No one wants to raise taxes but sometimes it has to be done.
According to the Rivlin-Domenici group, by 2020 the federal government will pay $1 trillion or 17 percent of all federal spending on interest payments on the debt alone. Half of all income tax receipts will go to pay interest. And by 2025, the federal revenue would be consumed by interest payments and entitlements such as Medicare, Medicaid and Social Security.
The only solution is adding a value added tax (VAT) targeted 100% to debt reduction. Late last year, the prominent, bipartisan Policy Center's Debt Reduction Task Force or so-called Rivlin-Domenici plan called for a combination of spending cuts and tax increases as the only way to stabilize the debt by 2020 at 60 percent of gross domestic product, a generally acceptable debt barometer by economists. Today our debt is at a whopping 90 percent of GDP.
Even Margaret Thatcher increased the VAT in the United Kingdom. One response to the "no new taxes" crowd would be an addition to the Rivlin-Domenici scheme: stop the debt reduction VAT once a target -- say 55 percent GDP is met. Trigger it again when if it inched past 60 percent.
This would keep Americans even more attentive to government spending, and it would send a signal to the world that we are serious about deficit spending and debt reduction.
Today our debt is growing faster than our economy.
This high debt puts our economy, prosperity and national security in danger.
The nonpartisan Congressional Budget Office calculates this year's deficit -- the yearly amount by which spending exceeds revenue -- at a whopping $1.5 trillion, the highest ever. Add that to $14 trillion, our national debt, the total amount of money owed by the federal government, and you have the total of what we owe, at least half of it to foreign nations, particularly China, Japan and the United Kingdom.
You owe more than $45,000. So do I and every other American. This is each American's bill for the federal debt.
Congress and the White House are talking budget cuts. President Barack Obama has called for a five-year freeze on non-security related, discretionary government spending for a savings of about $40 billion a year. Republicans want more -- at least $100 billion slashed annually in what could mean drastic cuts in everything from law enforcement and border security to education and food and drug inspection.
Yet, reducing spending will slow the growth of future debt not eliminate it.
The proposed 6.5 percent broad-based Debt Reduction Sales Tax or VAT would be on most goods and services -- about 75 percent of them -- with exemptions on such things as services produced by government and charitable organizations, educational activities, government subsidies to health care, such as Medicare and Medicaid expenses, and housing rents. Domestic consumption would be taxed, not exports, and to ensure the debt reduction tax or VAT not be regressive, low income citizens would receive a rebate.
The VAT is simpler than income tax or state sales tax schemes. Under the VAT, already in effect in 150 countries, every time a business transaction occurs, the government receives a remittance and a business receives a credit for taxes already paid. At each stage, the total tax levied is a constant fraction of the value added by a business to its product, and importantly the cost of collecting the tax is borne by business rather than the state. The VAT gives the seller a financial stake in collecting the tax versus the state sales tax in which the seller has the burden of deciding whether or not the buyer is an end consumer on whom tax is normally charged.
The VAT, which according to the Congressional Research Service can raise $50 billion for each one percent levied, works better than increasing income taxes. It is not a disincentive to long-term wealth or capital accumulation needed to generate economic growth as the VAT does not apply to returns on savings and investments. It would not be an incentive to shift investment overseas as an increase in corporate income tax rates can be.
States could see advantages, too, as they might piggyback their taxes. Additionally, products sold on the Internet often have escaped state sales tax collections and now could be captured. As in Canada, the VAT could be listed on sales receipts so buyers know the amount.
Does anyone have a more workable solution? We need to hear it.
We cannot wait.
Deborah Szekely, the founder of both the Golden Door and Rancho La Puerta spa/fitness resorts, served as President and CEO of the Inter-American Foundation in Washington D.C, and had various assignments as a U.S. Diplomat.