April 18, 2010
If VAT, Ditch the Income Tax
By George Will
WASHINGTON -- When liberals advocate a value-added tax, conservatives should respond: Taxing consumption has merits, so we will consider it -- after the 16th Amendment is repealed.
A VAT will be rationalized as necessary to restore fiscal equilibrium. But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government.
Believing that a crisis is a useful thing to create, the Obama administration -- which understands that, for liberalism, worse is better -- has deliberately aggravated the fiscal shambles that the Great Recession accelerated. During the downturn, federal revenues plunged and spending soared. And, as will happen for two decades, every day 10,000 more baby boomers are joining the ranks of recipients of Medicare and Social Security, two programs with unfunded liabilities of nearly $107 trillion.
In the context of this concatenation of troubles, the administration's highest priority was to put an enormous new health care entitlement on the welfare state's rickety scaffolding. Why? Because the liberals' lunge to maximize government's growth depends on quickly creating a crisis that can be called a threat to the entitlement menu, and to the currency as a store of value. Then the public can be panicked into accepting the addition of a VAT to the existing menu of taxes.
A VAT is collected on value added at stages during the process of production, but most of its burden is borne by consumers. They file no VAT returns, so its stealthiness delights the political class, which can increase it in small, barely noticed increments, with every percentage point yielding another $100 billion.
Although the nation's welfare often varies inversely with that of the political class, a VAT would ameliorate a real problem: Americans consume too much and save too little. Furthermore, today's baroque tax code drives economic distortions and enables corruptions.
Corporations do not pay taxes, they collect them, passing the burden to consumers as a cost of production. And corporate taxation is a feast of rent-seeking -- a cornucopia of credits, exemptions and other subsidies conferred by the political class on favored, and grateful, corporations. Because the income tax is not broadly based, it radiates moral hazard: Its incentives are for perverse behavior. The top 1 percent of earners provide 40 percent of that tax's receipts; the top 5 percent provide 61 percent; the bottom 50 percent provide 3 percent. So the tax makes a substantial majority complacent about government's growth.
Increasingly, the income tax is codified envy. A VAT is the political class' recourse when the resources of the minority that is targeted by the envious are insufficient to finance ravenous government.
Because a VAT would shred Barack Obama's promise not to increase any tax on households with incomes less than $250,000, he must hope the deficit reduction commission he created will provide cover for his apostasy. But 14 of the commission's 18 members must endorse any recommendation. Good luck finding two votes for a VAT among the six Republican members -- Sens. Judd Gregg, Tom Coburn and Michael Crapo, and Reps. Paul Ryan, Dave Camp and Jeb Hensarling.
And wait until the political class' most imperious masters, the elderly, are heard from. When they worked they paid taxes on their incomes; retired, they will resent -- they are virtuosos of resentment -- being taxed when they spend their savings.
Because a VAT potentially taxes everything, it would be riddled with exemptions. This is because it maximizes the political class' opportunities for showing favoritism -- by, for example, exempting certain "green" goods. It also widens that class' scope for the pleasure of being bossy. For example, it could reduce a VAT's regressiveness -- like rain, a VAT falls equally on the rich and the poor, but the poor devote a larger portion of their income to consumption -- by exempting most foods but not those that the nanny state disapproves: "Put down that sugary soda and step away from the vending machine!"
Money is time made tangible -- the time invested in the earning of it. Taxation is the confiscation of the earner's time. Although some taxation is necessary, all taxation diminishes freedom. Adding a VAT without subtracting the income tax would constrict Americans' freedom much more than the health care legislation does. Because the 16th Amendment will not be repealed, adoption of a VAT would proclaim the impossibility of serious spending reductions, and hence would be the obituary for the Founders' vision of limited government.
Copyright 2010, Washington Post Writers Group