Senator Takes Preemptive Stand Against VAT

In a sign that the discussion of a national VAT is increasing behind the scenes, Iowa Republican Senator Chuck Grassley has written an editorial announcing his opposition to such a tax.

"Let’s not mistake the intentions underlying the premise of a Value-Added Tax (VAT). Those who advocate more government spending need to identify new revenue streams. Instead of cutting back on spending to tackle the looming debt crisis, unfunded entitlements and government bailouts, the White House and other Democratic leaders are looking for ways to capture more revenue by adding new layers of taxes. As suggested by former Federal Reserve Chairman Paul Volcker, the White House is entertaining the idea of the first-ever consumption tax in the United States.

Just consider, federal spending is on track to reach 25 percent of the U.S. economy. Washington’s march away from the historic average of 18.2 percent threatens the economic dynamics of a competitive marketplace. A chronic cycle of borrowing and spending by the federal government is arguably a risky route to economic recovery and certainly a misguided way to achieve long-term economic growth and job creation."

What makes the forthcoming VAT debate so potentially dangerous is that a lot of good-thinking free market economists actually support the adoption of a VAT - but only if it replaces the federal income tax.

If the VAT is adopted as an addition to the income tax, the increase in size of the federal government that will follow would be similar to the once-a-generation increase that happened in 1930's with the adoption of the "New Deal" programs and again in the 1960's with the "War on Poverty" programs.

There is much to be said about an economy where the taxes that are needed to run a government, which Tea Party supporters believe should be far, far less in amount than what most people over the last 100 years have come to think, come from taxing consumption (which is what a VAT accomplishes) rather than an income tax (which in effect taxes investment).

However, supporters of a VAT need to be vigilant to the risk of being tragically misunderstood to the extent their support for adopting a VAT as a means of eliminating the income tax is massaged by the mainstream media into being support for a VAT that supplements an income tax.