And Speaking of Higher Taxes….

Talk of adding a VAT (value added tax) to the long list of taxes American already pay is making the rounds in DC (via the WaPo):

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

Note to Lori Montgomery, who wrote this article: Adding more taxes to the economy is not a money making idea; its a money taking idea.

The idea of replacing taxes on capital and labor (corporate taxes, capital gains taxes and income taxes) with a VAT is one that I find very appealing. We should reform our tax system to better reward work and investment. The argument against a VAT has always been that if it were enacted, the politicians would forget the first part of the equation and just add it on top of our existing system. And that seems to be what is being considered. The only way I could support a VAT or national sales tax would be if the 16th amendment were repealed.

President Obama cannot pay for his agenda with taxes on capital and labor. They simply won’t yield enough revenue. If we were to repeal the income tax and shift to a VAT or national sales tax, we could probably extract enough revenue to pay for a higher level of government services (geez, there’s an oxymoron) without killing the economy. With the behavioral distortions of corporate, capital gains and income taxes removed and a tax on consumption we would get higher levels of investment which would mean higher long term growth.

But if the idea is to add the VAT without adjusting other taxes, the results would be disastrous. Raising the price of every good sold (which is what a VAT would do) would reduce consumption even further while providing no incentive for savings and investment. If we haven’t already reached the point of diminishing returns on the Laffer Curve, I feel certain that adding a VAT right now would solve that equation.