Free Markets, Free People

Is a national consumption tax coming?

Charles Krauthammer seems to think so.  Looking down the road, with trillions and trillions of dollars in deficit spending by government building the debt to unprecedented heights, common sense says we, as a country, have got to either cut spending drastically, increase taxes drastically or a combination of both.  But the word “drastically” remains common to any solution.  Krauthammer describes a national sales tax as a VAT (a VAT isn’t the same as a national sales tax, but for the purposes of this discussion, understand that’s what he’s actually talking about – a consumption tax).  He calls it the “ultimate cash cow” and Democrats are hungrily eyeing it – in fact they’re hungrily eyeing every potential revenue source.  When Nancy Pelosi was asked about a consumption tax, she replied “everything is on the table.”  They understand how fiscally unsustainable their present course is, but are committed to it for a reason – and it has to do with a matter of philosophy as Krauthammer lays out:

Obama set out to be a consequential president, one on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes; then, ultimately, you have to reduce government spending.

Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Step 1 – expand government.  Step 2 – say “you’ve got them (the government programs), you like them (an assumption played large), now you have to pay for them” and expand taxation.   One of the utilities of passing this huge new entitlement first is to justify step 2.  The reverse Reagan, as Krauthammer points out.

You remember the advocates of the Fair Tax don’t you?  They too wanted a national sales tax – but as a replacement for the individual income tax and as a way to abolish the IRS.  Unlike that, the new tax would be imposed on top of the individual income tax and, most likely, the IRS would be further expanded (more than just the 16,000 agents to monitor and enforce your health insurance compliance) to oversee the collection of these taxes.

So look for the “crisis” to hit within a few years.  Government will continue to build the unsustainability case even while they continue on their purposefully unsustainable course.  And, once the “crisis” (blamed, of course, on the previous administration(s)) is at the proper level of manufactured fear and panic, they’ll attempt to push through a nominally small national consumption tax (2 or 3%). If they succeed, game over.   Just like the income tax (which history tells us the proponents never thought would rise above 2%), they’ll incrementally raise that tax over the intervening years as they continue the fan the “crisis” flames – a crisis of their own making.  The desire would be to raise that tax to the 15 or 20% range (like Europe) to pay for the welfare state they’ll continue to try to expand.  And, of course, as is their history, they’d even overspend on that.  The fiscal crisis would remain, the GDP would tank, productivity would fall off terribly as more and more money is taken out of the private economy and we’d eventually find ourselves in much the same financial shape we are in now with no way to recover.

Yes, that’s conjecture – but it is based in history and precedent.  Name a government entitlement that isn’t in the red or headed into the red.  Entitlement spending dwarfs discretionary spending and continues to grow and consume more and more of the government’s budget as a percentage.  This health care debacle will be no different.  And as that proves out to be a money pit, the government is going to have to find new streams of revenue.  Some sort of new taxation is absolutely inevitable, and I’m in agreement that the easiest to implement and immediately collect on is some sort of national consumption tax.  And if and when they ever pass that, the road to our fiscal ruin will finally be fully paved.

~McQ

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9 Responses to Is a national consumption tax coming?

  • Common sense tells me tha t if  the govt would stop all unnecessary spending, stop playing around with people’s personal lives, and do something that would actually stimulate the economy and create jobs, there would be enough tax money coming in from the various tax laws already in place to solve many of our problems.

  • Whichever party implements a VAT will lose the next election they face the public. Therefore, I hope that will be the Democrats who do this. Then, I will pray that the GOP does not “repeal” the VAT but cut payroll and corporate taxes to offset the VAT.  Or just payroll, as that is regressive, hurts hiring, and hurts the working man. (populism, its not just for Democrats.)
    VAT has some nice advantages.
    1) Its hard to avoid it.
    2) Its a consumption tax
    3) Imports have to pay it. Exports get VAT rebated.
    Of course, the main worry is that it gets implemented and the pols “forget” to cut other taxes and spending to compensate.

    • I’m thinking that this is another reason that Obamacare doesn’t really go into effect until 2013/4.  It’s likely that if we do wind up with a VAT or similar tax, it won’t even be discussed until after the 2012 elections.  But that assumes that as of January 2013, we’ll have a Democrat led White House and Congress, and that seems dubious right now.  This November looks to be devastating for the Democrats.  I think 2012 is too far away to call, but at this point I think Obama will need more than just a tepid economic recovery to help him to a second term.
       
      Any attempt to push what amounts to another sales tax on top of everything else that has happened, would make this November even worse for the Democrats, and I think it would effectively finish the Obama administration.

  • I don’t see a significant difference in effects of a VAT over a sales tax other than the VAT is more complex for accounting and offers some minor income advantages for the government.  For one, they start getting money sooner in a product’s lifecycle and other being that they get some taxes collected in the making of a product even if the product isn’t sold.
     
    But I also see the opportunity to create all kinds of complex rules to play favorites.

  • JPM, the VAT is harder to avoid. If you’re in a VAT system as a business, you want your receipt. Its smaller chunks. The Amazon issue also somewhat goes away…everyone’s paid before its gets shipped out.
    Is a sales tax only retail, too? Does Southwest pay sales tax on its planes?
    The sales tax is equally gamed – not charges on food books, etc.
    They key is either sales tax or VAT is way better than income tax, payroll tax, corp. tax, etc.
     

    • Companies get forgiven sales taxes if they are forced to make purchases from someone that would otherwise charge sales tax.  And Amazon is in the contiguous US so it wouldn’t escape sales tax.  Just like residents in any state that has an Amazon type company have to pay sales taxes for their purchases.
       
      I’m just thinking the impact of a Sales and VAT tax added to existing taxes is essentially the same as the end consumer sees a higher price and react accordingly.

  • I don’t like a VAT.  It adds a tax wedge, accounting costs and government scrutiny at every point of production.  While it’s better than a sales tax (every country that’s tried a point-of-sale tax ends up with massive tax evasion and switches to a VAT) and probably better than our current income tax, I’d much prefer a simple flat tax.
    If you can imagine something that currently isn’t being taxed, the government is considering taxing it right now.  They’ve reached a point where they need something new to confiscate to keep the train rolling.  I consider the VAT and carbon-based fuels to be the most likely candidates for a large tax increase.  I’d take a carbon tax in exchange for at least one side of the payroll tax, though.