The biggest question facing all of us right now - not to mention our children, their children and all those yet unborn - is how in the world we're going to get out from under the mountains of debt that we have piled up over the years. We owe, as a nation, somewhere in the neighborhood of $11 trillion, and that is a conservative figure. Using generally accepted accounting standards that consider our gigantic unfunded liabilities, the national debt is several times that. We can no longer count on the people of other nations to lend us money that they now know will never be repaid in other than nominal ways, i.e., with vastly cheapened dollars.
Central bankers are flooding the world with new paper currency. Even the famously frugal Swiss have increased their money supply by 30 percent in the last few months. The idea, of course, is to prevent deflation. The conceit, born out of desperation, is that Federal Reserve Chairman Ben Bernanke and his counterparts in other nations can inflate (cheapen their currencies) in a controlled manner, preventing hyperinflation (the total ruination of their currencies). My strong suspicion is that massive increases in the money supply make ruinous inflation unavoidable in the long term, though so far in the current credit meltdown, price deflation is the overwhelming reality. Oh, excepting government, that is.
Since it's difficult to believe that the federal government can actually operate with a $3.6 trillion budget and a $2 trillion deficit, we see our nervous political class entertaining something so drastic, it has been off the table in this country for many years - even though more than a hundred other governments use it to pay for their ever-growing spending. I'm talking about a value-added tax, commonly referred to as a VAT. The Washington Post reported Wednesday that tax experts at a White House meeting on budget problems "pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT."
A VAT taxes the transfer of goods and services every step of the way, from their manufacture or initiation to their final purchase. From a government's point of view, a VAT is a wonderful tax because, as the Post story reports, "producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT." So, it's hard to dodge. It punishes spending rather than saving, which would represent a U-turn for the American economy, which has been rewarding spending and penalizing saving for many years.
It is, of course, a terribly regressive tax, whose burden falls disproportionately on people struggling to make ends meet. That our lawmakers are reportedly intrigued with this kind of tax is a measure of their desperation. Of course, the advocates for a VAT argue that it would make possible the elimination of income taxes for the majority of voters. That really isn't likely, though, given the proven bottomless appetite of governments for ever more money.
The Post story says the Senate Finance Committee refused to include a VAT among the options it is considering to pay for health care reform. Politicians, we are told, will need an even more desperate financial situation to consider a tax that reaches deeply into the pockets of everyone whose vote they desire. That situation, though, may be lurking just around the next corner.
Ron Smith can be heard weekdays, 3 p.m. to 6 p.m., on 1090 WBAL-AM and WBAL.com. His column appears Fridays in The Baltimore Sun. His e-mail is rsmith@wbal.com.
