GOP Letter Warns: VAT Would Make US Like Greece

Monday, 10 May 2010 05:03 PM

By John Rossomando

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The introduction of a tax on every stage of production, known as a value-added tax (VAT), in the United States could cause the nation’s economy to resemble that of debt-stricken Greece, House Republican leaders warned in a letter to the co-chairmen of President Obama’s debt-reduction commission.

Although the administration has not formally proposed a VAT some of the president’s allies have floated the idea. The president also recently told CNBC he was not taking the idea of a VAT off the table.

The letter’s signatories include Minority Leader John Boehner, R-Ohio; Minority Whip Eric Cantor, R-Va.; Rep. Mike Pence, R-Ind., the House Republican Conference chairman; and Rep. Joe Pitts, R-Pa., the letter’s primary author. Pitts’ office anticipates dozens of additional signatures by the time it sends the letter this week.

“In a depressed economy, the number one priority of government should be to stimulate job growth,” they write in their letter to Erskine Bowles and Alan Simpson, the debt commission co-chairmen. “With unemployment at nearly 10 percent, Americans cannot afford the burden of a new job-killing tax.”

In Greece, the government owns large chunks of the economy and imposes crushing regulations on businesses that keep costs high and stagnate growth. Roughly 40 percent of Greece’s 4.4 million workforce has government jobs, according to the CIA World Fact Book. A recent USA Today report found that Greece’s bill for its public-sector wages doubled in the past six years.

The lower interest rates that followed Greece’s 2001 adoption of the Euro allowed it to heavily borrow from abroad to fund what one Greek observer calls “the last Soviet-style economy in Europe.”

Amid this binge of spending, Greece’s budget deficit hovered at around 5 percent of its gross domestic product between 2001 and 2008, but it shot up to 13.6 percent in 2009.

All of this has combined to give Greece high debt and a stagnant economy, requiring the European Union to recently agree on a $1 trillion bailout package for the struggling nation.

“The VAT did not save Greece,” the members write. “These deficits grew in spite of Greece’s 19-percent VAT rate. The result of increased government spending and taxation in Greece has been a consistently high unemployment rate of nearly 10 percent and a bankrupt government.”

Many European governments promised their citizens lower income-tax burdens in exchange for the imposing a VAT, but Pitts told Newsmax they only received massive governmental growth and stagnant economic growth in return.

“European nations are struggling with their budget deficits just as much as the U.S. is doing, and the problem is we need to address spending,” Pitts said. “If you are going to spend more, you are going to have to tax more.”

Supporters defend the tax as a way to generate large amounts of revenue, but Pitts and others counter that it only accelerates government spending.

Unlike state sales taxes, VATs are not immediately apparent to consumers because manufacturers pass them along in the form of higher prices that do not show up at the cash register.

“Unfortunately, America is making the same mistake that countries like Greece made,” the GOP leaders’ letter says. “In the heart of a debt crisis, Congress passed yet another entitlement program with no way to pay for it, and government spending continues to grow at alarming rates. Our national debt grew from $9 trillion to $12 trillion in 2008.”

The Congressional Budget Office (CBO), using Obama administration numbers, projects that interest payments on the national debt could top 10 percent of all revenue in 2018 and 20 percent in 2020. Under more adverse CBO projections, Moody’s projects that debt payments could hit 22.4 percent of revenue in 2013.

“We can’t keep encouraging the growth of government without discouraging economic growth,” Pitts said. “This is a product of increasing taxes and debt; we don’t need to be copying the European model.”

The debt commission should prioritize spending reductions and consider all options because it is always possible to find waste, Pitts told Newsmax.

Instead of looking at the Greek model as a cautionary tale, the Obama administration has chosen to emulate its practices, while ignoring their downside, said Grover Norquist, president of Americans for Tax Reform.

“The value-added tax is a French word for big government,” Norquist said. “Right now, the policies that Obama is following are very much like Carter’s that will lead to inflation.”

Norquist believes the debt commission should focus on the Obama administration’s additional spending as a starting place in the quest for spending cuts. This includes the unspent stimulus money, healthcare spending, and the $1 trillion in discretionary spending in the budget.

He also favors divesting certain federal programs to the states, like was done with welfare, and funding them with block grants, which he believes would cost taxpayers less in the long run.

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