–Senior Republicans Pounce On Volker’s VAT Ruminations
–Ex-Fed Chiefs Volcker, Greenspan Say VAT Worth Considering
–Experts Agree That VAT Could Raise Large Revenues
–Any Accord On VAT Would Require Significant Entitlement Reforms

By John Shaw

WASHINGTON (MNI) – The political and economic potency of a value
added tax, or VAT, was in clear evidence last week.

Within a day of a comment by former Federal Reserve Chairman Paul
Volcker that appeared favorable toward eventually instituting a VAT, two
senior Senate Republicans issued sharp statements of disapproval.

Sen. Chuck Grassley, the ranking Republican on the Finance
Committee, blasted the Obama administration, saying it was using
Volcker’s comments as a way to “lay the foundation for a large,
misguided new tax.”

Sen. Orrin Hatch, the second most senior Republican on the Finance
panel, said the VAT is “largely a hidden tax” that, if imposed, would be
punishing to the American economy.

He said it’s important to warn Americans about the “damage this
invidious tax does to the economy.”

Later Thursday, White House budget director Peter Orszag danced
around a VAT-related question in a way that would make Mikhail
Baryshnikov envious.

Orszag, in response to a direct question on the tax, said the
administration has no official position on the merits of instituting a
VAT. He said that the supportive comments by Volcker were given in his
“private capacity.”

Orszag said the deficit reduction panel created by the White House
should review a wide range of spending and revenue issues without any
pressure from the administration.

Volcker’s comments about the VAT was more nuanced than some have
suggested.

“We have to think about really revamping the tax system,” Volcker
said, adding that a VAT is “not a toxic idea.”

Former Federal Reserve Board Chairman Alan Greenspan has called a
VAT “the least worst way” to hike taxes to cut budget deficits.

A VAT is a tax that is imposed and collected at every stage in the
production and distribution of a good or service. Various reports note
that it appears in a number of iterations at levels that range from
about 5% in Japan to 25% in Sweden.

According to a recent essay on the VAT in “Tax Notes” by Robert
Carroll and Alan Viard, a VAT is used by all OECD nations other than the
U.S. and by at least 145 nations around the world

Budget experts say that when a broad fiscal negotiation finally
takes place between the two parties on confronting massive future budget
deficits, the VAT is likely to enter the discussion at some point.

Bill Frenzel, a former Republican congressman who is now a guest
scholar at the Brookings Institution, says that he doesn’t think the two
parties are now ready to enter into frank negotiations on the nation’s
serious fiscal problems.

“I don’t think either the president or the Congress is ready to
move in a serious way on the budget deficit. But events may very well
force them to get serious about the deficit pretty soon, say in three or
four years,” Frenzel said.

“Clearly it’s going to take a lot of incentives on the spending
side for Republicans to give on taxes. And giving in on the VAT is
probably the last thing they will do,” he added.

Bob Bixby, executive director of the Concord Coalition, said that
imposing a VAT has long been viewed as a possible element of fundamental
tax reform.

“A lot of people have been looking at the VAT for many reasons
including a very simple one: it’s a revenue gusher. That’s its
attraction for many and its danger for some. A lot of people on the
right think it will be used just to feed the beast, to keep expanding
government,” he said.

Isabell Sawhill, a budget expert at Brookings, argues in a recent
essay that the eventual imposition of a VAT could be coupled with a
reduction in corporate tax rates to make it politically acceptable .

“In the end, any tax increase will be a heavy lift in a country
that seems allergic to paying its bills. But it will have to happen
sooner or later and sooner would be much better,” she writes, adding
that increased revenues should be coupled with spending savings in a
comprehensive package.

“As Larry Summers once noted, Republicans don’t like value-added
taxes because they are a revenue machine and Democrats don’t like them
because they are regressive. We will get a VAT when Democrats realize
they are a revenue machine and Republicans realize they are regressive,”
Sawhill says.

** Market News International Washington Bureau: (202) 371-2121 **

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