VAT attacks - Bill Clinton's proposed value-added tax

National Review, May 24, 1993 by Lawrence A. Kudlow

Bill Clinton promised to help small business, create new jobs, and reduce the deficit, all while reducing the burden on the middle class. The real agenda seems rather different.

PERHAPS it's a clever ruse, a breathtaking ploy whereby President Clinton gave all the remaining liberal-left policy people in the United States jobs in his Administration just so he could keep a careful eye on them. Then, crafty politician that he is, the President permitted them to pull together the most liberal economic program since World War II, knowing full well that Congress--not to speak of the American taxpayers--would never support it.

Or then again, perhaps President Clinton actually believes in his program to increase taxes, re-regulate business, enlarge domestic spending, and extend international trade sanctions. In this more likely scenario, Clinton spent last year's election campaign spinning the most elaborate web of cognitive dissonance in recent political history.

At its center, this web was held together by a series of little white lies and policy deceptions. It seduced just enough marginal voters--especially Reagan Democrats--into believing that Clinton's refreshing activism would replace Bush's standpat austerity with a new wave of small-business expansion, job growth, and deficit reduction, without burdensome tax increases on middle-class families.

But, as it turns out, Clinton's new economic plan follows a very different script: rising domestic spending, very high taxes, and across-the-board re-regulation. The number of broken campaign promises and policy reversals continues to mount. After the proposed $75-billion energy tax, which will fall most heavily on small businesses and middle-income families, nothing illustrates Clinton's commitment to big government better than the recently resurfaced Value-Added Tax, which like a bad penny, keeps popping up in high-level Administration planning discussions.

Once and Future Tax

CLINTON insiders refer to the VAT as a "future" policy that would be used for deficit reduction (read: higher spending) as well as health-care finance. And make no mistake about it, government activism must be financed.

All during the campaign both Clinton and Gore asserted over and over that government-sponsored and directed universal health care would cost Americans less, not more, than the present system. Seasoned political observers wondered aloud about the validity of the much-used phrase "government cost control," surely one of the great oxymorons of our time. Practical budget hands wondered how expanding benefit eligibility to cover roughly 35 million additional people could possibly result in lower spending, especially given the 25-year history of Medicare and Medicaid spending overruns.

Gradually during Clinton's first hundred days the white lie was exposed. Health-care planners inside the Administration quietly leaked that universal coverage might add spending of some $30 to $100 billion after all. More recently the range has been ramped up to $100 to $150 billion. The problem, of course, is how to pay for it.

This is particularly the case in the context of the overall public disappointment with Clinton's budget package, in which taxes are raised roughly three times more than spending is reduced, domestic spending actually rises, and the projected deficit averages $240 billion in the next four years, barely lower than Bush's $260-billion average and nearly $100 billion above Ronald Reagan's last deficit in fiscal year 1989.

A second white lie relates to the financing issue, since, in an effort to attract Main Street shopkeepers and owners of small family businesses from the Republican Party, Clinton repeatedly promised not to increase payroll taxes. Then again, promises are made to be broken.

That said, the Clintonites now find themselves wedged between a rock and a hard place. To finance their government-engineering social agenda and still take care of traditional Democratic interest groups, the new Administration has already proposed steep income-tax hikes on individuals and businesses, a Social Security tax increase, and a large-scale energy levy. It has used up its sources of funding even before it has got to its health-care reform.

Enter the VAT, a favorite fiscal tool of European industrial planners and state collectivists. Fashionable among Clinton advisors is the notion that latter-day Germany and Jacques Delors's technocratic vision of European unity is a far more intelligent organization of economic resources than was ever created in the relatively free-market economy of the United States.

The problem with this "new Europe" is that it simply doesn't work. Far from the free-market entrepreneurial capitalism of Adenauer's Ludwig Erhard and de Gaulle's Jacques Rueff, today's Europe increasingly drifts toward larger government, higher taxes, and slower growth.

Take the four largest economies of Europe--Britain, France, Germany, and Italy--with a combined population of 250 million and GDP of roughly $5 trillion. Together these countries created a combined total of only 5 million new jobs in the past 12 years, with an average unemployment rate which today is just short of 10 per cent. Directing these sluggish economies, the average government budget share of GDP comes to slightly less than 50 per cent. Financing this massive government influence is a VAT system that averages 17 per cent.