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A Holiday from Reality

Out of control spending will bite us in the end.

4:00 PM, Dec 19, 2009 • By IRWIN M. STELZER
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Congress will undoubtedly hear from constituents during the recess. The vast majority want the deficits brought under control, and oppose health care "reform", which they know will drive up their insurance premiums. Diana Furchtgott-Roth, my colleague at the Hudson Institute think tank, estimates the increase at over 40% for families who get health care insurance through small businesses.

There is talk in Washington of a bipartisan commission to review the entire fiscal situation, including the looming bankruptcy of the Medicare and Social Security systems. Traditionally, Democrats want to keep spending and cover deficits by raising taxes on high earners, while Republicans favor cutting spending. So far, there isn't much talk of compromise, perhaps because both parties are waiting to see how President Obama plans to implement his pledge to bring the deficit down to somewhere around 4% of GDP by 2019, which will still be high by historic standards.

The assumptions underlying the president's deficit-reduction program are, to put it mildly, questionable. His forecasts assume very rapid economic growth hitting an annual growth rate of 5.1% in 2011, and very low inflation. Believe that the economy can achieve those goals only one year from now, and I will get you a date with the tooth fairy.

My own guess is that deal will eventually be cut by a bipartisan commission. Democrats will accept some limits on net, new spending, and Republicans will accept some increases in taxes. That will most likely take the form of having the U.S. join almost all other countries and impose a Value Added Tax (VAT). Set at 20% in most European countries, VAT taxes goods and services at each stage in the production process. Democrats, especially the president, like any idea that makes us more like European welfare states, and know that VAT is a very easy tax to raise; it has champions in House Speaker Nancy Pelosi and key Democratic adviser John Podesta, even though it is difficult to build in features that prevent it from being regressive. Republicans like VAT because it is a consumption-based tax, the adoption of which would ease the pressure to raise marginal income tax rates, and might take the steam out of the drive to restore the inheritance tax, which Republicans loath despite the fact that it merely taxes the winners of the sperm lottery. Besides, by waiving VAT on exports, as Britain and other countries do, we will be able to provide a covert subsidy to exports without running afoul of World Trade Organization rules.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).