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Feed the Beast
Republicans are the problem

NY Times
April 6, 2005
Bruce Bartlett

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.

Commentary:
While it's nice to see some conservatives grow up intellectually, it's still very sad that they think they we have to redesign our entire tax system simply because they've failed so miserably. Recall how we had four years of record surpluses under President Clinton. To do this, all we had to do was pay our own way (IE: what is now called a tax increase) and decrease spending. Republicans were furious with President Clinton for trying to undo the Reagan disaster. In fact they gained power by going after democrats who dared to be responsible and raise taxes.

Now we've had over a decade of republicans in control of congress and we've seen the largest accumulation of debt since they've had a republican president. The only restraint they had during the Clinton years was Clinton. He refused to let them pass tax cuts and forced them to be responsible. The result was four successive years of surpluses.

Had republicans gotten their way, Dole would have passed a $600 billion tax cut and the republican congress would have passed a $900 billion tax cut. Both would have resulted in record deficits instead of record surpluses.

The republican plan to balance the budget for fiscal years 1998-2002 called for our first balanced budget in 2002. But by then we had four years of balanced budgets and Bush was returning us to record deficits again. Clearly only an intellectual dwarf would give them credit for such nonsense. We must conclude from the actions of the republican party ($6.7 trillion of debt since the Reagan tax cut) that they are too irresponsible and intellectually weak to do the right thing. They must be thrown out of power for the rest of time.

No generation, no party and no ideology has done more harm to our future than republicans and their silly tax cuts. Prior to the Reagan tax cut we had less than one trillion of debt. Today, we have over $7.7 trillion. During those 24 years we haven't found a way to pay back a single penny of what Reagan borrowed.

President Clinton put us on the path of record surpluses and a consensus to pay down our national debt in 10-years. It wasn't easy when Clinton did it and it's not going to get any easier if we wait. So, let's get to it and kick every republican out of office.