WHY A VAT?
May 11, 2005
The possibility of fundamental tax reform -- either the flat tax or any other plan that would completely uproot the current system and impose something entirely new from scratch is very small, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.
It just isn't going to happen politically, he says. Those who benefit from the current system are too powerful and there is no way of cementing any new system in place to avoid its being corrupted in the future.
According to Bartlett:
- In 1986, we got as close to a flat tax as we ever will when the top rate was reduced to 28 percent in return for eliminating many deductions and preferences from the tax code.
- But just four years later, the first President Bush raised the top rate to 31 percent without restoring the lost deductions.
- This paved the way for Bill Clinton to further raise the top rate to 39.6 percent.
The best we can hope to do, he says, is make incremental improvements to the existing tax system and hopefully prevent it from getting worse. Unfortunately, because the current President Bush and a Republican Congress have allowed spending to get totally out of control, Bartlett believes that higher taxes are inevitable. In particular, their enactment of a massive new Medicare drug benefit absolutely guarantees that taxes will be sharply raised in the future even if Social Security is successfully reformed.
Therefore, we must face the reality that taxes are going to rise a lot in coming years. Bartlett believes a value-added tax (VAT) is the least bad way of getting the hundreds of billions of dollars per year that will be needed. The alternative is higher tax rates that will be far more debilitating to economic growth, explains Bartlett.
Source: Bruce Bartlett, "Why A VAT?" National Center for Policy Analysis, May 11, 2005.
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