A Value-Added Tax Won't Solve the Deficit Crisis

As Congress prepares to raise the debt ceiling by $1.8 trillion, there are renewed calls from political elites for a value-added tax in America. The New York Times all but campaigned for the idea while touting it as a possible “cure for deficits.” But a VAT would do nothing to solve our deficit problem. Rather, it would supply new fuel to big government bureaucrats addicted to spending.

Supporters of a VAT mistakenly assume that increasing government revenues will lead to reduced budget deficits. While raising additional revenue may be part of any long term budgetary solution, it is not sufficient by itself – and probably not needed at all. Unless systemic changes are made, there is every reason to believe that additional revenues will simply be used to provide additional entitlements, pork barrel projects, and other wasteful government spending initiatives designed solely to enhance the reelection prospects of politicians. So long as deficit spending provides tangible benefits to the political class, they will continue to run deficits regardless of the amount of revenue raised.

Even in the midst of recession, federal revenues exceeded $2 trillion in fiscal year 2009. Can anyone really argue that $2 trillion is not enough for the federal government to perform the duties outlined in the Constitution?

Much of the spending is on programs that clearly fall outside of constitutional duties, so returning to those principles and limiting the reach of the federal government is an obvious solution. It’s also not likely to happen in the immediate future. While continuing to work toward this goal, there are other solutions we can pursue to bring more immediate payoffs.

Every state in the union except Vermont is legally required, either through their constitution or statutes, to balance the budget. Federal balanced budget amendments were very narrowly defeated in both the 80’s and 90’s. The Tea Party movement might just provide the additional electoral support to make another attempt worthwhile.

If we are successful in forcing Congress to take seriously the need for spending cuts, either by encouraging systemic changes in the budget process or just utilizing electoral pressure in general, then finding places to trim spending should not be difficult. Potential savings abound.

The federal government currently subsidizes the states to an annual tune of $500 billion. These federal grants have exploded in number over the last half century – doubling over just the last two decades from about 400 to over 800 programs – and include money earmarked for everything from education to community development. Medicaid accounts for almost half of the $500 billion. Grants to the states are rarely looked at as a place to find savings, but should be considered prime candidates.

Federal grants have a destructive effect on federalism and encourage waste in state budgets. Medicaid’s dollar matching system, for instance, encourages overspending. And funneling money through Washington D.C. not only adds an unnecessary and costly layer of bureaucracy, but also helps shield the politicians spending the money from those paying the taxes. This makes government less accountable to the people. As grant money often comes with strings, it also erodes state autonomy. Scaling back or even eliminating these programs would not only be a solid first step in restoring fiscal sanity, but is simply good policy.

There are too many productive avenues through which to pursue spending cuts to list them all here. Rather than taxing value – which of course means discouraging its creation – lawmakers need to find where they can trim the fat. The idea that a VAT will lead to reduced budget deficits is a pipe dream. If lawmakers want to raise taxes, they need to first convince us that it is truly necessary – and that means getting serious about reducing the bloat of government.