The Eurofication of America

In Wealth of Nations, published the year that America declared its independence, Adam Smith advised “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” Smith went on to show that he was a believer in pay-as-you-go for governments so that current expenditures should be paid with current income (taxes and tariffs) and surpluses should be saved for the inevitable rainy days when the state’s income is inadequate for its expenditures. Borrowing should be limited.

Historically the U.S. national debt has been the quantified aftermath of our recessions and wars. During WW II rationing and high middle-class taxes were the norm because political leaders believed we could have “guns or butter” but not both. And while there was no rationing during the Korean War, there were high taxes and social sacrifices in other ways.

The pay-as-you-go fiscal restraint went out of the window when the theories of John Maynard Keynes, whose 1936 magnum opus, The General Theory of Employment, Interest, and Money, began to hold sway with modern era government leaders around the world. Before Keynes, economics had been concerned with microeconomics – the mechanism of markets directing the allocation of resources. Keynes, however, thought on a macroeconomic plane and persuaded his acolytes that government debt was not the villain it had been characterized to be and in fact was little different than moving money from one pocket to another in the same pair of trousers. If government borrows from its citizens it’s no different than a child borrowing from a parent – the family is no poorer. Of course Keynes lived before global economies existed when a government’s debt isn’t always owned by a family member – a citizen of the country.

Keynesian economics was a license for ill-conceived governmental spending programs, mushrooming debt, and over- taxation, the Pandoran evils of today’s political policies. While FDR embraced Keynesian economics, the Eisenhower administration, valued pay-as-you-go so strongly that his Treasury Secretary, George Humphrey, recognized the moral hazards of Keynesianism by observing, “I do not think you can spend yourself rich.” Successive presidents were not so sober-minded, especially the current one and his predecessor.

Since 1960, politicians began to believe we could have “guns and butter” and lots of other goodies too. Thus while Lyndon Johnson was fighting the Viet Nam war, he was also busy inventing The Great Society, Medicare, Medicaid, the “war on poverty” (a war we’ve lost along with trillions of dollars) and politicians since made no pretense at fiscal sanity – a balanced budget – as evidenced by the fact that there has only been four years of the past 50 in which revenues exceeded outlays. Washington’s use of government revenues to pander to special interests has raised vote-buying to a new art form.

To pay for government profligacy taxes went up and to assure reelection tax rates became more progressive. When John Edwards campaigned in 2004 on the “Two Americas” theme he meant it to be the familiar trope of class warfare. "One America does the work while another America reaps the reward," Edwards whined. "One America pays the taxes while another America gets the tax breaks."

Edwards was more right than he realized. There are indeed two Americas – those that pay federal taxes (53%) and those that don’t (47%). Out of 100 Americans, the wealthiest three pay about the same amount in taxes as the other 97 combined. With all of Obama's new spending plans, the “two Americas” tax distortion will increase.

Because of its steep progressivity, the income tax makes an increasing majority of American citizens indifferent about government's growth, doubly so among the 60% who get more from the government than they pay in taxes.

In addition to destroying the foundation of a democracy, progressive tax rates don’t increase government revenue because of the workings of Hauser’s Law. A San Francisco investment economist, Kurt Hauser studied historic tax revenue and concluded in a 1993 article that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." Capital flees government regimes that treat it harshly and flows to where it’s treated well.

Even liberals understand that the tax aversion of the rich causes them to change their behavior and exploit loopholes. Corporate taxes aren’t a solution either. American corporate tax rates are virtually tied with Japan as the highest in the world. Besides that, corporations don’t pay taxes; they collect them. Their customers pay them.

No, the real money in a middle class society like ours is held by, well, the middle class. How to get at that money is a problem when candidate Obama promised there would be no middle class tax increase.

What to do … what to do. Here’s an idea. Appoint a commission to study the unsustainable trajectory of debt that Obama has ignited in his quest to transform American, and let the commission report its findings and recommendations – after the 2010 elections, of course. We wouldn’t want the recommendations to become campaign issues.

This week, the debt commission – laughably named the National Commission on Fiscal Responsibility and Reform – had its kick-off meeting with Obama, one of the co-conspirators who created the fiscal irresponsibility the commission will study. The other co-conspirator is no longer a government employee. The commission will examine ways “to meaningfully improve” the nation’s long-term fiscal outlook.

