Erik Larson

Apr 21, 2010

Piper Says "Pay"

Conservative pundits weigh in on the Value Added Tax (VAT): WaPo rock stars George Will and Krauthammer , the WSJ , the CATO Institute for starters. All of this in spite of Press Secretary Gibbs’ denial Monday .

What’s the issue? Oh, the VAT is just that consumer tax that social democracies like those in Western Europe have adopted to finance entitlements (aka their “welfare states”). In theory, VATs are fairer than income taxes, because income taxes shift the burden to specific income classes: in America the top 1% of earners provide 40% of the income tax receipts, the top 5% provide 61%, while the bottom 50% provide a mere 3%. This distribution stretches the limits of the reasonableness of the “if you have more, you should pay more” idea, and as Will points out, it creates a perverse incentive for a very large number of people to remain phlegmatic about the expansion of government: “…the tax makes a substantial majority complacent about government’s growth.”.

But the problem with the VAT, in practice, is that it’s not intended to replace or reduce income tax burdens, or to reduce income tax disparity between lower, middle and upper incomes. Basically, the VAT would be JAT (“Just Another Tax”) for everyone—not just the rich folks—raising the cost of goods for consumers rich and poor (exemptions like food etc.). It’s just more taxes for everyone, on top of the income taxes already owed.

Unfortunately, JAT may make sense today. The Europeans aren’t stupid; eventually, taxing just the rich isn’t adequate to pay for the benefits and entitlements given to all. Things just get more expensive , a kind of economic axiom that governments make their peace with (and try to disguise in election years) in order to provide entitlements and programs for everyone. Obama, and the rest of us, must soon make our peace with the cost of our own government.