Crony Capitalism: From GM to Greece, the Lies Keep Growing
By George Will
WASHINGTON -- To understand the pertinence to America of events in Greece, notice General Motors' most recent misbehavior. A television commercial featuring CEO Ed Whitacre demonstrates the institutional murkiness and intellectual dishonesty that result when the line between public and private sectors disappears.
In the commercial, Whitacre says GM has "repaid our government loan in full." Rep. Paul Ryan, R-Wis., noted that GM used government funds to pay back the government: It "simply transferred $6.7 billion from one taxpayer-funded TARP account to another." The government still owns 60.8 percent of GM's common equity, and the Congressional Budget Office projects that the government will lose about $34 billion of the $82 billion of TARP funds dispersed to the automotive industry.
When Ryan and two colleagues asked the Treasury Department for clarification, they got this careful reply: "Treasury has never suggested that the loan repayment represented a full return of all government assistance." A Treasury press release did say "GM Repays Treasury Loan in Full." The loan is, however, a small part of taxpayer exposure. Under crony capitalism, when government and corporate America merge, both dissemble.
Now American taxpayers also own a little bit of a small nation. They provide the U.S. contribution of 17 percent of the assets of the International Monetary Fund, which is giving Greece $39 billion (the IMF also is contributing $321 billion to a "stabilization" fund for other eurozone nations with debt problems). So the U.S. government, which would borrow 42 cents of every dollar it spends under the president's 2011 budget, is borrowing to rescue Greece and others from the consequences of their borrowing.
That nation, whose GDP is below that of the Dallas-Fort Worth metropolitan area, is "too big to fail," meaning too inconveniently connected to too many big banks. Bailing out Greece really rescues European banks that improvidently bought Greek bonds. Visit here for a useful New York Times graphic illustrating how European nations borrow from one another. For example, Italy owes France (French banks) $511 billion, a sum nearly equal to 20 percent of France's GDP. About one-third of Portugal's debt is held by Spain, which has $238 billion of its debt held by Germany and $220 billion by France. Russell Roberts of George Mason University notes that this "discourages prudence and wariness" because when "everyone has financed everyone else, you can justify bailing everyone out."
At the Parthenon last week, the Greek Communist Party, which got 8 percent of the vote in the last national election, draped banners emblazoned with the hammer and sickle: "Peoples of Europe Rise Up." Of course. "Arise ye prisoners of starvation" exhorts "The Internationale," the left's ancient anthem. But who is to arise against whom?
Time was, the European left said it spoke for horny-handed sons of toil oppressed in dark Satanic mills. But Athens' so-called "anti-government mobs" have been composed mostly of government employees going berserk about threats to their entitlements. Even Greek air force pilots went on strike. The government, unable to say how many employees it has, promises to count them. It cannot fire many of them because article 103, paragraph 4 of the Greek constitution says: "Civil servants holding posts provided by law shall be permanent so long as these posts exist."
America's projected $9.7 trillion in budget deficits in this decade will drive the nation's debt to 90 percent of GDP (Greece's is 124 percent). So some people say that to avoid a Greek-style crisis, America should adopt a value-added tax (VAT). But Europe's most troubled nations -- the PIIGS: Portugal, Ireland, Italy, Greece and Spain -- have VATs of 20 percent, 21 percent, 20 percent, 21 percent and 16 percent, respectively. As part of its austerity penance, the Greek government is going to give itself more money by raising its VAT to 23 percent.
Germans are furious about being the biggest bailers in this bailout of a nation where tax evasion is pandemic. They have not been assuaged by being told by their chancellor, Angela Merkel, that the stakes are stupendous: Their money will save "Europe." Hearing that, Greeks bearing banners proclaiming "Out with the IMF" might think:
Why accept "austerity" (as that is understood in Greece -- no more annual bonuses of two months' salary, no more retirement at 53)? Suppose, after pocketing some of the bailout, we just threaten to collapse and make a mess of "Europe"?
Greece now knows the terrific strength of weakness. Beware of Greeks -- or any other people -- receiving gifts.
georgewill@washpost.com
Copyright 2010, Creators Syndicate Inc.
Page Printed from: http://www.realclearpolitics.com/articles/2010/05/13/crony_capitalism_105560.html at May 13, 2010 - 10:52:59 AM PDT
Friday, May 14, 2010
Thursday, May 13, 2010
Classic Quotes, Unknown
An ancient adage says: "Sufficient for the day is the evil thereof."
http://www.realclearpolitics.com/articles/2010/04/27/filtering_history_105321.html
http://www.realclearpolitics.com/articles/2010/04/27/filtering_history_105321.html
Wednesday, May 12, 2010
An Incredible Tribute
"A man's worth can be measured in many different ways. Most of these ways are foolish.
