Can A Value-Added Tax Solve The US Debt Problem?

At The Street, Peter Morici discusses how it's no longer far fetched to imagine a Greece-like debt crisis in the US. An unsustainable budget imbalance is prompting some in the government to suggest a value added tax to increase government revenues. See the following post from The Street.


Greece is insolvent -- no austerity or new taxes will pay its debts.

Like a homeowner owing four times income, belt-tightening and a longer repayment period aren't enough. Either the house is sold to clear the debt, or the bank takes back the house. Greek bondholders don't have that choice; they can't repossess the Parthenon.

Greece is a sovereign country and either it will be the recipient of endless German largess -- an unlikely scenario -- or European creditors, banks among them, will take a loss.

Now, the International Monetary Fund bluntly warns Spain to avoid becoming the next Greece. It must radically overhaul labor laws, pensions and consolidate banks; that's tough for a sovereign that doesn't print money in the midst of a market panic.

Germany and European banks can't take that hit.

The next financial tsunami is emerging and will ripple to America, just as our mortgage debacle gave Europe fits.

Liberals on Capitol Hill and at the New York Times interpret this to mean Europe needs to toughen up on tax scofflaws and fine-tune Euro socialism.

Wrong. If governments in Athens, Madrid and other European countries collected all the taxes levied, their populations would have to eat sand. Post-modern Europe is failing under the weight of its own financial self-abuse.

Despite huge deficits, officials of the Obama administration and the Federal Reserve say it can't happen here because we have lots more room to tax, and the United States prints dollars, which is the global currency.

Don't bet the ranch on that.

With the new health care law, the U.S. has a social safety net that rivals Europe, and is more expensive. For example, the U.S. spends 19% of gross domestic product on health care, while Germany spends 12% for essentially the same outcomes.

Now, liberals want a value-added tax. After all, the United States has a safety net like Europe so why not taxes like Europe?

Not so fast.

Europeans pay value-added taxes and income and corporate taxes too, but pay little for health care and higher education; the government uses taxes to pick up the tab.

With a VAT, U.S. individual and business taxpayers would have tax burdens comparable to Europeans but would still face hefty bills for private health insurance and college tuition that Europeans don't bear.

The health care law contains firm commitments about scope of coverage and benefits guaranteed each citizen, but it is soft about bringing down higher U.S. drug, medical professional fees, administrative costs, and malpractice costs into line with Europe.

No one wants to take on public or private universities -- professors are junk yard dogs imbedded in the media.

Unless Barack Obama and the governors want to take on those vested interests, the combination of higher taxes, health insurance premiums and college tuition will break the middle-class and make the country as ungovernable as Greece or Spain.

Excessive borrowing will cause the bond market to render the same judgment on Washington as it will for Athens and Madrid.

High interest rates will compel Washington to print so much money that the kind of hyper-inflation that brought down the German Weimar Republic will result.

After Spain, for whom does the bell toll?

It tolls for America!

This post has been republished from The Street, an investment news and analysis site.