Another Tax That Hits the Middle Class

With the agreement at the Toronto G-20 summit of major nations to cut public deficits at least in half by the year 2013, we will start hearing a lot more about a value-added tax (VAT). We should keep our hands on our wallets.
The goal of cutting the deficit by a set amount by 2013 is arbitrary and premature. Whether that formula makes sense depends on whether the recession is really over. Until we get a stronger economic recovery, too much deficit reduction reduces purchasing power and slows job creation.
A VAT, which is a kind of national sales tax, is especially perverse because it is a tax directly on consumers, who have already been hit hard by the recession.
But it does raise a lot of money. A VAT of 5%, the number usually proposed, would bring in about $250 billion a year.
In the fiscal year that begins tomorrow, the deficit will be $996 billion, according to the bipartisan Congressional Budget Office. The CBO projects that, by fiscal year 2013, it will still be $525 billion. If you do the math, that means a normal recovery plus the expiration of the Bush tax cuts will cut the deficit nearly in half by 2013 with no massive new tax increases. But that hasn’t stopped the budget hawks, who want new taxes to cut the deficit even more.
VAT supporters include many members of President Obama’s own fiscal commission; the billion-dollar Peter G. Peterson Foundation (which bankrolls a lot of deficit hawkery); former Democratic Treasury Secretary Robert Rubin; and the outgoing director of the Office of Management and Budget, Peter Orszag.
Sen. Kent Conrad, chairman of the Senate Budget Committee, likes a VAT. Ezekiel Emanuel, brother of President Obama’s chief of staff and a White House adviser on health care, has called for a VAT as a way to finance expanded health coverage.
Supporters also believe that a VAT offers a bipartisan grand bargain. Because it taxes consumption, it touches only income that is spent. So wealthy people, who invest rather than spend most of their income, would not pay much VAT. As a sweetener for Wall Street, some enthusiasts would include a cut in the corporate income tax as well. That presumably makes it a tax that even Republicans might like.
Advocates trying to sell Democrats on a VAT point to Europe, where value-added taxes as high as 25% in Scandinavia raise prodigious sums that in turn support generous social services. And because a VAT typically exempts products that are exported, it would be good for American manufacturing and our trade balance.
But American budget hawks don’t want VAT revenues to go for more and better preschool or health care or job training or other favorites of liberals. They want the proceeds to go for deficit reduction. And most of the Republican leadership in Congress is dead set against new taxes. So a VAT remains a political stretch.
As the European experience shows, a VAT can indeed be an effective revenue raiser. But unless the proceeds go to support valued public services, it is just another tax on the middle class.
It is possible to make a VAT less regressive by using some of the new revenue to reduce income taxes or payroll taxes paid by working families. Some countries with VATs exempt necessities such as food. We can also offset its regressive nature by coupling it with new surtaxes on very high incomes.
So when the president’s fiscal commission raises the idea of a VAT, as is likely, we need to ask three questions:
• Are basic necessities like food and housing to be exempted?
• Is it part of a package that makes the tax system fairer and less onerous to the middle class overall?
• Do some of the proceeds go to finance public services that have been shortchanged for decades and that got further reduced in the current recession?
If not, the VAT should be considered dead on arrival. The last thing we need in a deep slump with persistent unemployment is higher taxes on the middle class.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His new book is titled A Presidency in Peril.

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