When smart, informed people do things that make no sense on the surface, it is usually because there is another strategic step that has not yet been unveiled. Thus, when President Obama presented a 2011 budget projecting trillion dollar annual shortfalls for the next decade, it did not seem possible that he really was accepting public debt to the level of Greece. Enter the recent burbling by Paul Volker (to conservatives, the most credible administration financial adviser) about a Value Added Tax.
It has seemed that Obama was in a box: promises not to raise taxes on people making under $250,000 per year (broken, but not yet shattered); corporate tax rates among the highest in the industrial world; heavy political support among the 47% of households paying no federal income taxes; already factored-in heavy tax increases on "the rich" with the expiration of the Bush tax cuts at the end of the year; and all available revenue gimmicks used to support the new trillion dollar health care entitlement.
Having exerted all of his political resources to raise federal government spending from 19.4 % of GDP in 2008 to 25.1 % in 2011, Obama has three choices: reverse course and drastically reduce spending (military; farm subsidies; education; whatever); increase marginal tax rates on individuals to the 85% level while throwing out the tax work of all of those corporate lobbyists; or change the game.
Enter the European-style Value Added Tax - a levy on sale prices minus component purchase prices at each step of manufacture - worth a hundred billion dollars for each per cent. (Europe ranges from 6 to 25%.) The VAT has several advantages - it is unseen by the consumer; it discourages consumption and encourages saving; it can be excluded from exports; it is an unknown to the public - and thus is easier to sell. The disadvantage is, of course, that a big tax increase is a big tax increase - and this will be an overlay, not a replacement.
So, the politics of it. With the Republicans gaining substantial numbers of seats (and potential control) in the House and Senate, who could possibly favor such a massive, economy crippling tax increase? Well, some answers:
1. People who are happy to see the federal government's share of the GDP grow to 25 or 30% (plus 10 to 15% state and local).
2. People who are unwilling to mortgage their grandchildren's future by running trillion dollar deficits and do not believe that enough spending can be cut.
3. The top tier tax payers who do not want all of the burden to fall on them.
4. Corporations who do not want all of the burden to fall on them.
5. Advocates of a "flat tax" who want to move from a complex personal tax system to something simpler.
Count me among those who don't believe that Paul Volker just goes around talking off of the cuff, that Obama has another year of "change you can believe in" planned after the November elections and before his reelection campaign begins, and that Republicans will be happy to let Democrats take the heat for tax increases which are necessary to prevent financial Armageddon. Besides, it is a lot more fun for the politicians to argue about how to restructure the tax code (with some reductions here and there) than how to cut Medicare and Defense.
I am reminded of a lesson from an old Purchasing course - the Principle of Least Interest. In any negotiation, the person least worried about the discussion collapsing has the most power. Who cares the least about trillion dollar deficits? So, those who care the most have a choice in the 2010 elections - either elect a lot of Congressmen and Senators who will roll back the huge growth of government, or be prepared for the new "painless" tax which will add 10% to the cost of all goods and services that you purchase. Unsustainable deficits are unsustainable.
-----You know something is going on when liberal media "personalities" like Donny Deutsch start making racist comments about Florida Republican Senate candidate Marco Rubio. After all, isn't it is the Republicans who are racist - ground breakers Senator Ed Brooke, Secretary of State Colin Powell, National Security Adviser Condi Rice, Republican Party Chair Michael Steele, Attorney General Alberto Gonzales, Senator Mel Martinez, Supreme Court Justice Clarence Thomas and a whole bunch of others notwithstanding. Maybe Cubans are fair game if they don't know their place.
bill bowen - 4/16/10