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"The income tax can't support the new era of spending"

Since this is April 15, it seems a fitting time to follow up on my mention last week of the increased attention being given in Washington to the idea of a European style value-added tax (VAT).

I came across a more detailed explanation of how the VAT works in this 2008 article from Fortune magazine. What really struck me about the article is the presumption that only more taxes can solve our problems.

Here are some of Fortune's observations, along with my comments in italics:

Fortune: It's highly possible, if not inevitable, that Americans will soon live under a radically different tax system — one that the pundits and politicians aren't talking about.

Since a VAT likely would not replace any current federal taxes, it's not a "different" tax system. It's an additional tax system.

Fortune: It's called a value-added tax, or VAT, and it's been used for decades to pay the bills and sustain the immense growth of governments around the world, from France to Mexico to Australia. Created in 1954 by a French economist, the VAT is the most potent, efficient machine for revenue generation yet invented.

Hmm. Couldn't we stop the "immense growth" of government spending so a VAT tax isn't needed?

Fortune: And if there's one thing the U.S. government needs as the federal budget balloons, it's a ton of new revenue. "The bottom line is that the income tax cannot support the level of spending that's projected..."

Then maybe we shouldn't plan to spend so much? Just sayin'...

Fortune: The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn't arouse nearly the uproar caused by increasing income taxes. The ease with which a VAT can be increased points to one of its big drawbacks: Governments see it as an easy way to pay for increased spending, which is a potential drag on economic growth.

The "genius" of a VAT is that it's "hidden" from the public?

Fortune: Make no mistake: A VAT may be unavoidable in the United States. The reason is that spending is rising far faster than the revenue that can conceivably be generated by the current tax regime.

Here's an idea: if you can't pay for it, stop spending. That's what our family does.

Fortune: The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an extra 2% of GDP.

Medicare and Medicaid are in financial trouble? The original projections as to their eventual costs were massively understated? Wow, who knew? Good thing we're not turning the entire health care system over to... oh, wait...

Fortune: The rub is that the fiscal pillar America has relied on since 1913 — the federal income tax — can't possibly support the looming new era of spending....The VAT may be the only answer.

The "only" answer?

Fortune: European governments have typically seen VAT hikes as an easy way to raise revenues during a recession. In some countries, government spending is more than 50% of national income. The results have been fiscal stability, but lackluster growth and a dearth of dynamism and entrepreneurship.

It would seem that those "European levels of spending" have some nasty side effects. (For more on this, see "Europe's VAT Lessons," an editorial in today's Wall Street Journal.)

Fortune: Given the budget numbers, the United States has already chosen a path of far bigger government. The trap has been set. It's unlikely America can escape without a VAT.

A "trap" may have been set, but we have a chance to "escape" this November. That's why our Founding Fathers created a representative form of government — the people get a say-so, not just the politicians (and their apologists in the press).

Please pardon today's tax-day rant. Every now and then, the insanity reaches epic proportions and I can't contain myself.

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