Expect a “Value-Added” Tax

It’s not enough to bleed you of your had-earned money via the recent “Cap-and-Trade” bill (which I lovingly refer to as:  “Cap-n-Bleed” ) passed by the House.  Now, the commies are setting their sights one gutting everyone via a value-added tax.

If history is any guide, a VAT will have several adverse effects. Specifically, a VAT will:

*  Expand the cost of government. Countries with VATs have a much heavier total tax burden than those without VATs. Before the creation of VATs, the burden of taxation in Europe was not that much larger than it was in the United States. However, since the late 1960s, when countries in Europe began to adopt VATs, Europe’s aggregate tax burden has increased by about 50 percent while the U.S. tax burden has remained relatively constant.

*  Inadvertently increase income tax rates. One of the main arguments for the VAT is that it is a less destructive way to raise revenue. This is theoretically true, but irrelevant. In the real world, the VAT has been used as an excuse to increase income taxes as a way to maintain “dis­tributional neutrality.” Indeed, income taxes in Europe today are higher than they were when VATs were implemented.

*  Slow economic growth and destroy jobs. A VAT undermines economic growth for two reasons. First, it reduces incentives to engage in productive behavior by driving a larger wedge between pre-tax income and post-tax consumption. Second, it facilitates larger gov­ernment and the concomitant transfer of resources from the productive sector of the economy to the public sector, diminishing economic efficiency.

Some “value,” eh?:

We’ll Need to Raise Taxes Soon
Expect Congress to seriously consider a value-added tax.
By ROGER C. ALTMAN – Wall Street Journal

Only five months after Inauguration Day, the focus of Washington’s economic and domestic policy is already shifting. This reflects the emergence of much larger budget deficits than anyone expected. Indeed, federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama and the Democratic congressional leadership. By 2010, reducing the deficit will become their primary focus.

Why has the deficit outlook changed? Two main reasons: The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. Yes, the President’s Council of Economic Advisors is still forecasting a traditional cyclical recovery — i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we’re on a much slower path.

[...]

Mr. Obama and his economic advisers understand this deficit outlook and undoubtedly view it as unsustainable. They also understand that increasing deficit concerns complicate their efforts toward universal health-insurance legislation, which is clearly a top priority of this administration. According to the Congressional Budget Office, which released its latest forecast June 16, such legislation would mandate more than $1 trillion of new federal spending over 10 years. Winning support for that much new spending — in the face of record deficits — will be a challenge.

[...]

In short we’ll have to raise taxes.

[...]

We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama’s pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.

This challenge may be the toughest one Mr. Obama faces in his first term. Fortunately, the new president is enormously gifted. That’s important, because it is no longer a matter of whether tax revenues must increase, but how.

Mr. Altman, founder and chairman of Evercore Partners, was deputy secretary of the Treasury in the first Clinton administration.

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