You can be sure that a value-added tax will be among the recommendations the commission makes, giving Obama the cover he needs to renege on his pledge not to increase taxes on the middle class. The VAT is essentially the love child of the French, who implemented it in the 1950s and are hardly paragons of economic virtue or champions of capitalism. Every step along the chain of production that adds value is taxed, so it is highly regressive. Obviously, the end consumer pays the total VAT tax, but the intermediaries additionally pay their proportional share. The VAT is a money machine, which is why liberal intellectuals and politicians love it.

John Volker mentioned the VAT as a new source of U.S. tax revenue earlier this month. His apostasy is surprising because he fought the inflation dragon of the Carter administration and the VAT is inherently inflationary. Pelosi, John Podesta, and other Obama minions have also taken up the chant for the VAT tax. Rather than waste editorial space explaining how it works, take an aspirin, or better still a stiff adult beverage, and read the Wikipedia version. The VAT is invisible unlike other taxes you must calculate or can see on a receipt. Therefore, there is no way of knowing how much of your income you are hypothecating to the federal government, so it will move us silently down the road to the statist goals of the Obama administration.

If history is an indication, a VAT will have numerous effects on American society, all of them bad. It will expand the cost of government, increase income tax rates, slow economic growth, destroy jobs, and impose even more arcane compliance costs on the VAT payers than the current tax code. In very a real sense, a value-added tax is a value-destruction tax. Unlike VAT countries like Germany and Japan whose economies are fueled by exports, ours is fueled by consumption – 70% of the GDP – so it’s insane to impose a consumption tax, which a VAT is, without repealing the existing tax on production – the 16th Amendment that created income taxes and allowed Congress to circumvent the Constitutional prohibition on direct taxes.

Not only would the combination of income and VAT taxes vaporize economic growth, it would affront the freedom of Americans even more than the healthcare legislation because it would forever doom the Founders' vision of limited government. Grover Norquist, the tax opponent spokesman for Americans for Tax Reform, found the right synecdoche for the tax. “VAT” he said, “is French for big government.”

Before the European VATs were put into effect, the average EU tax burden was 28% of GDP. By 2006 with the VATs the EU average tax burden was 40% of GDP. Average European government spending was about 30% of GDP when the VATs were instituted in the late 1960s. Today, European government spending is 47% of GDP.

In 2008, the average resident of West Virginia, one of the poorest American states, had an income $2,000 a year higher than the average resident of the European Union, according to economist Mark Perry of the University of Michigan. There’s no free lunch. The quid pro quo for European cradle-to-grave entitlement is a lower standard of living and it hits the middle class the hardest.

This week a damning report from Medicare’s chief actuary surfaced saying the new healthcare “reform” will actually raise costs $311 billion more than they would be over the coming 10 years. The report had been delivered to HHS Kathleen Sebelius one week before the historic healthcare vote in Congress and she sat on it, not revealing it to the Congress. This shows two things: first, government programs never achieve their planned outcomes; second there is a deepening mistrust of government, which worsens with every new revelation of deception.

A Rasmussen Poll in late March found that Americans oppose a VAT by 60% to 22%. As they learn more about it, as they did with healthcare, they will oppose it even more. Then last week, the Senate went on the record about the VAT, when John McCain forced a vote on a non-binding, "Sense of the Senate" resolution against the idea of a VAT. The vote was 85-13 against the VAT, with 12 of the 13 contra votes coming from Democrats. The lone Republican voting in opposition was George Voinovich of Ohio, who thankfully retires this year.

Many years ago, the satirist and social critic H.L. Mencken wrote, “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins; all of them imaginary.” So expect to hear lots of horror stories from the National Commission on Fiscal Responsibility and Reform designed to scare Americans into knee-jerk government schemes as was done with the bank bailouts, the corporate and auto bailouts, and the stimulus spending which failed to prevent unemployment from rising to calamitous levels as Obama had promised.

If they lose control of the House in the November elections, Democrats may try to impose the VAT on an unwilling public – as they did with ObamaCare – during their lame duck session as they careen toward the party’s Götterdämmerung. They’d have nothing to lose. But if not and if Obama is reelected, he will almost certainly propose a VAT and press Congress to enact it timed, of course, to take effect in late-term so the effects won’t have time to be a Republican campaign issue in 2016.

With a VAT tax, Obama’s transformation of America into Euro-America will be complete.