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March 26, 2010

Krauthammer: Get Ready For The VAT

Obama has set up a 'deficit reduction commission' that will report back to him by the end of the year, safely after the elections. And what do you think it's going to suggest we do about all this Obama debt? Cut spending or raise taxes? Yeah, me too.

Charles Krauthammer takes a look at our very European future.

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 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).

...Obama set out to be a consequential president, 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.

That's a lot of money being drained from the productive, entrepreneurial economy and shoveled directly into the hands of the government. History has also shown us that a tax raised for one purpose won't go to just that use, it will be used as an excuse to raise spending overall, creating greater deficits and debt, thus leading to higher taxes and on and on and on.

Here's the nifty little trick of ObamaCare and Obama in general...he's going to try and force the Republicans into the position of being the tax collectors for his welfare state. When the bill starts coming due next year, the Democrats are going to be squabbling over who to pick as their minority leader in the House and if they are lucky, Senate Democrats will be trying to figure out how to do things with a 1 or 2 seat majority instead of the 9 they have now. If they are unlucky, they will be doing the same as their little brother in the House.

Even if Republicans can undo ObamaCare before the most disastrous elements take effect, there's still a tremendous amount of debt that's been run up thanks to the so-called 'stimulus' and other ObamaReidPelosi spending efforts.

The real question for the Republicans is, once they take over will they roll this stuff back?

The federal government uses 'base line budgeting' to set it's spending levels. That means all of Obama's spending is baked into the budget cake forever. As the bond markets are telling anyone who will listen, this isnít going to go on forever.

I honestly don't know with something as complex and large as the federal budget, with all its component parts, whether zero baseline budgeting is possible but it was part of the original Contract With America. The numbers don't lie about where we are going if we simply assume that all spending will continually grow and each larger budget is the minimum going forward.

I know this kind of root canal economic conservatism went out of favor in the 80s when we simply decided that we could grow and borrow our way to any spending we wanted but it turns out our national spending appetite was greater than our ability to grow.

We did a fine job of creating growth but we spent and borrowed at an even faster rate. Again, this is simply unsustainable.

Before I'm run out of the movement...I get that pro-growth policies are good and that we have to constrain our spending but that doesn't mean we can never roll back the budget. I oppose government spending not just on financial grounds but also on the grounds of liberty. The more the government spends, the more it becomes entwined in areas of our lives it simply has no place being. I donít want to balance the budget at current levels; I want to balance it at a lower level as a percentage of the economy.

Unfortunately, this is more popular in theory among voters than it is in reality.

Obama ran on the promise (threat to some) he was going to fundamentally change America. Sadly he is well on his way to doing that. From health care to spending to regulations, Republicans need to decide if they are going to run on tweaking at the margins or will they use this moment try and roll back statist assumptions that pre-date Obama?

I really hope itís the latter.

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posted by DrewM. at 12:59 PM

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