Hatch: Value-Added Tax Threatens Health of American Economy
WASHINGTON – In a speech on the Senate floor today, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, outlined why raising taxes will not solve the nation’s spending-fueled, debt crisis and warned of the adverse impact a value-added tax (VAT) would have on the American economy.
“Instead of offering up bold proposals to bring down the debt that has ballooned given the President’s commitment to ever larger and more activist government, they have determined to give the American people talking points that attack the wealthy and successful small businesses in the name of equality,” said Hatch. “Given the fiscal cliff threatening America’s families and businesses, this decision to put politics above solutions is madness.”
Hatch continued: “Without significant reductions in spending or reforms to our entitlement system — neither of which we can expect from this President or the Democrats currently in Congress — there is just not enough money to be found in traditional revenue streams to cover the President’s spending bill. A VAT — or some other euphemized form of a VAT — appears to be the only option left to our friends on the other side of the aisle if they want to continue spending at current projections.”
Below are Hatch’s full remarks delivered on the Senate floor this afternoon:
Mr. President, recently there has been some commentary about the lack of substance in our political debates. This concern — that Washington has failed to confront our deepest political challenges, which are in large part fiscal challenges — is not without some merit.
But I would add one caveat to this analysis. It is not for lack of trying on the part of Republicans to have a grown-up debate about our nation’s fiscal and economic future.
Republicans are putting forward real ideas about tax reform and entitlement reform, with real numbers attached. But I would submit that only one side has put a team on the field for this debate.
When it comes to putting forward solutions to our nearly $16 trillion in debt and our archaic tax code, the President and his Democratic allies have largely stayed on the sideline.
Instead of offering up bold proposals to bring down the debt that has ballooned given the President’s commitment to ever larger and more activist government, they have determined to give the American people talking points that attack the wealthy and successful small businesses in the name of equality.
Given the fiscal cliff threatening America’s families and businesses, this decision to put politics above solutions is madness. But there is a method to it.
The fact is, the President and his liberal allies are not able to put forward serious solutions because they are between a rock and a hard place.
The rock is their base —a liberal minority that refuses any meaningful reforms of the spending programs that are bankrupting our country.
The hard place is the vast majority of the American people who flatly object to the massive tax increases that would be required to finance, on a permanent basis, the President’s commitment to larger government.
The bottom line is that the President is unable to come clean. He cannot tell the American people what the true tax bill would be for his expansion of government.
He suggests that our books can be balanced just by taxing the rich. Hence his commitment to the Buffett tax and other redistributionist schemes that have been pursued by the Senate’s Democratic leadership over the last two years.
But no serious person believes that the Obama Administration’s government can be financed simply by going after the wealthy. The only way to do it is by going after all Americans, and raising taxes on all citizens. That is the silent plan that the President will not discuss on the campaign trail. That is the Democrats’ phantom budget. And that is what I want to discuss today.
When it comes to addressing our deficits and debt, only one party in Washington has been willing to put its cards on the table. Only one party has been willing to acknowledge the difficult choices that have to be made. The other side has refused to provide any concrete solutions of their own, while demonizing anyone who had the temerity to propose anything resembling a workable solution. A case in point?
It has been more than three years since the Senate, which has been under Democratic control the entire time, passed a budget resolution. Three years without a budget.
Four years ago, if someone wrote a novel or a screenplay about a Senate majority that refused to pass a budget for three years, people in both parties would have laughed and called it absurd. Yet, here we are.
In fact, the only budget proposals from the Democrats have come from the White House. And they have been anything but serious. According to the CBO, the President’s most recent budget would keep the US on the same unsustainable path with an ever-widening gap between revenues and spending, varying from 8.7 percent to 2.5 percent of GDP, and averaging 3.2 percent of GDP.
Keep this in mind when you hear the President and his allies suggest that we can get our debt under control simply by raising taxes on the wealthy. The President raises plenty of taxes on upper income individuals and small businesses in his budget. Yet under the President’s budget, debt held by the public would STILL reach 76.3 percent of GDP by the end of the budget window.
Even the President’s budget, which raises taxes significantly, comes in with a debt level that is well above what leading economists, such as Kenneth Rogoff and Carmen Reinhardt, consider the danger zone of 70 percent.
The President claimed just a few weeks ago that his biggest failing over the last three years was that he just cared too darn much about policy. If only that was true.
