Friday, May 29, 2009

Taxes: Yes to VAT, But No To The Rest

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.
At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama's policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate..."There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."...Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look, Lori Montgomery, Washington Post, 5/28/2009

The economy shrinking at nearly 6% a year. Government spending will produce a two trillion dollar deficit this fiscal year. And yet, what are the Democrats considering? Raising taxes. Consumer spending is about 70% of the economy, or just under ten trillion. That's a trillion dollar a year tax increase the Democrats in Congress are talking about. The VAT is an instant 10% price increase. One can expect as a consequence lower consumer spending.

Many conservatives, however, have looked at a flat tax for years as a replacement for the income tax. Not the Democrats. They want to add the flat tax to the existing federal income tax. In a state like New York, a 10% flat tax would be added to state and local taxes, for a total sales tax of 19%. On a 450,000 condominium, that would be 90,000 dollars in taxes. While the Democrats and Republicans may be happy to consider what impact this will have on imports, have they considered the devastating impact on domestic businesses?

It's quite clear they have not. In fact, it's quite clear that Democrats in the House, Senate, and White House don't give a damn about the effect on any business. Perhaps they think the Treasury's printed money is worth something without productive enterprise. They think the same thing in Zimbabwe, Mr. President. They take baskets of paper money to buy a loaf of bread or an egg. A robber would steal the basket, not the money. Value in a currency is created by the productive enterprises that use it. Only a street corner radical would believe otherwise. Streetwise, sadly, only works on the street.

However, what is equally undeniable is that without tax reform and spending sensibility, the future of America is as a bankrupt. A real VAT replacement for all federal taxes, including corporate, would be a radical, and quite possibly, the right solution. Yes, it would constrain consumption, but it would dramatically impress citizens that savings is a really good idea. And we need investment capital, the feds haven sopped up most of available credit for the next decade.


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