The VAT Cometh

The only way to pay for the behemoth government takeover health care bill is with taxes, taxes and more taxes. You conveniently won't hear much about the upcoming taxes until after the November 2010 mid-term elections, and of course the tax increases already implemented will not hit until early 2011 either. The big push will be the european-style socialized Value Added Tax, more commonly known as VAT.

Anyone who has traveled to Europe is familiar with this. It taxes everything, including labor and professional services, so in addition to paying the high cost of -- say -- a lawyer, their services will also be taxed! The difference between Europe and us, is VAT is their form of taxation. Obama will add VAT on top of what American tax paying citizens already pay.

Most of us talked about this coming months ago, but it's never too late to reiterate, especially since this government takeover has passed and reality will not hit right away. As more and more companies are coming out with horror stories about their new tax burdens, this must be one of the biggest parts of the November election campaigns.

Charles Krauthammer writes another brilliant and frightening piece on this Obamanation in National Review:


The VAT Cometh
This massive new entitlement needs a cash cow.
by Charles Krauthammer, March 26, 2010

As the night follows the day, the VAT cometh.

With the passage of Obamacare, which created a vast new middle-class entitlement, a national sales tax of the kind almost universal in Europe is inevitable.

We are now $8 trillion in debt. The Congressional Budget Office projects that another $12 trillion will be added over the next decade. Obamacare, when stripped of its budgetary gimmicks — the unfunded $200 billion­–plus doctor fix, the double-counting of Medicare cuts, the ten-six sleight-of-hand (counting ten years of revenue and only six years of outflows) — is, at minimum, a $2 trillion new entitlement.

It will vastly increase the debt. But even if it were deficit-neutral, Obamacare would still pre-empt and appropriate for itself the best and easiest means of reducing the existing deficit. Obamacare’s $500 billion of Medicare cuts and $600 billion in tax hikes are no longer available for deficit reduction. They are siphoned off for the new entitlement of insuring the uninsured.

This is fiscally disastrous because, as President Obama himself explained last year in unveiling his grand transformational policies, our unsustainable fiscal path requires control of entitlement spending, the most ruinous of which is out-of-control health-care costs.

Obamacare was sold on the premise that, as Nancy Pelosi put it, “Health-care reform is entitlement reform. Our budget cannot take this upward spiral of cost.” But the bill enacted on Tuesday accelerates the spiral: It radically expands Medicaid (adding 15 million new recipients/dependents) and shamelessly raids Medicare by spending the $500 billion in cuts and the yield from the Medicare tax hikes on a new entitlement.

Obama knows that the debt bomb is looming, that Moody’s has warned that the Treasury’s AAA rating is in jeopardy, and that we are headed for a run on the dollar and/or hyperinflation if nothing is done.

Hence his deficit-reduction commission. It will report (surprise!) after the November elections.

What will it recommend? What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing, and changing the indexing formula from wage growth to price inflation.

But this won’t be nearly enough. As Obama has repeatedly insisted, the real money is in health-care costs — which are now locked in place by the new Obamacare mandates.

That’s where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude — if you exempt food, for example, the yield would be more like $900 billion).

It’s the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, one on the order of Ronald Reagan. With the VAT, Obama’s triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan’s strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes; then, ultimately, you have to reduce government spending.

Obama’s strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Ultimately, even that won’t be enough. As the population ages and health care becomes increasingly expensive, the only way to avoid fiscal ruin (as Britain, for example, has discovered) is health-care rationing.

It will take a while to break the American populace to that idea. In the meantime, get ready for the VAT. Or start fighting it.


— Charles Krauthammer is a nationally syndicated columnist. © 2010, The Washington Post Writers Group.

OBAMACARE'S CRIPPLING DEFICITS

As people watch Obama's speech at the abrupt emergency Joint Session of Congress on Wednesday, these are facts we must face, should he succeed in ramming through government run healthcare along with his Cap & Trade. And the emergency is not war, but the financial destruction being forced upon us.

From the Wall Street Journal:


ObamaCare's Crippling Deficits
The higher taxes, debt payments and interest rates needed to pay for health reform mean lower living standards.
by Martin Feldstein, September 7, 2009

While the deficits caused by the fiscal stimulus package will end in 2011 and will help to sustain a fragile recovery in 2010, the deficits projected for the longer term are a threat to our economic future. The starting point for controlling those future deficits is for Congress to abandon the administration's health-care plan—a plan that will cost more than $1 trillion.

The deficits projected for the next decade and beyond are unprecedented. According to an assessment released in March by the Congressional Budget Office (CBO), the president's budget implies that deficits will average 5.2% of GDP over the next decade and will be 5.5% of GDP in 2019. Without the president's proposals, the budget office forecasts a 2019 deficit of only 2% of GDP.

