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A Big VAT Lie

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As an observer of politics, I sometimes have to admire the Republicans for their ability to coordinate the rollout of a talking point. Even if I don't agree with it, or think it is laughably in the realm of fantasy. Because Republicans are very, very good at this sort of thing, and they can sweep public opinion in their wake, at times, behind fears of things which do not exist and are not likely to exist in the near future (see: "death panels"). As I said, they're good at this sort of thing. But the current bugaboo circulating among Republicans is so hypothetical and so impossible to imagine happening, politically, that many Democrats may laugh at the issue and feel free to ignore it. Which would be a mistake (see: "death panels"). Laugh at it all you want (actually, the correct response to such myth-making), but don't ignore it.

I speak of the "value-added tax," or "VAT." Republicans are horrified that President Obama has a secret plan to pass this tax, and are shouting from the rooftops (of the nearest Fox News building) how strongly they're going to oppose it. The facts that Obama himself has come out against the idea, and it seems to have virtually no support in Congress, have not gotten in the way of Republicans doing so, either.

But before we get to all of that, a quick introduction is in order, for anyone who has never heard the term VAT before. A value-added tax is one of those Orwellian terms that means pretty much the opposite of what you would think. It adds no value. In fact, it subtracts value -- if you define value as: "getting something for your money." It is a production tax, plain and simple. It taxes every stage of production, often at an obscenely high rate (European VAT rates vary, but can be as high as 23 percent or more). To the consumer, the VAT appears as a sort of sales tax, built in to the cost of the item being purchased. But the key is that if you buy a pair of shoes (for instance), you are paying VAT not only on the finished pair of shoes, but also for the company's costs in buying all the pieces that comprise your shoes. The company itself pays VAT to its suppliers of leather, shoelaces, soles, and all the other shoe parts. So the tax multiplies by the time it gets to the consumer, making goods a lot more expensive.

That's it in a nutshell, although it is admittedly an oversimplification (which ignores U.S. corporate complaints about refunding VAT for products which leave the country the tax is charged in, and other sub-issues). For our intents and purposes here, think of it as a federal sales tax.

Now, the VAT is an idea which think tanks like to kick around, much like Steve Forbes' "flat tax" idea -- but which also have very little likelihood of ever gaining enough political consensus (from either party) to ever be enacted. It's a little "thought experiment" for the most part, that academic types like to indulge in every once in a while ("What would happen if... America had a VAT?").

But getting back to the current Washington tempest, what set the Republicans off was an offhand comment made by Paul Volcker a few weeks ago, while responding to a question at an event at the New York Historical Society. None of the news sources I checked had the full transcript of either the question asked or Volcker's response, the closest came from The Hill, which reported Volcker's response thusly:

The former chairman of the Federal Reserve who is an outside adviser to President Barack Obama, said the value-added tax "was not as toxic an idea" as it has been in the past, according to a Reuters report.

Volcker made the remarks at a New York Historical Society event Tuesday night. Volcker also suggested that a carbon or energy-related tax may become necessary to bring the budget back into check.

Volcker acknowledged that the ideas weren't popular but that the outlook on entitlement spending and budget deficits were grim without some changes.

"If at the end of the day we need to raise taxes, we should raise taxes," he said.

The White House immediately disavowed the idea, saying: "The President has passed historic tax cuts for middle-class families and continues to push for more tax cuts. The President is not proposing to cut the deficit at the expense of middle-class families." But that didn't stop the furor. Someone dug up Nancy Pelosi saying that a VAT was "on the table," and the Republicans were off and running.

Their argument seems to be a second-order hypothetical. As Senator Chuck Grassley put it: "To make up for the largest levels of spending and deficits in modern history, the [Obama] Administration is laying the foundation for a large, misguided new tax, a first-time American VAT." As their thinking goes, Obama's going to have to raise taxes sooner or later (he is, after all, a Democrat, and Democrats absolutely live to raise everyone's taxes), and this is going to be the way he does it -- probably some time next year. The fear of hypothetical future taxes (as evidenced by the Tea Partiers, most of whom likely got an income tax cut from Obama this year) is strong out there, even if they haven't happened yet (since they're bound to sooner or later -- did I mention Obama is a Democrat?!?). And this hypothetical fear just got hypothetically more fearsome, because now all that aggregate fear has an actual (well, "an actual hypothetical") target to be afraid of -- a hypothetical type of hypothetical tax increase. Ahh! Run for the hills!

The fact that this goes against the bedrock belief of all Republicans -- tax cuts cause revenue increases -- has not seemed to dawn on them yet. If you are (for instance) a good Reaganite, then you believe that cutting taxes means government revenues go up -- always. It's a basic tenet of Republicanism. Since Obama cut taxes, you'd think they'd be predicting a flood of government income -- obviating the need for any tax hikes.

But, Republicans argue, all that extra spending will overwhelm this and necessitate tax increases. We just know they're coming, because -- did we mention -- Obama is a Democrat, fer cryin' out loud!

But once you examine the fantasy tax Republicans are fear-mongering right now, the prospects of its passage are laughably small -- even if Obama were championing the issue (which he most emphatically is not). And why would Republicans be afraid such a tax is going to pass next year, since they feel confident Congress will be much more Republican after the midterms? In other words, if it can't pass this Congress, how in the world is it going to pass the next (more-Republican) one?

