that Team Obama and the Democratic Congress were going to be forced to consider a VAT in order to pay for their extravagant spending. Now borrowing almost 50 cents on every new dollar spent, the Democrats will at some point begin to deal with the politics of deficit reduction as a way of countering Republican criticisms about deficit expansion. And the VAT’s part of their answer.

Senate Budget Committee chair Kent Conrad calls the VAT “fundamental tax reform,” and he argues for a VAT plus high-end income-tax hikes. The WaPo story talks about a White House conference earlier in the year where “a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT.” Budget chief Peter Orszag hired prominent VAT supporter Ezekiel Emanuel — the brother of White House staff director Rahm Emanuel — as an adviser.

Of course, President Obama blew an even bigger budget hole into long-run planning with a cap-and-trade proposal that would exempt 85 percent of the tradable emissions warrants from any auctions. In other words, it’s a free lunch, making a bad idea even worse. But the Democrats are going to want to hang on to their massive increases in social-spending transfer payments, along with the big expansion of health care and who knows what else.

Now remember, this VAT tax would come on top of existing income, payroll, and business taxes. This is how the European countries and many others do it. And the VAT is a tax imposed throughout the economic food chain, at all levels of production, finally ending up inside the consumer pocketbook.

The VAT is a sure way to permanently depress economic growth. It’s also a sure way to Europeanize the American economy. But at some point, after the economy gains at least some cyclical economic-recovery traction, the Obama Democrats will want to re-label themselves as deficit-reduction fiscal hawks. Hence the VAT, a real bad idea.