VAT's benefits outweighed by politics, experts say

By Lori Montgomery
Washington Post Staff Writer
Wednesday, April 21, 2010; A07

As Washington braces for the first serious conversation in more than a decade about deficit reduction, some economists and independent budget experts fear that the hyperpartisan political atmosphere is narrowing the options for dealing with the chronic budget shortfall.

The latest sign: the emphatic rejection by both parties in recent days of a value-added tax, a sales tax imposed by nearly every other developed nation. After a White House economic adviser was reported speaking semi-favorably about a VAT, the White House this week vigorously denied that President Obama is looking to include the tax in his deficit-cutting arsenal.

"This is not something the president has proposed, nor is it under consideration," White House press secretary Robert Gibbs told reporters.

The VAT isn't the only potential budget solution drawing fire. Republicans howled about cuts to Medicare in the recent health-care overhaul, and no one in Washington wants to raise taxes on the 98 percent of taxpayers whom the White House has defined as the middle class.

"We're taking all the feasible, non-disastrous ways of dealing with our budget problems off the table," said Leonard Burman, former director of the nonpartisan Tax Policy Center, who now teaches at Syracuse University. "We can't cut Medicare. We can't enact a VAT. We can't raise any income taxes ever, except possibly on the 17 people who make over $1 billion a year.

"Behind closed doors, almost everyone serious in Washington understands there's a big problem," Burman said. "But in public, basically if you say anything intelligent, you're killed."

Economists across the political spectrum argue that a VAT, which taxes spending rather than income, should at least be on the table when a commission appointed by Obama meets next week to craft a plan to reduce soaring budget deficits. Providing federal support to a vast wave of retiring baby boomers is almost certain to require higher taxes, budget experts say, and a VAT would be efficient and easy to collect and could raise significant revenue without imposing additional taxes on earnings.

Former Federal Reserve board chief Paul A. Volcker renewed attention on a VAT two weeks ago when he told a gathering in New York that politicians might have to consider one to close the projected budget gap. Volcker, who is advising Obama on tax policy and economic matters, said the tax "was not as toxic an idea" now as it has been in the past.

The reaction from Republican lawmakers and conservative opinion leaders was swift. The Wall Street Journal praised Volcker "for admitting what other Democrats also know but don't want to admit until after the November election: The political class is preparing to pass a European-style value-added tax."

Under the headline "Obama's National Sales Tax," the conservative Web site RedState announced that "Obama is vetting a new national sales tax (commonly referred to as a VAT) to extract more wealth from the private sector to sustain his insatiable hunger for more government spending."

And last week, in a tax-day speech on the Senate floor, Sen. John McCain (R-Ariz.) accused the Obama administration of having "floated the idea of" a VAT and called on his Senate colleagues to go "on record on this onerous new tax."

Eighty-five senators voted for McCain's amendment, which declared the VAT "a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery."

The resolution was nonbinding but could complicate any effort to seriously consider a VAT in the future. Among those voting yes: the six senators, three Democrats and three Republicans who were appointed to the president's deficit commission. The panel is scheduled to hold its first meeting Tuesday.

Historian Bruce Bartlett, a domestic policy adviser in the Reagan administration who has written extensively in support of a VAT, castigated McCain online for his "irresponsible attack," arguing that a VAT would be far more efficient and less damaging to the economy than many of the alternatives, including higher income taxes.

"I think we have to remember that low taxes or tax rates are not an end in themselves; they are the means to an end, which is higher growth and greater prosperity," Bartlett wrote on the blog Capital Gains and Games. "In this sense, I think right wingers pay far too much attention to the negative economic consequences of taxation while essentially ignoring the negative economic consequences of extremely large deficits."

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