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No VAT For Now

There's no easy fix to the budget mess.

2:48 PM, Apr 16, 2010 • By MATTHEW CONTINETTI
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Yesterday the Senate voted 85-13 for John McCain's anti-VAT resolution. The lack of any substantial support for a VAT in the Senate would suggest that, even if the president's fiscal commission recommends such a tax when it reports in December, Ross Douthat is right and the chances a VAT will be imposed prior to the fiscal crisis are small. Whew.

No VAT For Now

We're going to need a bigger bottle.

On the other hand, tax increases are still coming. Taxes on incomes, capital gains, dividends, and estates all go up on January 1, 2011. The health care bill raises all sorts of taxes and fees, including the Medicare tax for high earners. In this post, David Frum runs through some other taxes that will likely be raised. For those of you too lazy to click on the link, the answers are (1) the AMT, (2) taxes paid on mortgage interest, and (3) the Medicare tax (again). At the state level, the Times had an eye-opening piece a couple weeks ago on the taxes being levied on haircuts and funerals.

Taxes are going to go up whether we have a VAT or not. But they won't solve our fiscal problem. Donald Marron makes the point convincingly in "America in the Red" in the latest issue of National Affairs:

As with almost any large, complex problem, there is a natural desire to resolve our budget crisis with just a single solution. Some observers look at the numbers and conclude that the solution is obvious: raise taxes to pay for the additional spending. Others look at the same figures and conclude just the opposite: cut spending so we do not need to move beyond historical levels of taxation. And most observers cling to the hope that growth might set us free, boosting revenues so much that we will not have to face any hard choices. Unfortunately, none of these single solutions will work.

Why? Brookings's Tax Policy Center found that "The size of the required tax increases would almost certainly induce affected taxpayers to adjust their behavior in ways that would reduce economic efficiency and thus offset at least some of the gains from smaller deficits and lower national debt." Congress is allergic to spending cuts and offending the senior lobby. As for economic growth, there are no guarantees, especially when high taxes and massive spending crowd out private investment.

When you look at the budget projections, you see that social insurance is the prime cause of future imbalances. Pensions and health care will bury us, not earmarks or the Department of Education. American politicians have made promises they cannot possibly keep. And the American senior is understandably reluctant to give up the benefits for which his taxes have paid. Which is why we've reached an impasse.

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