"Is a man's worth measured by his wealth? Hardly. History is littered with wealthy people who are scoundrels. I meet lots of wealthy people whom I detest -- whom I don't wish to be near or whom I pity because they are shallow.
"Is a man's worth measured by his power? Absolutely not. Hitler and Stalin and Mao had enormous power. But they are among the scummiest of history's scumbags. Powerful people are almost always detestable creeps.
"Is a man's worth measured by his education? No. Many people with advanced college degrees (and I know lots of them!) lack decency and generosity. Too many are crybabies, more childish than mature and more clever than wise.
"Too few men are truly great. Greatness comes from within and is often invisible to eyes unfamiliar with a great person. A man is great only if he is responsible; only if he is a loyal and loving husband and father and friend; only if he teaches his children and grandchildren properly, not only with words but by example; only if he is free of envy and spite and pettiness."
http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/boudreaux/s_624810.html
Read the entire tribute. This part was the most potent:
"I also remember how, a few years ago when you and Mom were visiting us in Virginia, an offensive former colleague of mine ridiculed a view you expressed about the economy. You took no offense at his remark. You just smiled, and said only, 'Well, that's how things look to me, but I'm not as educated as you are.' Your voice had no trace of insult or anger. You didn't back down from your view in the face of my colleague's obnoxious remark, but nor did you deny that he might be correct. By word and example, you (a shipyard worker) upstaged my colleague (a university professor) in both tolerance and good manners."
This reminds me of the "True Gentleman." Based on this tribute, it would seem the man in question was one.
Thanks for sharing, Dr. B.
"Is a man's worth measured by his wealth? Hardly. History is littered with wealthy people who are scoundrels. I meet lots of wealthy people whom I detest -- whom I don't wish to be near or whom I pity because they are shallow.
"Is a man's worth measured by his power? Absolutely not. Hitler and Stalin and Mao had enormous power. But they are among the scummiest of history's scumbags. Powerful people are almost always detestable creeps.
"Is a man's worth measured by his education? No. Many people with advanced college degrees (and I know lots of them!) lack decency and generosity. Too many are crybabies, more childish than mature and more clever than wise.
"Too few men are truly great. Greatness comes from within and is often invisible to eyes unfamiliar with a great person. A man is great only if he is responsible; only if he is a loyal and loving husband and father and friend; only if he teaches his children and grandchildren properly, not only with words but by example; only if he is free of envy and spite and pettiness."
http://www.pittsburghlive.com/x/pittsburghtrib/opinion/columnists/boudreaux/s_624810.html
Read the entire tribute. This part was the most potent:
"I also remember how, a few years ago when you and Mom were visiting us in Virginia, an offensive former colleague of mine ridiculed a view you expressed about the economy. You took no offense at his remark. You just smiled, and said only, 'Well, that's how things look to me, but I'm not as educated as you are.' Your voice had no trace of insult or anger. You didn't back down from your view in the face of my colleague's obnoxious remark, but nor did you deny that he might be correct. By word and example, you (a shipyard worker) upstaged my colleague (a university professor) in both tolerance and good manners."
This reminds me of the "True Gentleman." Based on this tribute, it would seem the man in question was one.
Thanks for sharing, Dr. B.
Monday, May 10, 2010
Samuelson on the Death Spiral
Excerpts follow, link below:
WASHINGTON -- What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.
To be sure, Greece's plight is usually described as a European crisis -- especially for the euro, the common money used by 16 countries -- and this is true. But only up to a point.
The Euro currency clearly hasn't lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies.
Economic growth in the "euro area" (the countries using the currency) averaged 2.1 percent from 1992 to 2001 and 1.7 percent from 2002 to 2008. Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans.
If other euro countries (Portugal, Spain, Italy) suffer Greece's fate -- lose market confidence and can't borrow at plausible rates -- there would be a wider crisis.
Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 56.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States -- calculated slightly differently -- were 9.9 percent and 53 percent.
Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.
The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day -- no one knows when -- doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.
Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 percent; wages for government workers will be cut 14 percent; the basic rate for the value added tax will rise from 21 percent to 23 percent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9 percent; some economists expect it to peak near 19 percent.
If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven't done that; indeed, President Obama's health program expands benefits. What happens if all these countries are thrust into Greece's situation? One answer -- another worldwide economic collapse -- explains why dawdling is so risky.
Copyright 2010, Washington Post Writers Group
http://www.realclearpolitics.com/articles/2010/05/10/the_welfare_states_death_spiral_105503.html
WASHINGTON -- What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.
