The desire of today’s big spenders in Washington to greatly increase their revenues is reminiscent of how FDR financed his spending binge during the Great Depression. During the 1930s, federal revenues from the income tax fell the more tax rates were raised. (Congress, take note.) To raise more revenue, FDR and Congress increased excise taxes—taxes embedded in the price of common consumer goods like gasoline, milk, and cigarettes. The effectiveness of those taxes as generators of government income derived from the fact that those taxes are difficult to avoid, unless you can live without milk, gasoline, etc.
VATs are essentially excise taxes. They are economically destructive and hit society’s most vulnerable members the hardest. Here let me offer both a political strategy to resist the imposition of a VAT and an alternative proposal for opponents of a VAT to rally around:
The strategy is a recommendation to Republicans to not obsess about or campaign for balanced budgets. This is not to say that deficits don’t matter. They do, and they’ve got to go.
The problem with focusing on a balanced budget is that it sets up a dynamic of balancing spending cuts and tax increases. Tax increases, as we have already seen, depress economic conditions. Who can get excited about that kind of economic plan? Deficits need to be eliminated by cutting spending, however unpopular that may be in certain quarters.
As economists for the past two centuries have made plain, the real burden of government is not what it taxes but what it spends, because whatever it spends comes at the expense of citizens, whether via taxes, borrowing, or creating additional Federal Reserve Notes. Reducing the burden of government means slashing government spending, not raising taxes.
Here is a counterproposal: Instead of adding yet another “stealth” tax—the VAT—to the many excise taxes already in place, let’s have Congress pass a truth-in-labeling law.
Let’s require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.
What’s holding you back, Congress? You aren’t afraid of the truth, are you?