Here is the reality of the situation (which has been, so far, largely absent in the mainstream media's coverage of this non-debate). Paul Volcker was asked some un-transcribed question. He answered that, in his opinion (he is not an official White House anything, merely an "outside economic advisor" to President Obama), the political climate right now is more favorable to passing a VAT than it used to be. He is wrong about that, but never mind. Nancy Pelosi, using a familiar political dodge, refused to rule out a VAT -- or anything else -- by repeating the canard "everything's on the table." None of this is, by definition, "support" for enacting a VAT, by the way. But that didn't stop Republicans from conflating it all, and gleefully rolling it out as the latest thing to be scared of from Obama's tax-happy White House and the tax-loving Democrats in Congress.

The idea of Democrats passing this any time soon is downright ludicrous. In the first place, the value-added tax is like a sales tax on steroids. It is a "regressive" tax, because it hits those with lower incomes hardest. It is not, in any way, shape, or form, "progressive." In the second place, it would drive American manufacturing out of this country (to non-VAT countries) faster than NAFTA. But, to give Republicans a shred of credibility, Obama and the Democrats have passed a regressive tax which hit lower-income folks directly, and they did so almost immediately after taking office (the tobacco tax). And NAFTA passed under a Democratic president. So it's not totally outside the realm of possibility, you might be excused for thinking.

But here's the real nail in the coffin of any chances of a VAT passing -- Senator John McCain forced the Senate to take a non-binding vote on the issue just last week (to score political points, of course). His anti-VAT measure passed 85-13. Meaning there is simply no chance of a VAT making it through the Senate, in any foreseeable future. Even if Obama were foolish enough to introduce the idea, it is dead on arrival in the Senate. Period.

But just because there is no remote possibility of it ever happening has never stopped Republicans from fanning the flames of fear on any particular issue. What the real story may be here (if this is all not just a cheap political ploy to manufacture a campaign issue out of whole cloth -- which indeed the VAT hysteria may be on the part of the Republicans) is a Republican "shot across the bow" of the new blue-ribbon commission Obama is convening to report on what to do about the deficit. This commission is scheduled to meet for the first time this week, and Republicans may be drawing a very strong line in the sand as a message to the Republicans on the panel. But even this is kind of laughable, because the commission is so weak currently that it's hard to imagine them ever signing on to recommending a VAT -- which has to happen with at least a few Republican votes. And, since the Republicans chickened out of their own idea (when it came time to actually vote on it) for an actual beefed-up congressional panel, the president's panel won't be able to force Congress to vote on their recommendations as a whole (with no ability to amend it -- just an up-or-down vote). Meaning, once again, that Congress would simply strip any VAT idea out before they voted on anything.

The idea of a value-added tax is kicked around every so often in think tanks from both the Right and the Left -- although, to be fair, when the Right proposes the idea, they usually do so "instead of" either corporate taxes or income taxes (or both). In other words, replace the income taxes we now have completely with a VAT. But then they sit down and crunch the numbers and figure out we'd likely have to have a VAT of at least 20 percent to do this -- and the idea quickly dies. What Republican, after all, is going to suggest everyone pay a 20 percent tax to the federal government on everything they buy? From the Left, the VAT is often thought of "in addition to" existing taxes. Which means it could start quite low -- a few percentage points. Make it small, get people used to the general concept, and then it can be quietly raised later if need be, this line of thought goes.

But while President Obama has shown a certain amount of weasel room on his pledge not to raise taxes on anyone "making less than $200,000 a year" (such as the tobacco tax, or the "Cadillac" health plan tax), and while the official stance now seems to be that Obama won't raise "income taxes" on the under-$200,000 group; it is still pretty easy to see that he's not about to propose any sort of VAT, either now or in the foreseeable future. That 85-13 vote means that a VAT is an issue which is guaranteed to lose in the Senate. And Obama, so far, has not shown any sort of willingness to champion ideas which are proven political losers. And it's hard to see that changing any time soon, either -- no matter how hard Republicans wish it would.

The entire issue, as far as I can tell, is nothing more than a gigantic red herring Republicans are desperately trying to drag across the media's (and America's) consciousness. It feeds into Republican resentment that a Democratic Congress and President Obama could actually pass a tax cut which benefits 95 percent of the public. They're angry out there -- really angry -- that their taxes have been lowered, in other words. This leads to dark fantasies of future tax hikes (since they don't have any current ones to get angry about), and this anger has found a target in the particularly dim fantasy of those wily Democrats passing a VAT, somehow. In other words, it's a perfect issue for Republicans to campaign on. Because it is mythological, it's impossible to rationally defend against the hypothetical nature of the argument. Even rebutting the fantastical notion puts Democrats on the defensive and feeds into the Republican talking point. The intelligent way for Democrats to counter the fear-mongering is to laugh at it as a paranoid fantasy of the Right.

Because that's truly what it is -- nothing more than a big VAT lie.

 

[Department of Redundancy Department Official Note: When discussing this issue, please note that "VAT tax" is redundant. It's like saying "ATM machine." There will be a quiz later, and your comments will be graded accordingly. Hrrmph.]

 

Chris Weigant blogs at:
ChrisWeigant.com

Follow Chris on Twitter: @ChrisWeigant

 

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