Here Comes the Vat Tax

| January 12 2013
John Walker

When Congress narrowly averted a plunge over the fiscal cliff on New Year’s Day, millions of American taxpayers heaved a collective sigh of relief. Income tax rates in place for over a decade were made permanent.

Senate Minority Leader Mitch McConnell proclaimed victory. “The tax issue is behind us,” McConnell said. “Now it’s time to pivot and turn to the real issue, which is our spending addiction.”

Not so fast, Senator. The fiscal cliff deal actually contained 13 tax increases. (See Western Free Press, January 10, 13 Tax Increases in 2013.) These tax hikes include a payroll tax increase for all workers, higher tax rates on investments,  a boost in the death tax, and taxes associated with Obamacare.

While Sen. McConnell and his colleagues in the Senate in the House look for spending cuts, the Congress has only less than 60 days before the next crisis – votes on increasing the national debt limit and moves to head off the dreaded cuts in the so-called sequester.

But President Obama and his Democratic colleagues remain committed to the balanced approach. Spending cuts and new revenue sources must go hand-in-hand.

The most likely targets are the much criticized tax loopholes or tax expenditures – tax breaks that rob the federal government of much needed revenue in the face of annual deficits that top $1 trillion.

The top candidates are the mortgage deduction and charitable deductions for high earners. But these initiatives are unlikely to succeed in the face of fierce resistance from powerful lobbies.

There will be much talk of the need to reform the tax code and modify runaway entitlements such as Medicare, Medicaid, and Social Security. But these are tough challenges and no doubt will be delayed after resolution of the debt ceiling dilemma and dispatch of the sequester cuts.

Not to worry. The search for revenue may rest in a secret weapon known as the value added tax – or the VAT tax – a surefire revenue source that has been lurking in the shadows for years.

The VAT tax is a consumption tax that is levied on each transaction in the chain of production of goods and services. It is a hidden tax unlike the sales tax that shows up as a line item at the cash register.

The European Union has financed its welfare state with the VAT tax for decades. It is used in other nations such as Canada andJapan.

Why would the U.S.turn to the VAT tax? The answer is simple. As former Reagan economic advisor Bruce Bartlett stated, “The U.S. needs a money machine.” The VAT tax is just the ticket.

In 2010, the Congressional Research Service estimated that one percent of a value added tax would raise $50 billion annually. In the oil business, that’s called a gusher. In the tax and spend world ofWashington, it’s called deliverance.

Imagine a VAT tax as high as 20 percent, a rate not uncommon inEurope. Surely the rate would start at a far lower level, but it would quickly escalate as the money rolled in.

We may not hear suggestions of a VAT tax floated in the immediate future. Talk of tax increases is too toxic. But the VAT tax is likely to take wings when Congress takes up tax reform in earnest.

In the never-ending quest for revenue and a losing battle to cut spending, the VAT tax is a natural. It may not happen any time soon, but it’s out there and eventually will be front and center in the United States Congress. The billions available through the VAT tax are too tempting to resist.