VAT’s All, Folks

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A fair description of President Obama’s agenda is that it is “neosocialist.” This means that his goal is not necessarily to nationalize all industries (though he has nationalized a few) but that he wants a European-style welfare state. He wants us to be like France or Italy, with massive taxes, a wide web of subsidies for individuals and companies, and such a stranglehold of regulation that the state virtually controls all industry, administering the whole by a Mandarin army of bureaucrats.

The goal of neosocialists is to dominate the economy and siphon off the lion’s share of wealth and power for themselves, while leaving business owners the chore of actually running the day-to-day operations. Neosocialism is fun for the neosocialists: you get to rule and live well, and when anything goes wrong, you can just blame “Big Business” or “Wall Street.”

Neosocialism explains what we see in Europe: slow growth, because socialized businesses are inefficient; technological stagnation, because entrepreneurs can’t easily start innovative new enterprises; permanent high unemployment, because the hurdles that the state puts in the way of firing employees make companies reluctant to hire them to begin with; and an aging population, because people can’t afford children in the face of confiscatory taxes, and feel that they don’t need them since the state will take care of them in old age.

In terms of the growth of government, Obama has certainly advanced his agenda. ObamaCare was a milestone: it set in place the takeover of one-sixth of the economy. But so far, we haven’t seen much growth in taxation. He has created programs and spent money like nobody before him, but he has financed it all by borrowing. However, the Taxman Cometh.

Obama has made no secret of his intention to let Bush’s tax cuts die in December. But he well knows that income tax hikes won’t bring in nearly the revenue needed to fund his neosocialist agenda. “Soaking the rich’ — even if the government killed them all and confiscated all their wealth — can’t generate that much revenue, for the simple reason that there aren’t enough rich people.

The income tax tends to bring in about 19% of GDP, even when rates on upper-income wage earners are high. But Obama has pushed spending to 25% of GDP. So he is adroitly maneuvering to put in place the welfare state’s preferred tool, the value-added tax (VAT). Point man in this sneak VAT-attack is Obama’s White House economic adviser, Paul Volcker, who started the ball rolling by saying that both the VAT and an energy tax have to be “on the table.”

The VAT tax is common in Europe. It is a kind of sales tax, but one that is applied at every stage of the chain of production and distribution. Statists love it, because it is hard to evade, and even more because it is largely “invisible”: the citizen only notices that everything costs a lot, for which he blames business, not government.

Obama’s pitch will be that a VAT tax of just 1 or 2% would be nothing to consumers. But his veracity is negligible, and anyway, what does observation show us? In the EU, VAT rates range from a low(!) of 15% to a high of 25%. The average rate throughout the EU zone is nearly 20%. European countries started implementing VAT taxes a half-century ago, and in every case, the VAT rate only went in one direction — up.

And that is about where Obama would have to set it, to manage his enormous deficits. The latest estimates (which are low, because the full cost of ObamaCare has yet to be reckoned), is that the new deficits will total $12 trillion over the next decade, but an American VAT would bring in only about $250 billion a year at the 5% level. So we would need a VAT set at least at 20% (in addition to all the other existing taxes) to pay for the new deficits.

Now, some are suggesting that while the VAT is a painful solution to the deficits, if it is combined with spending cuts, it might be acceptable. But again the European history of VAT makes this very dubious. The countries that introduced a VAT tax did not use it to reduce deficits or to offset other taxes. Instead, governments used the new funds to increase spend- ing programs, always spending more than the growth in new revenues. In fact, spending rose 45% faster in VAT nations than in those without a VAT.

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