Sunday, April 25, 2010

The Value-Added Tax (-man Cometh)

I can remember hearing it often: " I will not raise taxes on anyone making less than $250,000 a year." No how; no way. My family was not going to be hit with higher taxes; thank you, President Obama! I'm so glad to know that...

What? That's not true, you say? My taxes will go up? That can't be right - except I'm looking at numerous news reports saying that the President and his fiscal commission are considering the implementation of a value-added tax (VAT) that would hit everyone in the United States. I'm also reading how phenomenally the implementation of a VAT in Europe has worked out for our neighbors across the Atlantic. Let's look for a moment at excerpts from an April 15, 2010 story in the Wall Street Journal on this topic:

VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%.

In the U.S., VAT proponents aren't calling for a repeal of the 16th Amendment that allowed the income tax—and, in fact, they want income tax rates to rise. The White House has promised to let the top individual rate increase in January to 39.6% from 35% as the Bush tax cuts expire, while the dividend rate will go to 39.6% from 15% and the capital gains rate to 20% next year and 23.8% in 2013 under the health bill, from 15% today. Even with these higher rates, or because of them, revenues won't come close to paying for the Obama Administration's new spending—which is why it is also eyeing a VAT.

One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. From the 1980s through 2005, deficits were by and large higher in Europe than in the U.S. By 2005, debt averaged 50% of GDP in Europe, according to OECD data, compared to under 40% in the U.S.

Certainly, if the Administration were considering such a tax, they would come right out and say it. Hey, Austan Goolsbee, you'll be straight with us, won't you?

So there we have it - an official White House spokesman telling us ... absolutely nothing, although clearly demonstrating his ability to give fantastic non-answers to basic questions. What makes it worse is that he's an economist giving non-answers; where's Paul Krugman when you need him? At least he'd give you a straight answer...

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