Why The VAT Tax Is Not Going To Happen

Recently, there has been some inside-the-beltway chatter about a value added tax. The policy reason behind it is basically that it could raise a lot of money. The foolish political logic behind it is that liberals won't like it because it is very regressive, but in desperation, to increase revenue, they will somehow convince conservatives who oppose tax increases to sign on because it hits the poor more than the rich. The thinking is somehow this screw-the-poor-and-middle-class idea could become law because it is what the Washington centrist cheerleaders think is the perfect foundation for a “compromise,” one that makes no one happy. This political thinking is dead wrong, and there is no way a VAT will happen.

Republicans will hate it because it is a new tax in violation of the no new taxes pledges

First, Republicans are never going to sign on just because it is regressive. The “taxpayer protection pledge” does not say “no new taxes--unless they are regressive.” It says “no new taxes.” It is a great political play for Republicans. I know Republicans like to cut taxes for the rich, but actively raising them for the middle class would be a horrible political move for them. If any Republican endorsed a massive new tax on everything, it would destroy them in their party.

The Democratic base will hate it because it is regressive

Second, the progressives will hate it because it is regressive and hits the low and middle class more heavily than the rich. If Republicans are not going to support any new tax increases, why would Democrats embrace this foolish idea? If you are planning to increase revenue through a new tax, at least choose one more popular with your base because it can have added side benefits--like a tax on greenhouse gases.

If Democrats push this they will be hammered by their own base for trying to push a regressive tax. It also requires President Obama to seriously damage his credibility by breaking his “no tax increase on those making below $200,000” pledge.

Everyone will hate it

Finally but most importantly, the idea is just politically toxic. In the past two decades, Congress has been terrified of raising the very small gas tax. It is not even indexed to inflation so it has basically decreasing in real value terms, but still it has not be raised. If Congress does not want to increase a tax on one consumer good by a few cents, what could possibly make anyone think they will find the will to impose a roughly 10% VAT on all consumer goods.

A recent Economist poll found only 17% would favor the idea, while 53% oppose, and 30% are undecided. A majority already oppose the idea, even though very few people know much about it. If it were seriously considered and anti-tax groups launched a campaign against it, those number would probably plummet.

It would not be difficult to whip up opposition to the idea because the majority of the country should oppose the idea. The vast majority of the country is not rich, they are poor and middle class, exactly the people who would be disproportionately hurt by this new tax.

I see nothing but political death for politicians who support a VAT. If Democrats somehow managed to push it through alone, they would get wiped out by Republicans. If you can be depicted as the party that made everything in the store cost 10% more, it would make for a very tough election. If in some insane universe Republicans and Democrats implemented it together, I could almost imagine the rise of a third party. The politics for it are so bad, it does not matter how much the Washington pundit class loves to talk about it. Coming up with a "compromise" that makes no one happy is a compromise that no one is going to waste political capital making happen.

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