Paul Volcker and Ronald Reagan tamed inflation and laid the groundwork for 25 years of global economic expansion. The growth was interrupted by just two of the shortest and shallowest recessions on record. The long boom ended in December 2007, when the financial crisis metastasized and the economy went into the worst economic downturn since the 1930s. Reagan is gone, but the octogenarian Volcker advises President Obama on economic policy. Volcker’s ideas on busting the banks and banning proprietary trading, when banks trade for themselves and not their customers, seem sensible. Now he’s talking up the Value Added Tax (VAT) as a way to bring America’s finances into balance. No thanks.
Economists prefer taxes on consumption rather than taxes on income, labor, and investment. You can argue that America today has too few of the former and far too many of the latter. But when Volcker talks up the VAT, he isn’t advocating a major, perhaps even constitutional tax reform that would replace the income tax with a national sales tax or VAT (the two are different because the VAT is assessed at each stage of production). He wants to augment the current tax system with a VAT. This would be a significant increase in the tax burden and complete America’s transition to a social democracy similar in almost every way to those in Western Europe.
What’s funny is that even while liberals advocate higher taxes as a solution to our problems, they ignore the fact that Europe, which is already governed along lines that liberals prefer, faces the same problems. The UK has the income tax and the VAT, but its 2009 deficit- and debt-to-GDP ratios were greater than America’s. Liberals say the only way to avoid a Grecian fiscal crisis is to hike taxes and institute a VAT. Well, Greece has had the income tax and a 19 percent VAT for years, and look where they are today. Here in the states, California has a sales tax, business tax, and one of the highest top income tax rates in the country. It’s still bankrupt.
No amount of tax revenue will stop a politician from spending the additional dollar, and a VAT doesn’t stop politicians from making promises they cannot keep. The better way to bring America’s long-term fiscal picture into balance is through dynamic economic growth and fiscal prudence. You need low taxes for one, and changes to entitlement law (raising the retirement age, pegging benefits to inflation, means-testing, restructuring Medicare) for the other. Most of all, you need to stop spending money you do not have. No new taxes need apply.