VAT is a fix for spending addicts

Examiner Editorial
April 9, 2010

The political version of a speedball — the intravenous use of heroin and cocaine together in one syringe — would combine the quick rush of income tax increases with the euphoria induced by a value-added tax on consumption.

When drug addicts do speedballs, they combine cocaine and heroin in one massive dose that lets them experience the former drug's instant rush with the euphoria induced by the latter. Druggies say it's an incredible high, but it's also often a short one because the cocaine effects wear off quickly and the addict dies from an acute heroin overdose that paralyzes the lungs. Sounds a lot like what Washington's political establishment is trying now to avoid admitting its spending addiction.

The political speedball would combine the quick rush of income tax increases with the euphoria induced by a value-added tax on consumption. Tax increases typically produce a revenue spurt that quickly cools off as people find creative ways to evade them, while the VAT keeps taxing consumption at every stage from production to purchase of a product. European VATs typically create substantial revenue streams, but stifle entrepreneurial energy and job creation. That's why all of Europe's welfare states are slow-growth economies. As Greece's need of a bailout to avoid bankruptcy demonstrates, political speedballs eventually produce the economic equivalent of the lethal heroin overdose that is so common among speedballing drug addicts.

That Washington is hell-bent for a VAT became clear this week as former Federal Reserve Board Chairman Paul Volcker, now among President Obama's chief economic advisers, hit the hustings talking up a "European-style VAT" to eliminate the government's massive and growing deficit. Don't worry, Volcker cooed, the VAT is "not as toxic an idea" as its critics have claimed. Similarly, House Speaker Nancy Pelosi, who has long pushed for a VAT, predicted it will come soon in "a larger overhaul of the tax code."

And current Fed Chairman Ben Bernanke warned that "to avoid large and ultimately unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above." Bernanke knows, of course, that politicians like Obama and Pelosi aren't about to cut spending, which leaves only higher taxes.

That's why the fundamental problem here is not that Americans pay too little in taxes, it's that Washington politicians can't stop spending more and more of our money every year. By 2020, according to the Congressional Budget Office, federal spending will equal 90 percent of the country's gross domestic product. So our politicians clearly have no intention of checking into spending rehab. They're counting on getting that euphoria with the VAT fix. If they do, the rest of us will be left with a dead economy.