August 10, 2009 | Commentary on Taxes
No one can say President Obama lacks ambition. The speed with which he has pursued his agenda to radically change the relationship between Americans and their government -- spending colossal amounts of taxpayer money on health care, energy and the economy in the process -- has surprised even the most experienced Washington hands. But all that spending is driving deficits through the roof. Persistently steep deficits lower economic growth because they reduce private investment by individuals and businesses. That may explain why two of the president's top economic officials recently refused -- campaign promises notwithstanding -- to rule out new taxes on the middle class.
"We're going to have to do what it takes," said Treasury Secretary Timothy Geithner. "We're going to do what's necessary." Indeed, to stem the tide of red ink, there is a growing push to levy a new "value added tax" -- commonly referred to as a VAT -- on all American taxpayers.
When Obama took office, the deficit stood at $1.2 trillion -- then a record. But he was determined to pursue his agenda, so he and Congress doubled down and exploded the deficit by passing a $787 billion stimulus and a $410 billion spending increase. Then President Obama proposed, and Congress adopted, a budget that will increase the national debt by $7.5 trillion over 10 years. As a result, this year's deficit will likely hit $2 trillion, almost double what it was when President Obama took office. And deficits from 2010 through 2019 will average just under $1 trillion.
This out-of-control spending has led us to a point where the backers of bigger government consider higher taxes on all Americans unavoidable. In a cruel irony for taxpayers, this might have been the plan all along: to increase spending so much and so fast that massive tax hikes became almost inevitable. This plan to "glut the beast" stands in stark contrast to the "starve the beast" approach favored by President Reagan.
That approach sought to lower spending by depriving Congress of revenue through tax cuts. Taxpayers should hope glutting the beast fails as spectacularly as starving it did. Levying a VAT, atop all the other taxes we already pay, is one of the few options if Congress and the president hope to keep feeding the beast.
They can't raise income taxes on anyone making under $250,000 a year because of the Obama's oft-repeated campaign pledge. And they can't raise them on the rich more than they already plan, because there just isn't enough income left at that level to tax (unless income tax rates rise across the board to heights intolerable to most Americans).
That leaves the VAT. A VAT would still break President Obama's pledge not to raise the taxes of anyone earning less than $250,000, because every American who buys anything will pay it. But because it could largely be hidden from the view of taxpayers, the president's campaign promise would -- at least to the untrained eye -- appear intact.
If it becomes law, the VAT promises to be a whopper of a tax hike. Some have suggested a VAT rate set to raise $1.3 trillion each year. That would raise the taxes of each household in the U.S. by $10,700 annually on average. All that money, taken from families and businesses and given to a spendthrift president and Congress, would seriously harm the economy. A VAT levied on top of all the income, payroll and other taxes we already pay would mean less money for families to buy goods and services, or to save and invest for rainy days and retirement.
Businesses would have less money to expand operations, add new jobs and raise wages. Economic growth, and the jobs and wages that come with it, would suffer.
To avoid this, President Obama and Congress should drop their plans for an expensive government takeover of the health care system. And a costly new environmental and energy regulation regime should come right off the table. They'd be better off eliminating wasteful and ineffective spending and reforming entitlement programs such as Social Security, Medicare and Medicaid to make them more efficient and affordable. Then there'd be no need for an economically damaging VAT -- a "solution" to our needless deficits that would only make matters worse.
Curtis S. Dubay is senior tax-policy analyst at the Heritage Foundation.
First Appeared in the Tallahassee Democrat