[Paleopsych] NYT: Bruce Bartless: Feed the Beast

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Thu Apr 7 15:08:15 UTC 2005

Opinion > Op-Ed Contributor: Feed the Beast

[If I were wearing my incrementalist, establismentarian hat, I would agree 
that a value added tax makes sense. It does seem that voters will demand 
more and more for health care. Health care, as a percentage of GDP, is a 
rising function of GDP/capita, irregardless of the extent to which it is 
publicly provided. This means that public monies displace private monies. 
Also, there's no correlation between health care spending and health. 
These are two of many counter-intuitive results economists come up with. 
See Charles Phelps's standard textbook, Health Care Economics_.]


    Great Falls, Va. -- GROWING numbers of policy analysts and
    politicians are saying that it may finally be time to consider a
    value-added tax as part of our federal revenue system. In years past,
    I would have been in the forefront of those denouncing the idea. But
    now, reluctantly, I have joined the pro-V.A.T. side. Here's why.

    There are many arguments against a value-added tax, which is
    essentially a sales tax that applies at each stage of production. It
    is costly to put into effect, and it hits the poor and the elderly
    hardest because they spend a higher percentage of their income.

    When the idea of a value-added tax for the United States first arose
    during the Nixon administration, there was no question that it would
    have fueled the growth of government, just as it did in Europe. As a
    recent Wall Street Journal editorial pointed out, in the countries
    that established a V.A.T. in the 1960's and early 1970's, taxes as a
    share of the gross domestic product have risen significantly.

    But the main reason for this is that it was too easy to raise V.A.T.
    rates amid the double-digit price increases of the inflationary
    1970's. In those days, there were many economists who still believed
    that budget deficits caused inflation, making it easier to delude
    people into thinking that higher taxes were necessary to get inflation
    under control.

    Those countries that adopted the value-added tax since the end of the
    great inflation, however, have been very restrained in raising rates.
    Of those countries that had a V.A.T. before 1974, all have raised
    their rates by an average of seven percentage points. But of those
    countries that established a V.A.T. since 1974, the average increase
    is just one percentage point, and a majority have not increased their
    rates at all.

    In the 1980's and 1990's, I thought it was possible to restrain the
    growth of government by cutting taxes. This would "starve the beast,"
    as Ronald Reagan used to say, and force government to live on its
    allowance. And after Republicans got control of Congress in 1994, I
    thought the means had finally come to make a frontal assault on the
    welfare state.

    I have been sadly disappointed. After an initial effort at restraining
    Medicare spending - squelched by President Bill Clinton's veto pen -
    Republicans in Congress have become almost indistinguishable from
    Democrats on spending. They have been aided and abetted by President
    Bush, who not only refuses to veto anything, but also aggressively
    worked to ram a $23.5 trillion (of which $18.2 trillion must be
    covered by the general revenue) expansion of Medicare down the throats
    of the few small government conservatives left in the House.

    This behavior has led me and other conservatives to conclude that
    starving the beast simply doesn't work anymore. Deficits are no longer
    a barrier to greater government spending. And with the baby-boom
    generation aging, spending is set to explode in coming years even if
    no new government programs are enacted.

    As Alan Greenspan, chairman of the Federal Reserve, told the House
    Budget Committee on March 2, "The combination of an aging population
    and the soaring costs of its medical care is certain to place enormous
    demands on our nation's resources and to exert pressure on the budget
    that economic growth alone is unlikely to eliminate."

    Yet many conservatives continue to delude themselves that all we have
    to do is cut foreign aid and get rid of pork barrel projects to rein
    in the budget. But unless health spending is confronted head on, even
    the most draconian cuts in discretionary spending won't be enough to
    restore fiscal balance.

    I am no deficit hawk. For decades I have argued that the negative
    effects of deficits are generally exaggerated. But unless spending is
    checked or revenue raised, we are facing deficits of historic
    proportions. It is simply unrealistic to think we can finance a 50
    percent increase in spending as a share of gross domestic product -
    which is what is in the pipeline - just by running ever-larger
    deficits. Sooner or later, that bubble is going to burst and there
    will be overwhelming political support for deficit reduction, as there
    was in the 1980's and early 1990's.

    When that day comes, huge tax increases are inevitable because no one
    has the guts to seriously cut health spending. Therefore, the only
    question is how will the revenue be raised: in a smart way that
    preserves incentives and reduces growth as little as possible, or
    stupidly by raising marginal tax rates and making everything bad in
    our tax code worse?

    If the first route is chosen, the value-added tax is by far the best
    option available to deal with an unpalatable situation. Absent any
    evidence that the White House and Congress are prepared to restrain
    out-of-control health spending, I see no alternative.

    Bruce Bartlett is a senior fellow at the National Center for Policy

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