Why Are Conservatives Talking About a VAT?

Have you heard about the value-added tax (VAT), a horrible new tariff Americans will soon have to shoulder? The alarm is sounding on the conservative Web site Townhall.com, in the editorials of The Wall Street Journal, and on the opinion pages of The Washington Post(as well as in the pages of NEWSWEEK): consumers can expect to soon see the feared VAT sneaked into price tags nationwide.

Or, actually, no. No one in politics is seriously arguing for implementing a VAT, and there’s no evidence that anyone with real power in Washington plans to propose it. But the sudden burst in anti-VAT campaigning does offer a peephole into the weird echo chamber of political journalism.

Although it’s the cornerstone of European tax systems, the VAT has been slow to gain support in the U.S. It’s a relatively simple variation on the idea of creating a national sales tax: at each stage where a good is moved, the government taxes a certain amount of the cost. Merchants are able to recoup their expenses from the government, but the end consumer pays the full amount. Economists, some liberal and some conservative, have endorsed the VAT because it raises government revenue without disincentivizing economic productivity (as conservatives believe that high income-tax rates do). By penalizing consumption it encourages savings, which are not taxed. Americans’ penchant for overspending and undersaving is regarded as an economic problem across the political spectrum.

But who would vote for such a thing? Americans are notoriously averse to raising their own taxes. That’s at least one reason that no one in Congress or the White House has proposed creating a VAT. Having campaigned on a promise not to raise taxes on families earning less than $250,000, it would be politically damaging for President Obama to sign a VAT bill into law, and the administration insists it won’t take that risk. “The president has not proposed this idea, nor is it under consideration,” says White House spokeswoman Amy Brundage. “We are not proposing to cut the deficit at the expense of middle-class families.” It’s equally hard to imagine many Democrats in Congress backing a VAT, since it’s a regressive tax—it adds an equal percentage to purchase prices, regardless of the buyer’s income. Progressive groups have lined up to fight any chance the VAT would have. In Europe, the VAT is just as regressive, but makes up for taxing the poor with more expansive and redistributive government services in health care, housing, and education.

The loudest opposition, however, has come not from the left but from the right, with bloggers spilling hundreds of pixels to express their outrage. It’s a little surprising, given that backers of consumption taxes—of which the VAT is one—are usually conservatives, says Howard Gleckman, a resident fellow at the centrist Tax Policy Center. “[Conservatives] rightly point out that it is a more efficient way to tax, and it distorts decision making less than income taxes do,” he says. Indeed, Rep. Paul Ryan, the recently crowned young budget lion of the GOP, proposes a corporate consumption tax in his lauded Roadmap for America’s Future, though not a VAT. Most of Ryan’s Republican colleagues are also uninterested in a VAT, worrying that it would be piled on top of existing income taxes, rather than replacing them. They would rather see drastic spending cuts (and therefore smaller government) than new taxes. Former Republican presidential candidate Mike Huckabee and some other conservatives have backed the fair tax, a national sales tax that shares some characteristics with the VAT, but also has some differences, such as a rebate for low-income Americans. A spokesman for Huckabee said he strongly opposes a VAT. And there’s the stain of Europeanness, which is enough on its own to make many right-wing pundits reject it on reverse-snobbery grounds. Once there’s a VAT, they say, the next stop is full-blown European-style social democracy.

Where did all the current buzz come from? Commentators who have tackled the subject in recent weeks have mostly insinuated that President Obama is considering it, then moved on to the weaknesses (or, occasionally, strengths) of VAT schemes. In the online version of his Post column, George F. Will backed his contention that liberals are preparing their onslaught with a hyperlink—to a May 2009 op-ed. But the main stimulus seems to have been a remark Paul Volcker made on April 6 in New York. Since Volcker is a close Obama adviser, many conservatives took it as a “trial balloon” from the Obama administration, meant to gauge public opinion, when he said that the VAT “was not as toxic an idea.” An April 20 MSNBC appearance in which White House economist Austan Goolsbee denied that the White House backed a VAT in the vaguest terms possible (“I have no working knowledge that they’re contemplating a VAT”) fueled the fire. Grover Norquist, the veteran antitax crusader and president of Americans for Tax Reform, says that Obama’s refusal to quash the whispers proves he wants a VAT: “If he intended to keep his commitment, he could have said, ‘Of course not. There’s no way I’m going to break my campaign promise.’ ”

But others say this is old hat. “Volcker’s been saying this for years,” Gleckman says. “By the definition of news, there was nothing new in this. I don’t think this was a trial balloon.” Americans for Tax Reform’s timeline of comments by administration officials on the VAT suggests a certain low-level consistency. For example, Volcker made similar comments in September 2009, and Nancy Pelosi did the same the following month. Perhaps, cynics say, it’s all just a ploy. “The VAT is such a bugaboo among right-wingers that they hype the crap out of every tidbit suggesting the possibility that one may be imposed. They use it to raise money from dimwits,” says Bruce Bartlett, a Forbes columnist and economic adviser in the Reagan and George H.W. Bush administrations who’s a major proponent of the VAT and has a track record of bucking conservative orthodoxy. Norquist rejects this analysis, joking, “It’s very clever of me to get my staff people, Volcker and Nancy Pelosi and Barack Obama, to do my will.”

As for the flurry of discussion among right-wing journalists—it’s all about good old-fashioned distrust of the other side, says Jonah Goldberg, a National Review staffer who has written about the VAT. His compatriots are skeptical about the VAT’s chances, but it’s smart for opponents to get ahead of the game, he says. “It’s kind of like how the left had convinced themselves that [George W.] Bush was going to bomb Iran—it was like Wile E. Coyote standing three feet past the cliff.” Maybe Bush never intended to attack Iran, or maybe advance left-wing pressure handcuffed him. There’s no way to prove such a counterfactual, but it can’t hurt to preemptively strike against a policy you oppose, right?

Maybe wrong, says Bartlett, since voters are typically unwilling to accept cuts in entitlements, which is the only alternative solution to America’s long-term budget woes. “People say, ‘I don’t understand, why don’t we just cut spending?’ Why don’t I don’t just grow a foot, and then I could play in the NBA?” Bartlett predicts that it could take a painful decade, but eventually voters, politicians, and conservative commentators alike will realize that the federal government has to raise revenue. When they do, he suspects they’ll turn to the most efficient mechanism at their disposal: a value-added tax.