29th May 2009
The minor problem is that Obama promised us a fiscally-responsible Presidency. He’s on record with a promise that when he leaves office, the Federal deficit will be no larger than 3% of GDP. (His first one will be 12% of GDP.) That’s not a problem because Obama can say whatever he wants and people will believe it. He will certainly claim that he fulfilled this promise, and be given credit for doing so, regardless of reality.
The serious problem is that no one knows what the impact will be of borrowing a trillion or more dollars every year for the forseeable future. Today, the public debt of the US is a bit more than 40% of GDP. Sometime in the next five to ten years, it will hit 100%. Already there are signs that the bond markets are starting to find it a lot less attractive to lend money to the US Treasury.
There’s only one answer: a VAT, or value-added tax. Europe and Canada have had one for years, and it generates a gusher of revenue because it’s largely hidden from view. What happens is that every business that adds value to a good or service pays a tax on that value. The tax gets baked into prices at every step, so there’s no big ugly percentage that a consumer has to pay, as with a sales tax.
You start off with a tiny percentage, maybe less than 1 percent, and you expand it steadily as you need revenue. In Europe and the UK, it’s gotten up to the high teens now. This of course is in addition to income and payroll taxes.
My expectation was that Obama would wait till after the midterm election in November 2010, and then start sending out surrogates to float the idea of a VAT. After he himself was safely re-elected in 2012, he would come out and champion the idea himself and get it done.
It looks like we won’t have to wait that long. Already, the PR push has started. Eighteen months ahead of what I thought the schedule would be.