But the fact is, he ignores the policy experts, and their warnings, when it comes to the debt. Consider what CBO Director Elmendorf wrote to House Budget Committee Chairman Paul Ryan regarding the debt earlier this year.
Budgetary policies affect the economy in a variety of ways…All else being equal, scenarios with higher debt tend to imply lower output and income in the long run than do scenarios with lower debt, because increased government borrowing generally crowds out private investment in productive capital, leading to a smaller stock of capital than would otherwise be the case.
Director Elmendorf continued:
Moreover, that same crowding out leads to increases in interest rates, raising the government’s interest payments and therefore further boosting government deficits and debt. A perpetually rising path of debt relative to GDP is unsustainable.
No one can legitimately dispute that our entitlement programs — Medicare, Medicaid, and Social Security in particular — are the major forces driving our future national debt. This chart, produced by the Bipartisan Policy Center, shows the cannibalization of the budget, and ultimately the American economy, if we go with the status quo on health care entitlements.
Yet under direct questioning by Members of Congress, leading Obama Administration economic policy officials, such as Treasury Secretary Geithner, basically demur on dealing with the runaway entitlement spending.
In February, Secretary Geithner identified to House Republicans that the administration was putting forth no plan to reform entitlement, but, as he said “we know we don’t like yours.”
The only official proposals we receive from the President and his administration would simply maintain the status quo — a status quo that is so unacceptable that not one member of the House or Senate supported the President’s budget.
Not one. So what proposals do Senate Democrats support? On that, they prefer to keep the American people guessing. Perhaps the President will keep the American people in the dark until he possibly gets “more flexibility.” Democrats have not been willing to put their vision down on paper.
By comparison, there is the budget put forward by Paul Ryan. Unlike the Democrats who are hiding the ball from the American people, Republicans have not been afraid to talk about the Ryan budget.
The Ryan budget keeps taxes low, but close to their historic average as a percentage of the economy. The Ryan budget constrains federal spending, and keeps it close to its historic average at 21 percent of GDP. By exercising that spending discipline, the budget pulls the deficit down to 1.7 percent of the GDP.
By comparison, President Obama’s budget deficits are at 3.2 percent of GDP on average, nearly double those of the Ryan budget. When you boil it down, there’s $3.5 trillion more in deficit reduction in the Ryan budget than the President’s budget. $3.5 Trillion!
That’s how much the Federal government currently spends in one fiscal year. And because of the President’s failure to tackle runaway entitlement spending, that yawning fiscal gap between the two plans only gets much bigger in the out years.
Whether we are debating the budget, or the debt ceiling, or Taxmageddon, one thing is clear. The President and the Democrats in Congress do not like to talk in specific numbers. Instead, they want the American people to measure specific Republican alternatives like the Ryan plan against a series of campaign speeches and attack ads.
The current fiscal debate is between the Ryan budget and a phantom Democratic budget. Apparently, the Chicago campaign sharpies have determined that it is safer to wait until after the election to finally unveil the details of the phantom budget. And their advice has been heeded.
If your proposals are never written down, no one can check your math. We do not know the actual fiscal position of my friends on the other side, but we can fill in some of the blanks. We know by their vicious attacks on the spending restraints in the Ryan budget and other Republican proposals that the President and his allies in Congress have no interest in reducing spending.
We know their income tax proposals do not add up to much in terms of revenue. Even if they let the entirety of the current tax relief expire — which is a distinct possibility given the game of chicken they are currently playing with the fiscal cliff — there probably is not enough money to be found in the income tax to pay for the coming explosion in entitlement spending.
So where does the Democrats’ phantom budget find the fiscal juice to fill its structural hole? The answer is simple — a European-style value-added tax, the VAT, or its green cousin, a carbon tax.
I am quite certain that my colleagues on the other side will write this off as fear-mongering and fabrication. But what other conclusions are we left to draw?
Without significant reductions in spending or reforms to our entitlement system — neither of which we can expect from this President or the Democrats currently in Congress — there is just not enough money to be found in traditional revenue streams to cover the President’s spending bill. A VAT — or some other euphemized form of a VAT — appears to be the only option left to our friends on the other side of the aisle if they want to continue spending at current projections.
