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Yet another regressive proposal that punishes lower income earners disproportionately, as the Obama administration seemingly continues to pursue policies that shift real wealth from the bottom to the top, as Europe has done for decades. It’s also highly contractionary as it reduces aggregate demand, and the higher prices add to headline inflation and get passed through to CPI indexed contracts:

Podesta Says Value-Added Tax ‘More Plausible’ as Deficits Grow

By Heidi Przybyla

Sept. 25 (Bloomberg) — John Podesta compared the nation’s current budget crisis to the situation former President Bill Clinton faced in 1993 and said some form of a value-added tax is “more plausible today than it ever has been.”

“There’s going to have to be revenue in this budget,” said Podesta, Clinton’s former chief of staff and co-chairman of President Barack Obama’s transition team, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing today.

A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” said Podesta. Value- added taxes in Europe and Japan encourage savings by taxing consumption.

Podesta said such a tax may be regressive, but can be balanced by exempting some products and using “the money to support low-wage workers.”

Response:

>   
>   (email exchange)
>   
>   On Sun, Sep 27, 2009 at 10:20 PM, Wells wrote:
>   
>   I am totally with you on this Warren. This VAT is a truly regressive tax.
>   

right.

>   
>   People like Forbes pushed for this a new years ago but it went nowhere.
>   After studying it I was left feeling that it hides the true cost of
>   government by burying it in the many stages of production with the end
>   product being just the tip of the tax iceberg. No doubt it probably does
>   encourage savings, as if savings are the be all, end all.
>   

Reducing consumption also reduces ‘savings’- the old paradox of thrift.

The only way it could increase savings is if it threw people out of work and the federal deficit went up, as savings of net financial assets of the non govt sectors can only come from govt. deficit spending.

It’s also a transaction tax, which serves to make transactions more expensive and thereby reduce them. This reduces our real standard of living as it discourages specialization of labor and economies of scale as people tend to do more things themselves rather than do them for each other.

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