The Second Shoe - VAT

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.

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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  

Comments

[Bill McCormick]

Havn't ranted for a while so it must be time to summarize the things that appear to be being ignored:

The second wave of the stimulus money has not occurred and the result is that infrastructure namely roads and bridges are projects that are going unfunded. Remember that 97% of the state of Virginia stimulus money went to unemployment benefits and entitlement programs. If that is true for most states and I beleve it is then we now know why the states are in the process of laying of hundreds of thousands of teachers. The second shoe of this recession may be in the public sector at the state and local level while the Feds furiously hire. So the wonderful "education President" is watching the teacher force be devastated, classroom sizes increase while they use stimulus money to extend unemployemnt benefits and welfare benefits.And, the teachers are a UNION. Getting what you paid your union dues for and your campaign contributions now teachers?

Unemployment growth is still masked by government hiring of permaneant and temporary (census) workers.

Commericial real estate clients of ours are beginning to lay off their business development staff becaue they say that there is no business to be won so no need to pay anyone to look for it. And, if they are not Union they are not eligible for many projects anyway. In DC the new tenant on the block is the GSA grabbing up space.

The real "National Security" Obama has begun to reappear as he has announced we are on schedule to withdraw from Afghanistan only 4 month's into his surge.
We won the war already?? In actuality it is becoming more apparent that the US has decided that there is no problem with the Afghanistan farmers growing poppy and we are actually running off the Taliban (or more likely forcing them underground) protecting their crops for the opium dealers to buy directly. So it is my guess that our President has decided that the corrupt government is too corrupt to bother to change and we are falling back to the Pakistan "you better protect your turf" policy and resigned to fly the drones to keep Al Queda in their caves leaving Karzid to become a Taliban surragate eventually.

Consumer borrowing is down 3.7% another indication theat the banks are reeling in the cedit card debt and dampening the ability of consumers to buy. This is not a healthy sign for the economy. rule number one in Business school for healthy sales is available credit.

Small businesses are still hesitant to hire without any sales increases and reduced captial to finance expansions. We now have McD's advertising that 1 out of 12 Americans were trained by McD. And, Walmart is the largest employer in the world. If these are the two superstar large company employers in America then what does that say about the future of our chidren and grand children's jobs?
Get a PHD and be a Walmart greeter or a McD's drive in window order taker?

The banks are reporting record profits. They take government money from the Fed at 0% interest and buy bonds that pay 2-3%. Why should they lend money to businesses in America?

Obama made $5.5M last year and gave $375,000 to charity. Under the premise that you only need $250,000 to be rich you would think he would have given away a few million. And, Biden ? He gave about $5,000 to charity. (Remember that Obama made $4M last year when he ran for President.) So he has made $9.9M in the last two years. No wonder he doesn't think a little higher taxes would hurt.

On the good news side now that the earthquakes have opened the vents in the earth the volcanes are beginning to erupt. Good news you say? Yes, the clouds that will circle the earth for months or years will cool the earth thus offsetting the climate warming and create global cooling. Then we'll fund CO2 generation plants to heat the earth and Al Gore will make another $100M. (The last time the volcano in Iceland erupted it went on for 5 years. Don't plan to visit Europe by air anytime soon.)

Now I feel better---I have given all my worries to you. Except the coming surge in debt service and in September when the Healthcare costs hit us and then next year when GWB's tax cuts expire. Oh and then there's the energy bill and the VAT to come.

I can't wait to pass along my next thoughts to you, my friends. Please vote in November.

[flyoverstate]

I'm hoping all of you financial types can help me out. I've been studying the VAT because of a high school friend who lives in Birmingham, UK. He said that the tax is 17.5% in the UK and most things have this tax. The tax started way lower but because it is hidden, the government can raise it wheneer they want. Foods that are not processed don't have the tax but, like me, we grew up on beer and nuts and if he wants nuts he pays an extra 17.5% unless he wants nut that don't have salt or are not roasted. He hates 'em. Stuff made in the UK (which according to him is not very much anymore) is priced too high because of this hidden tax so people buy a lot of stuff made in China or Mexico or some other country like that. He has buddies who used to own small manufacturing companies but they have been driven out of business because of the VAT. So...if we put in the VAT in the US, how is the small guy going to make it? And you have been saying it is the small guy that does the hiring.

The plumbing business is picking up but the guys who were laid off are still off. Rumor is they will never get a job in those companies because they are now replaced with computers. I don't have money in the stock market (no way to afford that) so can't say our income is growing. Heard on the radio today that there is some country in the EU who is deciding that a vacation is now a right so they are going to subsidize people who can't afford a vacation. Can't believe the stupidity that is going on there and here. Balance your bloody budget! Take care of your family. Don't look to the government to bail you out. Help your neighbor in any way you can.