The CBO's deficit projections are based on the optimistic assumptions that the economy will grow at a healthy 3% pace with no recessions during the next decade; that there will be no new spending programs after this year's budget; and that the rising national debt will increase the rate of interest on government bonds by less than 1%. More realistic assumptions would imply a 2019 deficit of more than 8% of GDP and a government debt of more than 100% of GDP.

Such enormous deficits would crowd out productivity-enhancing investments in new equipment and software as the government borrows funds otherwise available to private investors. The result would be slower economic growth and a lower standard of living.

In the nearer term, the projected deficits could cause interest rates on bonds and mortgages to rise sharply if bond investors fear that the government will not prevent inflation. This is a greater risk now that more than half of the U.S. government debt is held by the Chinese and other foreign investors. Such an interest rate rise could kill a recovery in 2010 or 2011 and depress growth in the years that follow.

Dropping the Obama health plan would significantly reduce fiscal deficits over the next decade and help restore public confidence in the ability of Congress to control spending. The CBO estimates that the House committee versions of the Obama health plan would add more than $1 trillion to federal deficits over the next decade. But the actual costs would be much higher.

For starters, $1 trillion of extra debt-financed spending would cause the government to pay about $300 billion of extra interest in the next decade. Moreover, the CBO's method of estimating the cost of such a program doesn't recognize the incentives it creates for households and firms to change their behavior.

The House health-care bill gives a large subsidy to millions of families with incomes up to three times the poverty level (i.e., up to $66,000 now for a family of four) if they buy their insurance through one of the newly created "insurance exchanges," but not if they get their insurance from their employer. The CBO's cost estimate understates the number who would receive the subsidy because it ignores the incentive for many firms to drop employer-provided coverage. It also ignores the strong incentive that individuals would have to reduce reportable cash incomes to qualify for higher subsidy rates. The total cost of ObamaCare over the next decade likely would be closer to $2 trillion than to $1 trillion.

The administration's claim that the health-care plan would be "self-financing" is both false and irrelevant. It is false because it would only be self-financing if one counts a variety of President Obama's proposed tax increases—and even those would produce much less revenue than is assumed in the budget calculations. The claim is irrelevant because those tax increases have nothing to do with health care and could be used instead to reduce other projected deficits.

For example, the administration and the congressional designers of ObamaCare say they would finance a substantial part of health reform with the revenue from new taxes on corporate foreign profits and on high-income individuals. The likely revenue from these tax changes would be much less than the official estimates because of the induced changes in taxpayer behavior that the estimators ignore.

Previous experience with changes in the marginal tax rates of high-income individuals implies that the current proposal to raise the marginal tax rate to about 50% from today's 40% would produce only about half of the official revenue estimates. No one knows how much of the estimated extra tax revenue on foreign profits would be lost as the resulting fall in international competitiveness reduces profits, and as businesses sell their overseas subsidiaries or shift their profits in other ways.

While abandoning health reform would be an important step, it would not be enough to limit the exploding level of future deficits and debt. That requires substantial reductions in existing spending programs, if large tax increases are to be avoided. Since Medicare is the largest contributor to the explosive growth in government spending, a good way to start shrinking government outlays would be by restructuring Medicare to shift more of its costs to supplementary private insurance, perhaps on an income-related basis.

Given the perceived need for significant additional tax revenue to shrink future fiscal deficits, there is now talk in Washington of introducing a value-added tax (VAT), the kind of national sales tax that European governments use to finance their welfare states. That would be a triply bad idea. Although it is a tax on spending, a VAT effectively raises marginal tax rates. Like the income tax, it reduces the reward for work and entrepreneurship by adding a tax to the prices of all goods and services. A VAT would also be grossly unfair to those whose lifetime savings would now be subject to a new tax when they start to spend those savings.

A VAT would open the door to an explosion of new spending programs. That's because, no matter how low the initial rate, the tax rate would be drawn inevitably to European rates of more than 15%—on top of existing income and payroll taxes.

The key to raising revenue without raising marginal tax rates or creating a new tax is to reduce or eliminate some of the "tax expenditures" that now lower tax revenue by special deductions and exclusions. Ending the current exclusion from taxable income of employer payments for health insurance would increase income tax revenue by more than $1 trillion over the next five years and nearly $3 trillion over the next decade. Eliminating this subsidy would also lead to a restructuring of private health insurance that would give patients the incentive to seek more cost-effective care and thereby bring down the overall cost of health care.

Restructuring Medicare and reforming tax rules would be politically difficult. But a failure by Congress to address the exploding path of fiscal deficits would be morally irresponsible.


Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.