Letting the VAT Out of the Bag

Obama and the Democrats have been spending money like there’s no tomorrow, sinking the country deeper into debt than we’ve ever been before. Moreover, we’re getting nothing for our money. At least the New Deal gave us the San Antonio Riverwalk. The U.S. has already been downgraded, and is bound to be downgraded again if Obama is reelected.

Can’t Democrats do math? Don’t they realize that our present path is unsustainable? Some, undoubtedly, can’t and don’t. But I’ve thought for some time that the leadership knows that the current pattern of spending 40% more than the government takes in can’t continue. They also know that before long there will be a stark choice: cut spending back at least to 2007 levels, or raise taxes—massively, and on the middle class, since that’s where the money is. Of course, campaigning on a massive tax increase for everyone isn’t likely to work. So, they’re trying to maneuver the country into bankruptcy so that we have no choice.

I’ve been expecting this to remain a secret until after the election, when, suddenly, if Obama wins, he’ll propose a European-style VAT, and the Democrats will all say, “Of course! Europe’s way ahead of us on this. Adults have realized this was bound to come for a long time. Anyone who opposes it is in favor of bankruptcy, or wants vicious cuts that will hurt the poor.” The Seattle Times, however, has let the VAT out of the bag. They blame the debt problem on Bush, which is disingenuous. (They also seem not to realize that state and local taxes are deductible. Is no one at that paper familiar with a Form 1040?)  But they do recognize that reversing the Bush tax cuts and even raising taxes on the “rich,” however one cares to define it, would scarcely make a dent in the deficit. The solution: a value-added tax, which has the effect, essentially, of a national sales tax, but tends to have its full effects hidden from the consumer. It’s a politician’s dream: it raises large amounts of money while remaining mostly invisible to the voters.

At some point, Americans will have to engage in a grown-up discussion about a value-added tax, which is a kind of national sales tax. Critics on the right complain that it’s a sneaky way to fund government programs. Critics on the left grumble that it is regressive: It doesn’t distinguish between rich and poor shoppers.

To the left we say, if it funds government programs for the middle-class on down, its end results are progressive. That’s how Europe pays for its social safety net.

To the right we say, the VAT is a tax on consumption, not investment. That’s how your hero Margaret Thatcher pulled off cutting income taxes without bankrupting Britain. As prime minister in the early 1980s, Thatcher raised the VAT to 15 percent from two rates of 8 percent and 12.5 percent.

Expecting Obama to share stern truths before the November election may be unrealistic.

It certainly is.

What would a VAT do? The first and most obvious effect would be to raise the prices on almost everything by the amount of the tax—in Europe, usually 15-25%. But that’s just for starters. That price increase will depress economic activity and drive a lot of smaller firms and stores out of business. That will decrease supply, further driving up prices, while throwing people out of work, increasing demand for social services and forcing what might be an initially low rate up to European levels.

Here’s what I’ve seen in Denmark: the total effect of such a tax is gigantic. Prices there are 50-100% higher on everything (except leather jackets, which are for some reason fairly reasonable). You’d like a beer at the local bar? $8. A mattress? On sale, this weekend only, for $3,200. A new Mazda 6? $40,000. Energy prices? Insanely high. The effects ripple through the economy. A 2,000 square foot house in a distant suburb costs well over $1 million. The stores are mostly empty; so are the bars and restaurants, except in the most fashionable areas frequented by tourists. People dress in dark colors and don’t make eye contact with one another. I don’t think it’s just the Baltic weather. There is no sense of opportunity, no sense that the future might be better than the past. The entire nation becomes like a business with massive overhead costs; there’s no money left to take risks, expand, or do anything frivolous. The most one can hope for is to find a slot in the system. Many won’t. But even those that do just fill the slot; innovation is virtually impossible.

