NCPA - National Center for Policy Analysis


April 8, 2010

Kudos for candor to Paul Volcker, the former Federal Reserve Chairman and current White House economic adviser, 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. 

Answering a question at the New York Historical Society on Tuesday, Volcker said that a VAT -- a consumption tax levied along stages of production -- "was not as toxic an idea" as it has been, and that both a VAT and some kind of tax on energy need to be on the table.  "If at the end of the day we need to raise taxes, we should raise taxes," he said. 

According to the Wall Street Journal: 

  • It has long predicted that this would be the White House fiscal strategy, and its new deficit commission is bound to propose something along these lines.
  • In Europe, a VAT rate that reaches 20 percent in some countries applies to countless products and services, so the middle class would be hit especially hard.  

Though Volcker didn't say this, he is acknowledging that taxes on the rich can't begin to finance the levels of new spending that the current government has unleashed.  Even the expiration of the Bush tax rates next January and the new taxes in the health care bill won't be enough, says the Journal: 

  • In recent decades, the current tax code has yielded revenue on average of 18.5 percent or so of gross domestic product (GDP), whether tax rates go up or down.
  • The wealthy adjust their behavior or shield more income via loopholes, so income-tax increases never gain as much revenue as politicians claim.
  • With spending as a share of GDP now at 25 percent, Democrats have to soak the middle class because that's where the real money is. 

Look for media Democrats to begin explaining why a VAT is essential to U.S. well-being, even as they fail to recall Obama's 2008 pledge not to raise taxes on the middle class.  The United States can't have a European welfare state without European tax rates, and so France, here we come, says the Journal. 

Source: Editorial, "Volcker on the VAT: The middle class is where the money is," Wall Street Journal, April 8, 2010. 

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