The Coming Tax Hike

Obama may have handed Republicans the perfect election-year slogan: Just say no to new taxes.

It should be clear to everyone that the monumental costs of the health care bill, along with the astronomical debt already run up by the Obama administration, are unsustainable. This clarity presumably includes the president himself, who has charged the “National Commission on Fiscal Responsibility and Reform” with the task of figuring a way out of this mess.

Long-term projections suggest that the national debt will rise to unprecedented levels in the years ahead, based on all of the promises and programs associated with this administration. Clearly, something needs to be done. The commission is looking at both spending cuts and “revenue enhancements” (what we used to call “taxes” back in the old days) as a means of getting the budget back under control. Anybody care to place a wager on which method will be most preferred?

The commission is billed as bi-partisan, and that’s true in terms of party representation. There are three Republicans from the House and three more from the Senate on the eighteen member panel. Further, any recommendation has to be approved by at least fourteen commission members before being incorporated into the commission’s final report, due in December. Seemingly, Republicans could derail any tax-hike proposals. Whether they will or not is another matter. But, whatever the GOP members of the commission do, it probably won’t matter in the long run. This commission will deliver one of two results, neither of which is very attractive to a fiscal conservative.

On the one hand, Republicans may stick by their “no new taxes” pledge. In that case, the commission will fail. Absent a tax hike, the only route to balancing the budget goes through massive spending cuts. Doing so would be plainly unpalatable to Democrats, who aren’t going to abandon or pare down the very kinds of entitlement programs and enormous bailouts that they have happily been implementing for the last year. A few modest cuts? Sure. A proposal to fix Social Security, or at least push the day of reckoning farther down the road? Perhaps. But, meaningful, responsible cuts in social programs? Not a chance.

In this scenario, the commission would be expected to deliver a cursory report with few meaningful recommendations, or perhaps no report at all. The president would then wring his hands, furrow his brow and lament that he tried his darnedest to find a by-partisan solution, but those awful Republicans continue to play politics with every issue Democrats bring to the table. If, at this point, Democrats still hold the House and Senate, Obama or one his patsies in Congress will then propose a solution. We’ll get to the specifics of that solution in bit.

The other possibility is that enough Republicans will cave and the commission will recommend a tax hike. Perhaps Republicans will see a tax hike as inevitable and view this as their best opportunity to minimize the hit while wrangling some spending concessions from Democrats in return for their support. Perhaps they will be promised some goodies for their districts. Or maybe they will look at the flood of rink ink that’s set to pour over the dam and conclude that a tax hike is the responsible, if painful, thing to do. Whatever their motivation, it’s a creditable scenario. Republicans have shown a bit of fiscal backbone as of late, but history tells us that is usually a temporary condition in the GOP.

It’s worth noting that Obama put Service Employees International Union president Andy Stern on the commission. That’s worse than putting the fox in the henhouse. It’s more akin to handing Colonel Sanders the keys to the chicken coop. Stern, who apparently has an “anytime, all access” pass to the White House, based on the amount of time that he confers with Obama, isn’t going to agree to any deal that might result in some of SEIU’s 2.2 million members losing their jobs. Since Stern is now an insider with the commission, the unspoken threat has to be clear to the politicians serving on it: make a recommendation that hurts SEIU and Andy Stern will let the rank and file know exactly how you put big business in front of the working man.

In either scenario, the tax hike to come – as has been reported by many media outlets – is likely to be the “value added tax,” or VAT. The VAT is the most politically palatable means of raising revenue for a couple of reasons. It’s a stealth tax, for one. Consumers won’t see a line item on their receipts labeled “VAT,” but the costs will be built into the products they buy as surely as if it were a sales tax. It also appears to be a fair tax, since it applies equally to all goods and services. That’s how the VAT will be sold to the public, but the reality is quite a bit different.

The VAT is a regressive tax, making the costs of goods and services more expensive as a proportion of income for those who can least afford it. It’s also another way for government to extend the clinging claws of the bureaucracy even further into the free market, since the VAT is applied to every transaction that occurs along the way as goods are produced and services are offered. Liberals may – probably will – point out that some conservatives have championed VAT proposals in the past. True enough, but those conservatives who like the VAT do so as an alternative to an income tax, not in addition to an income tax.

There is one scenario in which the VAT might actually make sense: as a temporary measure tied to federal workforce reductions. In other words, Democrats can have the VAT for a year or two, with a hard sunset provision included, but only if they agree to cutting the federal workforce by “x” per cent in year one and by a further “y” per cent in year two.

That would be a neat start to fixing the mess the Democrats have created, but it is of course an unworkable solution. Nobody in their right mind would trust Congress to stick to a sunset provision attached to revenue generation and, even if you could, Andy Stern isn’t going to let his troops lose job one. Accordingly, the smart move for Republicans is to cut the legs out from under the VAT now, by making it an issue in the November elections. Might we hear a “say no to the VAT” pledge from GOP candidates this year? Taxpayers, and beleaguered American entrepreneurs, would welcome such a promise with open arms.