Paul A. Volcker, Inflationist

Paul A. Volcker, Inflationist

Fiscal Policy: There are ironies, and then there are ironies. Former Fed Chairman Paul Volcker, who 30 years ago wreaked havoc slaying inflation, now advocates the most inflationary tax ever devised.

Conquering the seemingly intractable double-digit inflation of three decades ago was a national objective of such import to Volcker that as chairman of the Federal Reserve Board he was to tighten monetary policy to an unprecedented level of pain — raising the federal funds rate to 20%.

So hated as an inflation fighter was the cigar-chomping appointee of Carter and Reagan that an army of farmers once blocked traffic in front of his majestic offices on Constitution Avenue.

Yet on Tuesday, the chairman of the president's new Economic Recovery Advisory Board proposed an idea just as unpopular as his Fed policy of the days of yore — except that this policy would explode inflation.

Speaking at the New York Historical Society, Volcker claimed that Europe's infamous value-added tax was "not as toxic an idea as it has been in the past." Volcker reportedly added that "if at the end of the day we need to raise taxes, we should raise taxes."

Last fall, another former central bank chief, Alan Greenspan, also talked up tax hikes and called a VAT "the least-worst way."

Even a supply-sider such as former Treasury economist Bruce Bartlett has cozied to the VAT, in which Uncle Sam would collect money on goods at every stage of the production process. He views it as an inescapable accommodation to massive new spending.

In "Impostor," his 2006 critique of George W. Bush's economic policies, Bartlett wrote: "In my view, the VAT lends itself to dealing with our long-term budget problem because it can be raised a little bit at a time without causing serious economic repercussions."

Lovers of big government have long yearned for a VAT, and statements made by House Speaker Nancy Pelosi make it clear that she is salivating for its enactment to pay for some of the Democrats' endless spending spree.

How unpopular is the VAT? The best person to ask would have been the late Democrat Al Ullman. As chairman of the powerful House Ways and Means Committee during much of the 1970s, he was one of the most powerful politicians in Washington. But he actually lost the Oregon congressional seat he had held for decades after championing the VAT.

First cooked up by France, the VAT's hidden nature is what gets ordinary Americans justifiably furious when they hear talk of it. Steve Forbes and Elizabeth Ames, in their new book "How Capitalism Will Save Us," call the VAT "insidious because it imposes an invisible layer of taxation that inflates the cost of living . .. increases the cost of doing business and hits all consumers."

As Hoover Institution flat-tax gurus Robert E. Hall and Alvin Rabushka have warned, a VAT is unacceptable "to most Americans on grounds of equity" because "by taxing consumption from the first dollar at the same rate, it puts a substantial tax burden on the poor." It therefore "is rarely considered as a replacement for the income tax."

But it would also inflict an inflationary assault — the last thing our economy needs right now. "Experience in Europe has made it plain that the incorporation of the VAT in product prices is not just an academic proposition," Hall and Rabushka point out.

"Not only are prices marked up by the amount of the VAT as soon as the tax goes into place," the economists add, "but there are second and third rounds of inflation as wages respond to higher prices through cost-of-living escalation. In 1979, when Britain raised its VAT rate while cutting income tax rates, a burst of inflation crippled the economy for several years."

The statists now running Washington are too in love with income taxes to replace them with a VAT; it's an added value-added tax they want, starting at a "painlessly" low rate, then growing like a cancer.

Many believe Paul Volcker has cemented his place in history as the 20th century's mortal enemy of inflation. But his endorsement of a tax that constitutes the obvious next step by Democratic politicians toward European-style socialism in the 21st century further exposes the truth about his inflated reputation.