Kudlow’s Money Politics

Volcker’s VAT Plan Is Nuts

As I’ve said many times over the past year or so, there are major storm clouds looming on the horizon for our fragile, yet recovering, U.S. economy. The latest ominous cloud comes by way of former Federal Reserve chairman Paul Volcker, who is pushing President Obama to adopt a value-added tax, or VAT.

Now, I have the utmost respect for Paul Volcker. He was my boss 35 years ago when I worked at the New York Fed. And it was Volcker, of course, who conquered the inflation that took root in the 1970s. He may very well be the greatest central banker of all time.

But with all due respect, Volcker’s call this week for a European-style VAT(as well as a carbon tax) is itself a historic mistake.

The last thing we need right now is more tax hikes. There are a dozen new tax hikes already squirreled away inside President Obama’s health-care law. Medicare payroll taxes are going to be imposed on capital gains and dividends. Investor taxes are going way up when the Bush tax cuts expire at the end of this year. And to top it all off, half the states in the country are raising taxes.

Look, if you think for a one moment that spendthrift politicians in Washington won’t treat higher tax revenues as their very own honey pot, think again. That’s exactly what this crowd will do. If you give these guys one more nickel of tax revenue, they won’t use it to cut the deficit, they’ll spend it. They can’t help themselves. It’s why, rather than tax hikes, we need emergency-style, sharp-edged, across-the-board spending cuts everywhere in the federal government. And I mean everywhere. We’re talking government programs, departments, agencies, worker pay. You name it, slash it all.

And if you think we can tax our way into prosperity or a balanced budget, you’re wrong again. It doesn’t work. Just look at the tax-happy Europeans, who haven’t created a new private job in over two decades.

Half the people in this country don’t pay the income tax, and of the ones that do, the top 10 percent pays a staggering 70 percent of it. Meanwhile, the top 1 percent of income earners shoulders 40 percent of the overall tax burden. And now, on top of all that, Mr. Volcker wants to tax consumers and producers throughout the production and consumption chain with a VAT?

This is nuts. Absolutely nuts.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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