IBD: VAT’s the Matter?

Investors Business Daily
October 6, 2009

Fiscal Policy: Sometimes the worst ideas are the most tempting. So it is with the value-added tax, or VAT — a potential money gusher for strapped governments but a massive new levy on all Americans.

At least twice a decade, it seems, desperate politicians latch on to the idea of a VAT as the best way to raise lots of money for their spending schemes. No wonder. Unlike our current system, a VAT would impose a uniform levy at each level of production, from raw materials to finished goods, so the revenue potential is huge.

Which is why it keeps coming up in our free-spending Capital.

Earlier this year, Treasury Secretary Tim Geithner, fresh from crafting a $700 billion bailout for the banks, a $787 billion “stimulus” package and untold billions more in other spending, suggested that a good way to pay for it all might be a VAT.

In recent days, as Congress feels the public’s ire over its gross fiscal irresponsibility, the VAT is getting even more attention.

White House economic adviser and former Fed chairman Paul Volcker suggested it’s one way the budget deficit could be closed, and another former Fed chief, Alan Greenspan, went a step further by calling it “the least worst solution” to our budget problems.

House Speaker Nancy Pelosi, asked point blank by TV interviewer Charlie Rose if she’s considering a VAT, answered: “I would say, put everything on the table and subject it to the scrutiny that it deserves.” She went on to extol the virtues of the VAT.

So, we’ve been warned. The VAT is a bad idea, however, and should be rejected out of hand. It wouldn’t solve the core problem of fiscally incontinent politicians; it would only give them more money to waste, and lead to even bigger government.

This massive levy would fall on all Americans, including those earning less than $250,000, the group President Obama promised would not pay a dime in higher taxes.

Tax analyst Curtis Dubay of the Heritage Foundation notes that, because of the way it’s structured, a VAT tax even at low levels would be a disaster.

Using data for 2008, a VAT of just 1% would raise an added $63 billion. Make it “just” 5%, and it’s a $315 billion annual tax hike on all Americans — or roughly $2,670 on every household, including the poor and middle-class.

To sell the idea to gullible taxpayers, politicians play down these problems, focusing instead on tax “efficiency” and the idea that the VAT is a low rate applied against a broad base of taxpayers.

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