To be sure, Greece's plight is usually described as a European crisis -- especially for the euro, the common money used by 16 countries -- and this is true. But only up to a point.
The Euro currency clearly hasn't lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies.
Economic growth in the "euro area" (the countries using the currency) averaged 2.1 percent from 1992 to 2001 and 1.7 percent from 2002 to 2008. Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans.
If other euro countries (Portugal, Spain, Italy) suffer Greece's fate -- lose market confidence and can't borrow at plausible rates -- there would be a wider crisis.
Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 56.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States -- calculated slightly differently -- were 9.9 percent and 53 percent.
Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.
The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day -- no one knows when -- doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.
Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 percent; wages for government workers will be cut 14 percent; the basic rate for the value added tax will rise from 21 percent to 23 percent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9 percent; some economists expect it to peak near 19 percent.
If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven't done that; indeed, President Obama's health program expands benefits. What happens if all these countries are thrust into Greece's situation? One answer -- another worldwide economic collapse -- explains why dawdling is so risky.
Copyright 2010, Washington Post Writers Group
http://www.realclearpolitics.com/articles/2010/05/10/the_welfare_states_death_spiral_105503.html
Thursday, May 6, 2010
Cal Pension Death Spiral
The state pension follies
Broken system, not side issues, should be focus of reform push
By UNION-TRIBUNE
Tuesday, April 20, 2010 at 12:02 a.m.
For years, congressional earmarks have been the target of vast public and media ire. Earmarks are obnoxious in many ways. They are lightly scrutinized, if at all; they are commonly used as political payoffs; and they promote a culture of corruption, as San Diegans witnessed with Randy "Duke" Cunningham, the local congressman turned federal prison inmate.
But the problem with devoting so much energy to earmarks is that they are a relatively minor part of a vastly larger problem: enormous federal deficits and the burgeoning national debt. Consider what happened in February: The U.S. government spent $328 billion while only receiving $107 billion in revenue. For anyone worried about government spending, preventing similar fiscal atrocities should be the priority, not fighting earmarks.
Now we're seeing a similar dynamic in California with another huge long-term fiscal problem: the cost of public employee pensions. In Sacramento, reformers are pushing for eliminating the use of "placement agents" - well-connected insiders, normally - to acquire hundreds of millions of dollars in investments from the California Public Employees' Retirement System and the California State Teachers' Retirement System. There are also efforts to make it more difficult for public employees to spike their pensions through dubious late-career job transfers and to have pensions be based on an average of a worker's final five years of pay, not the final year alone.
These ideas, while worthy, don't address the pension system's fundamental problem: Its basic structure is unaffordable. California needs a complete break with current policies that allow government workers to retire in their 50s with pay equal to 60 percent to 90 percent of their final salaries. We need a new system with much less generous pensions and with disincentives to early retirements.
Last summer, CalPERS' own actuary said the current system is unsustainable. But CalPERS' official stance amounts to denial. It rails against those who doubt its optimistic return forecasts and who note the pension giant's key role in promoting a ruinous 1999 state law allowing local governments to give away 50 percent retroactive pension increases.
In key ways, this defensiveness is indistinguishable from dishonesty. As documented by David Crane, an economics adviser to Gov. Arnold Schwarzenegger, CalPERS uses accounting gambits to minimize its gigantic unfunded liabilities that it would never tolerate in the companies it invests in.
Such duplicity props up a broken system. This deserves much more attention than the relatively minor issues now taking up the time of many pension reformers in Sacramento. The sooner this sinks in, the better.
http://www.signonsandiego.com/news/2010/apr/20/state-pension-follies/
Broken system, not side issues, should be focus of reform push
By UNION-TRIBUNE
Tuesday, April 20, 2010 at 12:02 a.m.
For years, congressional earmarks have been the target of vast public and media ire. Earmarks are obnoxious in many ways. They are lightly scrutinized, if at all; they are commonly used as political payoffs; and they promote a culture of corruption, as San Diegans witnessed with Randy "Duke" Cunningham, the local congressman turned federal prison inmate.
But the problem with devoting so much energy to earmarks is that they are a relatively minor part of a vastly larger problem: enormous federal deficits and the burgeoning national debt. Consider what happened in February: The U.S. government spent $328 billion while only receiving $107 billion in revenue. For anyone worried about government spending, preventing similar fiscal atrocities should be the priority, not fighting earmarks.
