When We Will Get a VAT

The recent mini-boomlet for a value-added tax (VAT) that was kicked off a few weeks ago when former Federal Reserve chairman Paul Volcker indicated support for the idea is now officially over. Jackie Calmes of the New York Times quotes him this morning as dismissing the VAT for the time being. “I don’t think it’s on the political table for now or for the indefinite future, but that’s the kind of thing you have to look at,” Volcker said.

Volcker is unquestionably correct that the VAT is too politically toxic for it to be considered anytime in the near future. Since his brief comment of support on April 6, the right-wing crazies have been having a field day denouncing it. No doubt, millions of pieces of direct mail have already been dropped to raise money for an all-out war against the VAT. Thousands of little old ladies will be induced to sign over their Social Security checks for dubious campaigns against a tax that has no chance whatsoever of being enacted for many years. In a few months, they will be told that their pitiful contributions are what turned the tide for now, but that the VAT could arise from the ashes at any moment and so even more money must be contributed to ward off this insidious tax and keep it at bay. Since there is nothing to keep at bay, all such contributions will simply go into the pockets of executives at the organizations sponsoring these direct mail campaigns and the companies that do the mailing.

Even though I think we should enact a VAT as soon as possible for reasons I have explained many times here and elsewhere, I am under no illusion that it is remotely feasible under current political and economic conditions. But those conditions will inevitably change if projections of future federal deficits are even close to correct and if economists’ beliefs about the impact of deficits are remotely true. They mean that sometime in the not-too-distant future we are going to see significantly higher inflation and interest rates than we have today. At some point–I don’t know when–they will pass a political threshold and politicians can start to talk honestly about the sorts of fiscal actions that will be necessary to bring inflation and interest rates down to tolerable levels.

Even then, I don’t anticipate that a VAT will be among the first options that will be considered. What I expect is that when there is the inevitable flare-up in financial markets as bond prices crash, the dollar takes an unexpected dip, the price of oil shoots up or whatever that Congress and the White House will solemnly vow to cut the deficit because it will be the one thing that everyone will be able to agree upon that might help and at least won’t hurt. Everyone will go out to Andrews Air Force Base and after weeks of intense negotiations announce that a deal has been struck to deal with the crisis.

Republicans will inevitably agree to some modest tax increases, Democrats will agree to trim Medicare and Medicaid, and both sides will promise that discretionary spending will be slashed. But after the low-hanging fruit has been picked clean, deficits continue to rise and financial markets once again suffer some turmoil we will, after perhaps 10 years of unsuccessful efforts to get our finances under control, eventually reach a point where a VAT is politically viable. Republicans will finally be brought around to it by using the revenue to offset many of the ad hoc tax increases that will have been previously enacted, with a little left over for deficit reduction. This way they can rationalize their surrender to the inevitable as a tax reform rather than a tax increase. But in fact it will simply be a retroactive tax increase.

David Ignatius put it well in the Washington Post this morning. Said Ignatius, “By ruling out a VAT when it could keep the federal deficit in check, politicians have all but guaranteed that the debt crisis, when it comes, will be more damaging. But by then, everyone will be clamoring for a VAT, so it will be safe to endorse it.”

Personally, I think it’s stupid to put up with a decade of unnecessary pain and suffering before we finally bite the bullet and do what has to be done to stabilize our nation’s public finances. But I don’t see any other path that will get us there. The right-wing, tea party fantasy that we can solve our fiscal problems only by cutting spending has to be proven by experience to be a failure before rational people can finally put real solutions like a VAT on the table without being denounced by Larry Kudlow and the Wall Street Journal editorial page for trying to Europeanize the American economy and turn every American into a tax-slave.

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