That’s our future, America. At least, it’s the future that Obama and the Democrats have planned for us. Ironic, isn’t it, given that Europe is demonstrating for us, as we speak, that even that bleak future is unsustainable. High unemployment, massive deficits, falling birthrates, economic decline—that’s what socialism brings in its wake. In Virginia Postrel’s phrase, it’s an enemy of the future. Well, of course it is—the future brings uncertainty, and that’s what socialism, in a misguided attempt to usher in a paradise on earth, tries to eliminate.

5 thoughts on “Letting the VAT Out of the Bag

  1. Forget about what it would do to our culture and economy (the Dems certainly have!): this is all about having a huge spigot of revenue, camouflaged as a good or service that you need, for funding government. Less accountability, less arguing over raising tax rates because most people won’t “see” it, its pain will be insidious and destructive. But then, our future has been mortgaged to the hilt as it is. $1 trillion in student debt? Good G*d.

  2. What’s disingenuous is calling a VAT “European”. Consumption taxes such as the VAT or Goods and Services Tax are used in more than 140 countries around the world, including the largest trading partners of the US. We might as well call it that nasty tax from Canada. Like a cold front, or a bad storm, America is destined to have a Canadian style tax! Run for the borders! Wait a minute – Canada is across the border. Canada – the place next door, with the soundest, safest banking system in the OECD. How many banks have failed in Canada – 0. What are those crazy Canadians doing with tax rates. Corporate tax = 15% nationally and that VAT they have, the one they call a “GST” what crazy rate has it been raised to? Actually, it was lowered from 7% to 5%. Perhaps some perspective and a look north versus a long attempt to understand what is happening in Europe which is far far more complicated than simply being caused by a VAT, would be fair.

  3. You’re right that the rate makes a huge difference. Iran’s is the lowest in the world—4%—and Canada, Japan, and Taiwan have 5%. That’s low enough that it doesn’t have a huge effect, though I wonder whether the amount raised is larger than its compliance cost. Canada’s government spending is at 39% of GDP, just slightly higher than in the U.S.

    I’m familiar mostly with the Scandinavian versions of the VAT, which are at 25%—almost the world’s highest. (Hungary is at 27%.) They’re high enough to have very significant effects.

    It’s been estimated that the U.S. would need a VAT of at least 16% to cover the current deficit.

    I don’t mean to say that the VAT is the cause of all Europe’s troubles. But it would enable the federal government to grow far beyond the 16-20% range that has been typical in the U.S. over the past century. Obama has increased the federal government’s share of the economy to 24%, and Obamacare, not to mention any new initiatives, is going to push it higher. Denmark’s government spends about 52% of GDP, as does Sweden’s. When one starts approaching those levels, the balance between private initiative and government bureaucracy changes, with profound cultural effects.

  4. The whole fallacy is thinking gov’t will cut spending after implementing the VAT.

    Illinois is a great example of this. 2011 Illinois lawmakers raised income tax rates by 46 percent on businesses and a record 67 percent on individuals. And with this flood of new tax dollars, urgent pressure to pass lasting structural spending reforms deflated. The state is still broke 2012. Not only still broke, but they borrowed more money last year further ballooning state debt.

  5. The Fair Tax folks have thought this through -www.fairtax.org – adding a VAT without decreasing spending, or subtracting other taxes, could lead to the death spiral pointed out by Mossomo.

    “The FairTax is replacement, not reform. It replaces federal income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.”

    The problem with the fair tax as presently proposed: the “revenue neutral” rate is too high to be politically feasible.

    Everything else about it makes perfect sense. If the “fair tax” rate were 10% or even 15% people might go for it. But at 23% (inclusive – meaning that it looks like 30% – read the whole thing to figure out the math), the chances of it obtaining a 60% majority are slim and none (for now anyway).

    I still would prefer the “fair tax” to the current mess.

    I especially like the idea of those who pay no tax right now (illegal aliens, tax evaders, drug dealers, ultra rich who live off tax-free bonds, mortgage fraud con artists, etc.) having to pay based on how much they spend over the “prebate” minimum.

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