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VAT Is he Thinking?

My favorite British Prime Minister, Benjamin Disraeli, once observed that there were three kinds of lies: lies, damned lies, and statistics. It doesn’t take a PM, however, to figure out that there must be a lot of statisticians in the White House.

A week or so ago, Paul Volker raised the idea of a VAT, or Value Added Tax. Almost immediately, the Senate voted overwhelmingly in favor of a non-binding resolution that criticizes such a tax as “a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.”

The White House spent days saying that Obama is not considering a VAT. “I think I directly answered this the other day by saying that it wasn’t something that the president had under consideration,” White House press secretary Robert Gibbs told reporters shortly before Obama spoke with CNBC.

So Obama goes on CNBC, and, when asked if he could see a potential VAT in America, says “I know that there’s been a lot of talk around town lately about the value-added tax. That is something that has worked for some countries. It’s something that would be novel for the United States. And before, you know, I start saying ‘this makes sense or that makes sense,’ I want to get a better picture of what our options are”

And then, after the interview, White House deputy communications director Jen Psaki said nothing has changed and the White House is “not considering” a VAT.

So, let’s see. It’s 2-1 for no VAT being considered. Gibbs and Psaki say no, Obama has ruled nothing out. Who’s lying? It’s clear that it must be someone.

Obama said his first priority “is to figure out how can we reduce wasteful spending so that, you know, we have a baseline of the core services that we need and the government should provide. And then we decide how do we pay for that.” Which, if you ask most people, is exactly backwards. Anyone who has had to run a household will tell you that first, you figure out how much you have available to spend, then decide what to spend it on. And as far as wasteful spending goes, Obama has yet to achieve the savings based on wastefulness that he campaigned on. He has, in fact, increased wasteful spending to record levels.

However, if he were to ask me, I have a few suggestions as to where to lay the budgetary axe. Aside from the easy ones, like the Department of Education, the Rural Electrical Administration, and the National Endowment for the Arts, there are tons of areas ripe for cutting that would save billions.

There are two aspects of budget cutting that we can focus on. The first is the immediate, like the cuts mentioned above. In addition to those, there are programs like the 12 billion dollars in farm subsidies and the half-billion dollar Corporation for Public Broadcasting. And let us not forget the absurd amounts spent on aid to foreign countries. In 2008, 2.5 billion dollars to Israel alone.

The second aspect is the long-term approach towards cutting the deficit and the debt. And one of the largest long-term expenses that we have is Social Security. Along with Medicare and Medicaid, they form the largest drain on America’s future. So how do we solve this problem? The answer is identical to the answer about how porcupines make love. Carefully! The first thing to realize is that the transition to a world without Social Security is going to be painful. However, like pulling off a band-aid, it’s a necessary pain.

First, we guarantee the program’s promises to those aged 50 and older. Then, we make it optional for those between 40 and 50. Those in that group can make a one-time election to remain in the program, or to leave. If they elect to leave, they forfeit their contributions, but keep the 7.5 percent deduction. Third, the program ceases to exist for those under the age of 40. They lose their contributions, but they also stop having the 7.5 percent removed from their paycheck. And their employer stops having to send an additional 7.5 percent of the employee’s pay to the Feds. Depending on the economy and the labor market, that 7.5 percent is now available for either labor or capital investment. And the 7.5 percent the employee keeps could fund a substantial IRA or 401K that would surpass SSI in terms of income security.

If we take as a baseline a 40 year old, with a life expectancy of, let’s say, 90, that means we can eliminate Social Security obligations in 50 years. Yea, it’s a generation off, but we must start somewhere, or it will be two or three generations off. Assuming the program survives that long. And if we make these serious cuts, perhaps we won’t need a VAT.

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