Now we're seeing a similar dynamic in California with another huge long-term fiscal problem: the cost of public employee pensions. In Sacramento, reformers are pushing for eliminating the use of "placement agents" - well-connected insiders, normally - to acquire hundreds of millions of dollars in investments from the California Public Employees' Retirement System and the California State Teachers' Retirement System. There are also efforts to make it more difficult for public employees to spike their pensions through dubious late-career job transfers and to have pensions be based on an average of a worker's final five years of pay, not the final year alone.
These ideas, while worthy, don't address the pension system's fundamental problem: Its basic structure is unaffordable. California needs a complete break with current policies that allow government workers to retire in their 50s with pay equal to 60 percent to 90 percent of their final salaries. We need a new system with much less generous pensions and with disincentives to early retirements.
Last summer, CalPERS' own actuary said the current system is unsustainable. But CalPERS' official stance amounts to denial. It rails against those who doubt its optimistic return forecasts and who note the pension giant's key role in promoting a ruinous 1999 state law allowing local governments to give away 50 percent retroactive pension increases.
In key ways, this defensiveness is indistinguishable from dishonesty. As documented by David Crane, an economics adviser to Gov. Arnold Schwarzenegger, CalPERS uses accounting gambits to minimize its gigantic unfunded liabilities that it would never tolerate in the companies it invests in.
Such duplicity props up a broken system. This deserves much more attention than the relatively minor issues now taking up the time of many pension reformers in Sacramento. The sooner this sinks in, the better.
http://www.signonsandiego.com/news/2010/apr/20/state-pension-follies/
Classic Quotes, O'Rourke
"The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters-all the voters, right up to the tippy-top corner office of Goldman Sachs-think so too."
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/791jsebl.asp
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/791jsebl.asp
Sunday, May 2, 2010
What's A VAT?
For one thing, it just adds to the hidden taxes you already pay on everything you buy.
http://www.chicagotribune.com/news/opinion/ct-oped-0413-byrne-20100413,0,4761142,print.column
And to make matters worse, try finding this federal tax on a receipt
Dennis Byrne
April 13, 2010
Where will they strike next?
Now that we've been flattened with the crushing weight of what Democrats imagine is health care reform, what additional burdens will follow? Some say it'll be "comprehensive" (there's that word again) immigration reform, providing a "path" for millions of expatriates here illegally to be rewarded with citizenship.
But you've got to be careful when trying to figure out the direction of the next Democratic blitz. The Democrats are likely to surprise you by suddenly veering off in a different direction, or sneaking in the unexpected. Like they did with the federal takeover of the student loan program while we were distracted by the sizzling health care debate. While similarly distracted, they also zapped us with another exorbitant "stimulus" package of "investments" in roads, bridges, "clean energy" and whatnot. What have I forgotten? Oh, yes, Race to the Top, another futile showering of public schools with billions in a continuing campaign to concentrate education powers in Washington.
It's as if liberals had been waiting for years for their chance to launch this frenzy, and now with a gigantic, satisfying belch, they have issued forth every invention, concoction or scheme they've been unable to launch since President Lyndon B. Johnson. I guess they figure this is their one chance in a generation of getting them all enacted, and in that, they'd be right.
So, as we rush to break up the commotion around the corner about, say, immigration reform, we end up discovering that it's only a feint. Because in the other direction, behind our backs, is approaching an even larger horror - the value added tax.
Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board, dropped the bomb last week when he said a value added tax is "not a toxic idea." That was an odd way to describe what essentially would be a national sales tax designed to suck hundreds of billions of dollars out of the American economy.
That Democrats might embrace a VAT surprises me. Well, maybe I shouldn't be surprised, because the tax is widely levied in Europe, and we know how fond liberals are of all things European. Republicans have occasionally toyed with the VAT idea, but as a substitute for - can I say it? - "comprehensive" reform of the present jumbled tax system. Republicans weren't proposing that it be piled on top of existing taxes.
Of greater surprise and importance about Democratic interest in the VAT is its punitive effect on poor and middle-class Americans. Liberals - at least old-school ones - long opposed sales taxes because the poor and middle class pay a greater percentage of their income for it than the rich. To put it bluntly, the regressive VAT leaves the poor and middle class holding the bag.
Here's how: The tax is levied at each stage of production. A knitting mill, for example, pays a yarn-maker $1 for the yarn in each sweater. The mill then sells each sweater to Kmart for $3. The value added is $2 per sweater. If the VAT is 10 percent of the added value, the sweater-maker pays a 20-cent tax. Now comes the hitch: The sweater-maker may not have to pay the full 20 cents; when he pays his tax, he can deduct whatever everyone upstream in the supply chain, including the yarn-maker, paid in the VAT. For example, if the yarn-maker paid 10 cents for the value he added to the product, the mill can deduct that from the 20 cents he must pay.
