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VAT by Any Other Name Is a Tax Increase

Posted by Larry Doyle on July 13, 2009 5:13 PM |

How does a politician pretend to keep a campaign pledge and simultaneously fund a ballooning deficit? Very skillfully. Do not be surprised to see some sleight of hand in the process. How does one define tax increase and on whom? Let’s play politics, Washington-style.

While Obama rode his promise of only increasing taxes for the top 5 % of wage earners in our country, no credible analyst currently believes that. Bloomberg’s Al Hunt opines, Obama Can’t Avoid Taxes in Fixing Fiscal Mess.

With our deficit soaring, tax revenues plummeting, and a whole set of new federal programs coming online, Obama and team have no choice but to craft new taxes. Hunt proposes:

While the majority of a deficit package will likely consist of enhanced revenue, that’s complicated by three painful realities: Some of the most palatable initiatives will be skimmed off by the costly health-care and climate change legislation; the president made a campaign commitment not to raise taxes on anyone making less than $250,000 a year, and huge amounts of money have to be raised.

Compared to boosting taxes directly on middle-income earners or slashing domestic programs, a value-added tax as a partial replacement for income and possibly some payroll taxes may be a more attractive alternative, Altman believes. A growing number of Democrats, such as Senate Budget Committee Chairman Kent Conrad and Obama tax-reform adviser Paul Volcker, concur.

If so, it will cause a political bloodbath, particularly if it is a big net revenue-raiser. The “sales tax” label can be lethal. Consumption levies are usually regressive, hurting middle class and poorer people the most, and almost three decades later there remains a belief that espousing such a measure cost the former House Ways and Means Committee Chairman Al Ullman, now deceased, his supposedly safe seat in 1980.

Raising taxes is often a death knell for a politician, so I find it very interesting that Altman, Conrad, and Volcker are looking for an approach to raising taxes which is politically expedient. Nothing better than proposing a tax which has not been previously used in the United States. The VAT, more commonly delineated as the value-added tax, is widely utilized in the European Union.

Make no mistake, though, the VAT is a form of a sales tax and ultimately gets passed along to the consumer. As such, it is typically considered a regressive tax, that is, a tax which more impacts the lower and middle incomes.

In true political fashion, our leaders are as much concerned with the delivery and appearance of these tax increases as they are the results. Hunt asserts:

Conrad believes that once politicians look at the challenge — deficits as far as the eye can see, insufficient savings, over-reliance on regressive payroll taxes — “a value-added tax in combination with a high-end income tax” will seem more acceptable than directly hitting middle-and upper-income taxpayers.

While politicians will not tell you taxes are going up, they are not being straightforward on this issue. No matter how you slice it, taxes are going up on everybody.


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