Is there a VAT in our future?

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There is an “emerging consensus” that we are headed for a value-added tax (VAT) in the United States. But the more optimistic among the experts and pundits believe it won’t come until after the 2012 election and then only if President Obama is reelected. There is no doubt that something will have to be done about the financial crisis and the federal debt—even if ObamaCare is repealed—and many believe the “hidden” VAT is the politically viable solution. Many openly say that the VAT, with its costs hidden in the price of commercial products, is the only way to get the money to pay for ObamaCare.

Paul Volcker, former Federal Reserve Board chairman and now chairman of President Obama’s Economic Recovery Advisory Board, predicted that a VAT would be the solution to the financial crisis and insisted that the VAT is “not a toxic idea.” Other Democrat leaders have weighed in advocating the VAT, including House Speaker Nancy Pelosi (D-Calif.), Sen. Kent Conrad (D-N.D.), White House advisor Ezekiel Emanuel, and John Podesta, head of the Center for American Progress.

The Senate recently opposed the creation of a VAT by an overwhelming vote (85-13). The non-binding resolution stated that the VAT “is a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.” Of course, President Obama promised there would be absolutely no tax increases for families making less than $250,000 per year. But, Americans for Tax Reform reports that President Obama recently changed his rhetoric—just slightly—to say that he won’t be raising “income” taxes on families.

President Obama has also gone on record telling his debt commission, The National Commission on Fiscal Responsibility and Reform (NCFRR), that “everything is on the table” when it comes to ways of reducing the nation’s $1 trillion-plus federal deficit. The NCFRR is an 18-member commission co-chaired by former Clinton White House Chief of Staff Erskine Bowles and former Republican Sen. Alan Simpson of Wyoming. The NCFRR will be presenting their recommendations to the president by Dec. 1, 2010—conveniently after the November elections. The commission was told to recommend ways to reduce the federal budget deficit from 10 percent to three percent of the GDP by 2015 and to submit solutions for cost containment of Social Security and Medicare.

Economist Thomas Sowell described the political benefit of a VAT: “In general, the less visible a tax is, the revenue can be collected without resistance or electoral retribution by the voters.”

According to the Cato Institute, a 10 percent VAT would raise about $500 billion a year and would cost each household about $4,300 a year. Most European countries have a VAT tax that averages 20 percent. Dick Morris believes that the VAT puts our free-market system at risk. Morris sees three choices in 2011:

  1. Raise taxes to 40 percent,
  2. Cut spending to 30 percent, or
  3. Half and half.

He believes that President Obama will opt for the VAT because it is a “hidden” tax that is buried into the price of the product.

Charles Krauthammer, lamenting the nation’s $8 trillion debt and the anticipated $12 trillion that will be added over the next decade, summed up the VAT’s money-raising appeal, calling it the “ultimate cash cow.” Sadly, he notes, “as we approach European levels of entitlements, we will need European levels of taxation.”

Michael Barone calls the battle over the VAT the culture battle between dependence and independence. Pete DuPont elaborates on Barone’s idea by defining dependence as “the belief of American liberalism that government can make better decisions for people than people can make for themselves.” DuPont laments the fact that since WWII, America has become a nation of dependency where federal spending under the Obama Administration will be up to $32,000 per household by 2019. DuPont also links reduced job growth in Europe to its embrace of the VAT. In his Townhall column, Michael Barone cites several states that have successfully attacked their deficit to argue that “voters may support spending cuts more than most American politicians and pundits have assumed. And much more so than a value-added tax.”

Indeed, the more we learn about the VAT, the less attractive it is.

Irwin Stelzer of the Hudson Institute described how VAT works in practice. One of the major problems with the VAT is that it hits the poor harder than the middle-class or rich. To help that problem, European nations do not levy a VAT on food. Because bureaucrats have the responsibility of classifying products—they have tremendous power. They can label a product “food” and thus not VAT taxable or call it “food” and arbitrarily increase the price by the amount of the VAT. Stelzer uses as an example of the arbitrariness of bureaucratic labeling the fact that bras up to and including size 34B are called children’s clothes and thus have no VAT. Other classifications are not quite so amusing. With a little imagination, it is easy to see the potential corruption and arbitrariness of the VAT labeling process. Stelzer gives Americans fair warning: “Since there is world-wide experience with this tax, none of [the unfortunate consequences of the VAT] can be deemed ‘unintended’—they are already out there for all to see.”

Clearly, VAT is not the solution; the problem is not a revenue shortage, but government over-spending.

Janice Shaw Crouse, author of Children at Risk, is Executive Director and Senior Fellow of Concerned Women for America’s Beverly LaHaye Institute.