Confusing, yes. But here's how to keep it simple: Guess who pays the full cost of the VAT? The "end user." That'd be you, the consumer. Unlike manufacturers, you can't deduct the VAT paid by previous producers in the supply chain. You pay it all, because it is built into the price you pay for your sweaters, cars, appliances, etc. The sneaky part is that, unlike state and local sales taxes, the national sales tax is not separately listed on your receipt. So, it feels like you're not paying the tax. From the viewpoint of the politicians, it's a perfect tax because it is invisible.
Perfect, that is, for Democrats to try to impose on an unwilling public during a lame duck session after the November election. It would be their final belch in this generation.
Dennis Byrne is a Chicago-area writer and consultant. He blogs at ChicagoNow.com
Copyright C 2010, Chicago Tribune
http://www.chicagotribune.com/news/opinion/ct-oped-0413-byrne-20100413,0,4761142,print.column
And to make matters worse, try finding this federal tax on a receipt
Dennis Byrne
April 13, 2010
Where will they strike next?
Now that we've been flattened with the crushing weight of what Democrats imagine is health care reform, what additional burdens will follow? Some say it'll be "comprehensive" (there's that word again) immigration reform, providing a "path" for millions of expatriates here illegally to be rewarded with citizenship.
But you've got to be careful when trying to figure out the direction of the next Democratic blitz. The Democrats are likely to surprise you by suddenly veering off in a different direction, or sneaking in the unexpected. Like they did with the federal takeover of the student loan program while we were distracted by the sizzling health care debate. While similarly distracted, they also zapped us with another exorbitant "stimulus" package of "investments" in roads, bridges, "clean energy" and whatnot. What have I forgotten? Oh, yes, Race to the Top, another futile showering of public schools with billions in a continuing campaign to concentrate education powers in Washington.
It's as if liberals had been waiting for years for their chance to launch this frenzy, and now with a gigantic, satisfying belch, they have issued forth every invention, concoction or scheme they've been unable to launch since President Lyndon B. Johnson. I guess they figure this is their one chance in a generation of getting them all enacted, and in that, they'd be right.
So, as we rush to break up the commotion around the corner about, say, immigration reform, we end up discovering that it's only a feint. Because in the other direction, behind our backs, is approaching an even larger horror - the value added tax.
Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board, dropped the bomb last week when he said a value added tax is "not a toxic idea." That was an odd way to describe what essentially would be a national sales tax designed to suck hundreds of billions of dollars out of the American economy.
That Democrats might embrace a VAT surprises me. Well, maybe I shouldn't be surprised, because the tax is widely levied in Europe, and we know how fond liberals are of all things European. Republicans have occasionally toyed with the VAT idea, but as a substitute for - can I say it? - "comprehensive" reform of the present jumbled tax system. Republicans weren't proposing that it be piled on top of existing taxes.
Of greater surprise and importance about Democratic interest in the VAT is its punitive effect on poor and middle-class Americans. Liberals - at least old-school ones - long opposed sales taxes because the poor and middle class pay a greater percentage of their income for it than the rich. To put it bluntly, the regressive VAT leaves the poor and middle class holding the bag.
Here's how: The tax is levied at each stage of production. A knitting mill, for example, pays a yarn-maker $1 for the yarn in each sweater. The mill then sells each sweater to Kmart for $3. The value added is $2 per sweater. If the VAT is 10 percent of the added value, the sweater-maker pays a 20-cent tax. Now comes the hitch: The sweater-maker may not have to pay the full 20 cents; when he pays his tax, he can deduct whatever everyone upstream in the supply chain, including the yarn-maker, paid in the VAT. For example, if the yarn-maker paid 10 cents for the value he added to the product, the mill can deduct that from the 20 cents he must pay.
Confusing, yes. But here's how to keep it simple: Guess who pays the full cost of the VAT? The "end user." That'd be you, the consumer. Unlike manufacturers, you can't deduct the VAT paid by previous producers in the supply chain. You pay it all, because it is built into the price you pay for your sweaters, cars, appliances, etc. The sneaky part is that, unlike state and local sales taxes, the national sales tax is not separately listed on your receipt. So, it feels like you're not paying the tax. From the viewpoint of the politicians, it's a perfect tax because it is invisible.
Perfect, that is, for Democrats to try to impose on an unwilling public during a lame duck session after the November election. It would be their final belch in this generation.
Dennis Byrne is a Chicago-area writer and consultant. He blogs at ChicagoNow.com
Copyright C 2010, Chicago Tribune
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