The United States is on an unsustainable financial course, and everyone seems to know it. As Heritage highlighted in our recently published 2010 Budget Chart Book, if nothing is done, federal obligations will reach heights that even enormous tax increases will be unable to reverse. In 2010, the federal budget deficit will be 11 percent of GDP, and the federal debt is on course to continue to skyrocket. Interest payments on the debt in one month alone in 2009 exceeded yearly expenditures on several federal departments, including the Department of Labor and the Department of Agriculture. And President Obama’s deficit will only magnify the impending crisis, creating an estimated budget deficit at the unprecedented level of 7.8 percent.
Federal Reserve Chairman Ben Bernanke echoed these concerns in a testimony yesterday before the Joint Economic Committee. Bernanke predicted that under current law, excluding improbable assumptions it makes about federal activity in years to come, the federal debt would reach 100 percent of GDP by the end of 2020.
Reining in the federal government’s irresponsible spending is imperative not only to the stability and success of the United States, but also to the future of its economic prosperity. Said Bernanke, “maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance. A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”
So what exactly do our elected officials have planned to address these issues? President Obama’s Bipartisan National Commission on Fiscal Responsibility will meet for the first time at the end of this month to begin its attempts to address the country’s fiscal woes. However, one of the ideas supported by the President and his Administration is a Value-Added Tax (VAT), which would be disastrous for taxpayers and the economy.
The U.S. has had a VAT among its plethora of taxes and for good reason. But this revenue source is old news in Europe, allowing Americans the ability to scrutinize its effects. Reports the Wall Street Journal, “VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate.”
The Journal goes on to say how the reality of a VAT is that rates often increase after implementation. Denmark’s VAT started at 9 percent and rests now at 25 percent; Germany’s grew from 10 to 19 percent, and Italy’s from 12 to 20 percent. These increases do nothing to curb federal spending—instead, they encourage more of it. Moreover, experiences in Europe show that adding a VAT does not result in less federal borrowing.
A VAT in the United States would not replace current taxes, but rather join their ranks. This would be in addition to the tax increases and new taxes imposed already by the Obama Administration, including expiration of the Bush tax cuts for high-earners, an increase in the dividends tax rate, an increase in the capital gains tax rate, and a total of 18 new taxes under the recently-passed health care bill. Adding a VAT to Americans’ tax burden will choke economic growth in the United States. Several better routes for restoring federal fiscal responsibility already exist—the President’s deficit reduction commission should pursue these instead lest it become a tool to lock in President Obama’s big spending big government agenda – permanently
