Janet Novack writing in Forbes details the long-term U.S. budget and tax realities that will lead to “The Coming Shakedown.” Big taxes and skimpy benefits, she writes, are baked in the cake:
Here’s what sober budget analysts (from both parties) see when they focus on 2020 and beyond: The well-off will pay higher federal taxes, for sure. But ordinary folks will pay more, too. They will pay as tax burdens diffuse into the costs of things they buy. They will likely pay more for fuel and electricity, as the costs of carbon permits and renewable-fuels mandates get built in. They may be asked to pay a European-style value-added tax. And they will pay on the other side of the ledger: Their retirement benefits will get clipped.
The federal government will get bigger, but not big enough to keep all the promises Washington has made. So the normal age to receive Social Security retirement benefits, already rising in steps to 67 for those born in 1960 or later, will increase further, perhaps to 69. High earners will pay more in and get less back in retirement. Call it a “tax” or call it “means testing”—it’s government, and it will make you poorer.
Economists of all stripes think we absolutely need a new value added (or a kind of sales) tax.
“A VAT has got to happen. We’re at a point where the traditional money-raising options are not going to work,” says Yale law professor Michael J. Graetz, who was a Treasury official during the Administration of President George H.W. Bush and has been pushing a plan to use proceeds from a VAT to reduce corporate income taxes and exempt families earning less than $100,000 from the income tax. A VAT encourages personal savings, which the U.S. needs more of. Plus, it forces retirees to help pay for their government benefits. Says Graetz: “You tax the elderly and you tax the coupon clippers. But no politician is going to say that out loud.”
To be sure, a VAT faces tremendous hurdles. Two decades ago economist Lawrence H. Summers, who later became President Clinton’s Treasury Secretary and is now an Obama adviser, famously observed that the U.S. hadn’t adopted a VAT because “liberals think it’s regressive and conservatives think it’s a money machine.” The country might get a VAT, he went on, when liberals realized it was a money machine and conservatives figured out it was regressive.
Larry Summers is a smart liberal, one of my favorites, and he’s probably right. But let’s get something straight: layering a VAT on top of our current tax system would be catastrophic. Some have suggested trading a VAT for a reduction in the corporate income tax. But that too is a dangerous game. One option I’d consider, versions of which have been suggested by both Art Laffer and Sen. Jim Demint, is a low-rate flat income tax with a low-rate VAT — say 8% each. That would be a hugely efficient and growth-fueling fundamental tax reform.
But it wouldn’t be the increase in government that the normal VAT backers have in mind. The way to “solve” the Medicare problem is not to gouge American producers in an inevitably futile effort to close the $43 trillion dollar unfunded budget gap. We shouldn’t wrack our brains trying to pay for the current bloated system. Much better to transcend the issue altogether by transforming health care with new medical technology and a newly dynamic, entrepreneurial, and consumer-driven market.
