Feed the Beast
Republicans are the problem
April 6, 2005
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
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
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
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
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