What's Cooking on the VAT front?

Bruce Bartlett is about as pure an anti-tax cat as you'll find, so when he writes in The New York Times that he thinks a value-added tax now makes sense for America, you should know something is up.

Bartlett confesses disappointment at the GOP's track-record running Congress since 1994—join the club there—and notes that the Bush administration's indifference to any kind of spending restraint, especially on entitlements, adding new ones even, makes galloping budget deficits almost certain.

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.

Bartlett also notes that the lack of inflationary pressures tames a VAT somewhat and that countries which have recently enacted VATs have rarely increased rates, a big worry of anti-VATers over the years.

Personally, I've always been in the anti-VAT camp, but like Bartlett find myself coming around to the idea. For one thing, I think the compliance cost of our wacky tax code is way too high. For another I think the VAT might offer an escape hatch for our current Social Security mess.

Bush erred by running with Social Security reform instead of tax reform for his second term. He should've tried to do both. Lose the payroll tax and the fictional, but distortionary, corporate income tax, replaced by some mandatory savings mechanism into personal accounts and a VAT. Make clear that Social Security will continue to be funded for older workers with VAT proceeds, but that the program is definitely sunsetting.

Far, far from perfect but far, far better than the huge marginal income tax rates we'll face in a few years if the status quo persists.