Many prominent Democrats have expressed some level of support for a VAT in the past. In 2009, during an appearance on the Charlie Rose show, then-House Speaker Nancy Pelosi said that a VAT was “on the table.” A year later, President Obama, in a CNBC interview expressed a willingness to consider a VAT to address the deficit.
Countless high-profile Democratic strategists and advisors — people like John Podesta and Paul Volcker — have unapologetically suggested implementing a VAT in the U.S. Ezra Klein, a writer with real cache among liberal Democrats, expressed similar views in the Washington Post in 2009.
Here’s a revealing quote from Mr. Klein’s article:
First, a simple fact: Tax rates will rise over the next decade. Even with painful spending cuts, tax rates will rise. At some point, taxes have to come further into line with spending, and that means the direction they will travel is up. But — and this isn't a fact — they won't rise within the current system. People don't trust the current tax system. It feels opaque and unfair, largely because it is. An increase in revenues will have to come alongside a change in the tax system. And the change in the tax system that most economists prefer and that most other countries use is a value-added tax.
I agree with Mr. Klein that our current tax system is a mess. But, while he and other liberals see that as an opportunity to seek larger pots of tax revenue elsewhere, my fellow Republicans and I see it as a call to reform the tax code.
And we disagree on the fundamental assumption behind Mr. Klein’s arguments. Like most of my friends on the other side, Klein takes at face value the benefits of future spending. Notice how he uses the phrase taxes will have to come further into line with spending.
His focus is almost entirely on the revenue side with only a passing reference to the possibility of reducing spending.
A VAT would increase federal revenues. But it would also effectively be a tax hike on every American, including those who currently pay no income tax. If a VAT were imposed on top of our existing income tax system, it would likely cripple our economy by imposing new costs on virtually every purchase of goods and services in the U.S. It would hamper manufacturing and kill entire retail sectors. Worst of all, it would be the most regressive tax ever imposed on the American people, disproportionately impacting families with lower incomes who spend a higher percentage of their wages on necessities.
Simply put, a VAT would be bad policy in a strong economy. But in the midst of a slow economic recovery, it would be tantamount to economic suicide. It would be jet fuel for larger and larger government.
Numerous studies, including a 2010 study by former CBO director Doug Holtz-Eakin, have demonstrated that, in virtually every instance, the implementation of a VAT in other industrialized countries inexorably led to increased spending and an expansion of government.
Make no mistake, the current administration and my Democrat friends know only one way of engaging in fiscal reform — broaden the base. And every middle-income family in America should know that they will get hit with higher taxes, to pay for the Democrat goal of ever expanding government control over our economy and your paycheck.
The contention that implementing a VAT would make our government more fiscally responsible is a dog that just won’t hunt. The purpose of a VAT would not be to shore up deficits and pay down debts, but to expand the government into new areas backed by an all new source of funding.
Once again, I am quite certain that virtually all of my Democratic colleagues would publicly deny that their phantom budget includes a VAT. For now, they want us to ignore the VAT behind the curtain and instead just listen as the Great and Powerful Oz proclaims that every government program can be funded and every budget balanced simply by eliminating the so-called tax cuts for the rich.
But the American people are not so easily duped. And they are showing up at Emerald City looking for real leadership and real answers, not just talking points.
That, Mr. President, is the real choice facing the American people today. They can choose the fiscal leadership of those like Chairman Ryan who have put forth actual, real-world proposals to bring about reasonable restraints on entitlement spending and maintain taxation at its historic levels.
Or they can choose the President’s impersonation of fiscal leadership, which is built on a phantom budget and large-scale attacks on anyone, like Chairman Ryan, who offers a real, verifiable alternative.
But, let’s be clear, the phantom budget simply cannot translate into reality without collecting taxes that go far beyond those the President and Congressional Democrats publicly support. Given the limitations on existing revenue streams, a VAT, even with all of its many drawbacks, is one of very few logical alternatives left to the other side. If they do not plan on instituting a VAT, they need to come clean with the American people and let everyone know how they plan to pay for their outsized spending.
Mr. President, regardless of who wins this election, Congress will have to do more than click its heels and wish for enough money to pay all of our bills. Therefore, I think it is fair to assume that, in lieu of a line-item for ruby slippers, the Democrats’ phantom budget includes levels and forms of taxation heretofore unseen in the United States. You can be sure that, if it is not a VAT, it will be something equally damaging to our economy. I yield the floor.