The VAT Masquerade

By Samuelson, Robert J. | Newsweek, April 26, 2010 | Go to article overview

The VAT Masquerade


Samuelson, Robert J., Newsweek


Byline: Robert J. Samuelson

Why it's not a panacea for deficits.

There is always an easy solution to every human problem--neat, plausible, and wrong.

--H. L. Mencken

The VAT (Value-Added Tax) has become the designated solution for massive federal budget deficits. It's touted by think tank economists and mentioned by congressional leaders. A VAT could raise stupendous amounts of money, which, Lord knows, are needed to cover projected deficits. A VAT is likened to a "national sales tax," so once it was in place, most Americans would barely notice it--just as they barely notice state and local sales taxes. How's that for friendly politics? A VAT would also discourage consumption and encourage saving and investment, making America richer in the future. What's not to like?

Mencken (1880-1956), one of America's great wits, would chuckle. Almost every pro-VAT argument is exaggerated, misleading, incomplete, or wrong. The VAT is being merchandised as an almost painless way to avoid deep spending cuts. The implicit, though often unstated, message is that a VAT could raise so much money that it could eliminate future deficits by itself. This reasoning, if embraced, would result in staggering tax burdens and exempt us from a debate that we desperately need.

How big a government do we want--and what can we afford? In closing deficits, what's the best mix between tax increases and spending cuts? What programs are not needed? How much should we tax the young and middle-aged to support the old? Should wealthier retirees receive skimpier benefits? Should eligibility ages for benefits be raised?

Our basic budget problem is simple. For decades the expansion of Social Security, Medicare, and Medicaid--programs mostly for the elderly--was financed mainly by shrinking defense spending. In 1970 defense accounted for 42 percent of the federal budget; Social Security, Medicare, and Medicaid were 20 percent. By 2008 the shares were reversed: defense, 21 percent; the big retirement programs, 43 percent. But defense stopped falling after 9/11, while aging baby boomers and uncontrolled health costs keep retirement spending rising.

Left alone, government would grow larger. From 1970 to 2009, federal spending averaged 20. …

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