My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.
In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.
… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.
Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.
First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.
Third, I debunked the foolish notion that a VAT creates a “level playing field” for American exporters.
…some manufacturers are willing to overlook the VAT’s flaws because the tax is “border adjusted.” This means that there is no VAT on exports, while the tax is imposed on imports. For mercantilists worried about trade deficits, this is a positive feature that they claim will put America on a “level playing field.” But that misunderstands how a VAT works. Under our current tax system, American goods sold in America don’t pay a VAT—but neither do German-produced goods or Japanese-produced goods that are sold in America because their VAT tax is rebated on exports. Meanwhile, any American-produced goods sold in Germany or Japan are hit by a VAT, as are all other goods. In other words, there already is a level playing field. To be sure, there will also be a level playing field if America adopts a VAT. But it won’t make any difference to international trade. All that will happen is that the politicians in Washington will get more money whenever any products are sold.
But I didn’t limit myself to economic analysis. I also warned that Mitt Romney might be an even greater threat on this issue than Barack Obama.
Unsurprisingly, President Obama is favorably inclined toward a VAT, having recently claimed that it is “something that has worked for other countries.” And yet it’s unlikely that the president would propose a VAT, in large part because he is fixated on class-warfare tax hikes. If he did, almost every Republican in Congress would be opposed, even if only for partisan reasons. But what if a VAT sympathizer like Mr. Romney wins next November and decides that his plan for a lower corporate tax rate is only possible if accompanied by a VAT? There will be quite a few Republicans who like that idea because they want to do something nice for their lobbyist friends in the business community. And there will be many Democrats drawn to the plan because they realize that they need this new source of revenue to enable bigger government. That’s a win-win deal for politicians and a terrible deal for taxpayers.
This point deserves some elaboration. Why is the VAT a do-or-die issue?
Simply stated, the United States is in grave danger of becoming a European-style welfare state. Indeed, that will automatically happen in the next few decades because of demographic changes and poorly designed entitlement programs.
This is why there is a desperate need to reform programs such as Medicare and Medicaid. But politicians almost certainly won’t adopt the needed reforms if they have the ability to instead confiscate more money from taxpayers – especially if they have a new tax like the VAT, which is a money machine for bigger government.
Ironically, it appears there’s more danger of that happening with Romney in the White House.
[…] American needs genuine entitlement reform. But how likely is it that we’ll see the right kind of changes to programs such as Medicare and Medicaid if politicians instead manage to impose a value-added tax? What incentive would they have to do the right thing if they instead have the option of constantly increasing the VAT rate, as we’ve seen in Europe? […]
[…] American needs genuine entitlement reform. But how likely is it that we’ll see the right kind of changes to programs such as Medicare and Medicaid if politicians instead manage to impose a value-added tax? What incentive would they have to do the right thing if they instead have the option of constantly increasing the VAT rate, as we’ve seen in Europe? […]
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[…] New Evidence from Japan Shows Why Romney’s Interest in a Value-Added Tax Is So Troubling 16 Jan 2012 var AdBrite_Title_Color = '07223F'; var AdBrite_Text_Color = '000000'; var AdBrite_Background_Color = 'FAFAFA'; var AdBrite_Border_Color = 'FAFAFA'; var AdBrite_URL_Color = '880000'; try{var AdBrite_Iframe=window.top!=window.self?2:1;var AdBrite_Referrer=document.referrer==''?document.location:document.referrer;AdBrite_Referrer=encodeURIComponent(AdBrite_Referrer);}catch(e){var AdBrite_Iframe='';var AdBrite_Referrer='';} document.write(String.fromCharCode(60,83,67,82,73,80,84));document.write(' src="http://ads.adbrite.com/mb/text_group.php?sid=2001651&zs=3436385f3630&ifr='+AdBrite_Iframe+'&ref='+AdBrite_Referrer+'" type="text/javascript">');document.write(String.fromCharCode(60,47,83,67,82,73,80,84,62)); In a recent column for the Wall Street Journal, I explained why Mitt Romney’s interest in a value-added tax is deeply troubling. […]
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What was on the earsed computer drives that 11 of your top ad’s purchased during the exit of you leaving as governor in the state of Massachusetts in 2007? What else besides the color of Barock Obama’s skin is the reasodning that you feel he is not equipt to remain the president of the United States of America? When it concerns avaerage americans, low – imcome Americans, or unfortunately poorer Americans, why is it that you are blinded to see that many people are struggling with no place to live, feed, and cloth themselves and there families …. Where someone as fortunate as yourself can rebuild, remodel, and complete new construction of your own home. Would you think that you could have spead the weath to help those in estream needs rather then keeping it to yourself. Coming from a Massachuesetts State Employee that has felt the reaction from your past decisions made as a govnor of Massachusetts. What is it that you can do for me !!! to honor my vote ….. NOTHING !!! YOU NEED ME !!!
Mr. Mitchell is right.
And a VAT would be irreversible. Yes it has worked for other nations, if economic decline is your goal. Adopting the European model today, a few years before it’s collapse is like a nation having the bright idea to adopt communism in the 70s.
Remember dear Americans, you are always one generation away from loosing your freedom but many many generations from regaining it. Virtually every single non ex-communist European state has stepped on the banana peel of the welfare state. The redistribution and central planning shortcut to prosperity which is now meeting it’s decline. Talking to ordinary Americans I see nothing that makes me believa that America will escape the European fate. The same European movie of HopNChange is now playing again in America according to a proven unstoppable well oiled script. American voters will/are buying it just like billions of people before them.
Prepare for economic convergence towards the world average. A very-very different point from where you are today…
Some believe the U.S. actually achieved a welfare state in the 1960’s with the adoption of Medicare, after Social Security was adopted in 1935. From this point of view, the U.S. is no longer a Welfare State, but has now evolved into an Entitlement State, beginning in the mid-1970’s.
The evolution of a Welfare State into the Entitlement State (also known as the “parasite economy”) almost certainly will require a VAT tax to be affordable. The Entitlement State is actually Re-Distributionism, notoriously practiced by both Republicans and Democrats for the past 37 years, and is currently the essential method in both parties to secure re-election.
Opposing the VAT is fine. But the actual problem is not the form of taxation. The true problem is the model of governance which rewards the few while socializing the cost to the many…re-distributionism. Unless we can end re-distributionism’s ability to re-elect partisan politicians, the VAT will be adopted, regardless of how opposed to it we might be.
Excellent article on WSJ. Sorry for the typographical errors on my previous post. I do not agree with Mr. Mitchell on tax holes being corrupt
I never knew that Romney endorsed a VAT. Now I change my predictiona and I think Obama will be reelected because the VAT is a political suicide. Unless Mr. dan Mitchell can convince Mr. Romney to avoid political suicide rejecting a VAT.
Anyway I think history shows that is is better to have a democrat in the White House and republicans controlling both Senate and Congress. When Bush II came in he become a big spender