Taxes & Spending

Beware of a Value Added Tax

White House economic adviser Paul Volcker’s suggestion that Congress enact a “value added tax” (VAT) has spurred outrage from conservatives, led the White House to distance itself from his comments, and furthered speculation that a VAT may well be in the cards as soon as this fall.

The Heritage Foundation describes the VAT, already used in the European Union, as “similar to a national retail sales tax but is collected at every stage of business production until its entire burden ultimately falls on the consumer.”

While the VAT could replace the income tax, which wouldn’t be so bad in the eyes of many conservatives, the odds are overwhelming that under Obama it would be collected in addition to the income tax.

Volcker, speaking Tuesday at the New York Historical Society, addressed the growing deficit and talked about tax-hikes that could be used to control it, including taxes on carbon and energy and a value added tax.

The White House would not endorse Volcker’s comments, however. “Mr. Volcker was speaking for himself and not the administration,” a White House official said. “The President has not proposed the idea, nor is it under consideration.”

 

Notable voices from the right have expressed that there could be substance to Volcker’s suggestion.

Brit Hume, senior political analyst for Fox News, said that the VAT, though unlikely, could be enacted during a lame-duck session of Congress after November’s elections, even if the Democrats relinquish control of the House and Senate.

“You could hardly get [the VAT] through the Congress right now, but you might be able to slip it through after the election, with the old Congress still seated, the new Congress not yet here during the so-called lame duck session,” Hume stated, as reported by newsbusters.org. “I don’t think it is yet likely, but I wouldn’t rule it out.”

Columnist Charles Krauthammer forced consideration of the possibility of a VAT, with his recent column that appeared on HumanEvents.com arguing that the tax is the only way for the Obama Administration to pay for massive increases in entitlement spending.

“As night follows the day, the VAT cometh,” Krauthammer opened his column.

Mentioning Obama’s “deficit reduction commission” which will report after the mid-term elections this fall, Krauthammer asked: “What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.”

But he argued that such actions would not be enough to fix the deficit. “That’s where the value-added tax comes in,” he wrote. “It’s the ultimate cash cow. Obama will need it.”

“As we approach European levels of entitlements, we will need European levels of taxation,” he summarized.

A notable Republican senator responded to Volcker by slamming the idea of a VAT. Sen. Chuck Grassley (R.-Iowa), ranking member of the Senate Committee on Finance, said that Volcker was expressing what the administration was considering: enacting a VAT to cover excessive spending.

“Chairman Volcker is giving an unvarnished assessment of where the administration feels it must go,” Grassley stated. “To make up for the largest levels of spending and deficits in modern history, the administration is laying the foundation for a large, misguided new tax, a first-time American VAT. The Democratic leadership in Congress has said much the same thing.”

Grassley added that the VAT would only be a cover-up for the government’s “inability to do what every responsible American household does, and that is to live within their means.”

Speaker of the House Nancy Pelosi has reportedly supported the idea of a VAT in the past.

Two think-tanks—the liberal Brookings Institution and the conservative Heritage Foundation—have taken opposite stands on the desirability of the VAT.

The Brookings Institution praised Volcker for his assessment, and clamored for the tax.

“Volcker is so right. We badly need more revenue,” the organization stated. Brookings claimed the VAT would spike levels of consumption before it would be implemented, encourage saving once it was implemented, and would be more efficient than an income tax.

Brian Riedl of the Heritage Foundation argued that the VAT would be very costly to the American economy. “It would devastate families and business, kill jobs, and hammer the economy,” he stated.

“The problem is not declining revenues, but rather a spending spree unlike any in American history,” Riedl wrote. He argued that instead of enacting a VAT, government should cease expansion, and stop funding earmarks, unused federal property, and federal programs deemed unsuccessful by auditors.

Budget reforms and addressing the growth of Social Security and Medicare should also be undertaken, Riedl argued.

Cartoon courtesy of Brett Noel

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