Value-added tax inches closer via Volcker

Posted on April 7, 2010


Obama economic advisor Paul Volcker spoke yesterday at a New York Historical Society event and noted that America should consider raising taxes to curb deficits and improve our financial standing (heads-up from Allahpundit). But even more interesting is the suggestion by Volcker, a former Fed chair under Bush, that Congress should enact a value-added tax (VAT) in the style of European taxation schemes.

Charles Krauthammer noted a few weeks ago that with the passage of President’s Obama’s health care bill, a new revenue stream would need to be found to balance out our existing liabilities and pay for new ones created during the health care overhaul. If you think that finding new ways to pay for a program that is supposed to save us money sounds a little fishy, then you may have just discovered the hole in the cost argument that existed throughout the entire health care debate that was conveniently ignored by many.

Nancy Pelosi floated the idea of a VAT back in October, and chatter along these lines seems to have steadily increased culminating in a key White House advisor bringing the notion back up yesterday. Though no legislation or proposal has yet been drafted, it’s quite clear the VAT is increasingly being favored as a form of fiscal responsibility.

In a nutshell, the VAT taxes the manufacturing process of items at every step where value is added to a product. The tax is thankfully not compounded throughout the process, but the end result is still a tax on goods that results in higher prices for consumers and increased costs for manufacturers.

Politicians love the VAT because it’s a veritable cash cow for government programs. Indeed, a national sales tax has been floated by some conservatives as a method of replacing the income tax. But the key difference is that to make a budgetary impact, the VAT would have to be added on top of existing taxes.

James Pethoukis writes that Democrats may be more successful in selling the VAT if they promise to curb government spending at the same time as doing away with the rest of the tax code and itemizing the VAT cost on receipts. None of those three is likely to happen, especially the last item, as the hidden nature of the cost appeals to politicians wishing to shield themselves from voter anger over rising costs, which can be blamed instead on evil corporations and businesses.

You can also be sure that the VAT will not remain a measly few percentage points, no matter what initial rate is promised. A quick scan of European VAT rates shows only one European country, Switzerland, with a standard VAT below 10% – the rest have rates around 20%, with reduced VAT rates for essential items like food.

The VAT may solve some problems with the federal balance sheet, but it will hurt an already weak economy that’s attempting to recover, and places additional burdens on an American manufacturing sector that is already decimated. In addition, it will put American goods produced at artificially higher costs at a disadvantage with cheaply made foreign goods manufactured by countries like China.

Despite all of that, I don’t doubt that the VAT will be proposed in some serious form sometime soon. It’s too tempting of a money stream for bureaucrats intent on finding ways of sustaining a house that needs to be put in order before any more money is thrown at it.

Cross-posted at The Moderate Voice
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Posted in: News, Politics