Tax Day Tax Balloon

April 16, 1993

The Clinton administration celebrated the just-passed midnight deadline for filing income taxes in an odd way. It floated balloons suggesting that a value-added tax, a form of national sales or consumption tax, is under consideration as a means of financing health care reforms that may cost anywhere from $30 billion to $90 billion a year.

Such timing was less than smart politically. Not only does the balloon float catch citizens at a moment when they are particularly allergic to the subject of taxes; it gives Republicans fighting the president's $16.3 billion jobs-stimulus plan further reason to charge that the Democrats are once again hellbent to tax and spend everything in sight.

If the VAT balloon deserved to be shot down summarily, the administration's ineptitude could be passed off as a good thing. But in reality, the idea has generated a revolution in governmental financing around the world. Since the 1960s, more than 50 countries have adopted some kind of a value-added tax, leaving the U.S. as a holdout. Despite GOP potshots at the White House, the concept has advocates a-plenty in conservative as well as liberal circles.

Lawrence Summers, now a high-ranking Treasury official, once stated the inevitability of a value-added tax in jocular but telling fashion: "Liberals hate a VAT because it is regressive and conservatives hate it because it is a money machine," he said. "When liberals see that it's a money machine and conservatives see it's regressive, it will be enacted." Watch for both to happen.

Liberal latching-on to the money machine motif is increasingly evident in the work of Hillary Rodham Clinton's health care reform task force. President Clinton now acknowledges the idea is under consideration. Deputy Budget Director Janet Rivlin has described a VAT as "a possible candidate" with "a good deal to recommend it."

Last year, Sen. John C. Danforth, a Missouri Republican, formed a bipartisan coalition behind a change from reliance on the income tax system to a consumption tax. George Bush's Treasury Secretary, Nicholas Brady, chimed in during the transition by advocating a Business Transfer Tax somewhat similar to a VAT but insisted that all of its proceeds should be used for deficit reduction.

This, indeed, may mark the dividing line between Democrats and Republicans if the Clinton administration pursues a value-added tax. If Democrats propose to use the $68 billion in projected revenues from a 5 percent VAT as a Treasury windfall to pay for health care reform, GOP conservatives will be fighting to use its proceeds to reduce the national debt or to make the current income tax system a lot less onerous.

Where there is widespread agreement is in the notion that a VAT would discourage excessive consumption, encourage investment and saving and thus improve the U.S. competitive position. With such a putative payoff, the VAT is one balloon that deserves more than instant puncture.

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