Kudlow Warns 'European-Style' National Value-Added Tax on the Way

Surrogates for President Barack Obama have been claiming he could cut the deficit in half by 2013.

That’s just what CNBC contributor and Daily Voice online editor Keith Boykin said on CNBC’s April 17 “The Call.” According to Boykin, the deficit would be reduced by raising taxes on wealthiest, but uses some very optimistic projections in his equation.

However, CNBC “The Call” co-host Larry Kudlow called it a “canard” and said there was no way the deficit could be made up in taxes on the wealthy alone.

“Raising taxes on the wealthiest Americans is such a canard, Keith,” Kudlow said. “You’re not going to get – that is such a canard. You’re not going to get $25 billion out of that goofy tax hike. Everybody knows that.”

He suggested Obama might try to implement a valued-added tax to compensate for shortfalls where taxes on the wealthy are unable.

“See Rick Santelli, we are headed for a national value-added tax, European-style,” Kudlow said. “Because, isn’t president Obama essentially adopting European-style policies here?”

The value-added tax or VAT is a type of tax placed on a product whenever value is added at a stage of production and at final sale. The amount of VAT that the user pays is the cost of the product. As the Heritage Foundation explained when the issue of a VAT came up in the 1980s, there are four fundamental arguments against it:

“The four main arguments against a VAT are: 1) it is inflationary, because it leads to a jump in the price level when introduced 2) it is regressive, falling more heavily on those with lower incomes who consume a higher percentage of their income; 3) it is administratively complex and expensive to collect; and 4) it is a hidden tax and thus is easily increased once established.”

CNBC Chicago Mercantile Exchange Floor reporter Rick Santelli agreed on the notion that a VAT is possible. But, he also warned that basing present-day economic policy on optimistic long-term projections could have some unintended bad consequences.

“Exactly,” Santelli replied. “And you know, let’s step back and try to be reasonably logical. In 1999, in November, November 4th to be exact, then-Secretary, Treasury Secretary Larry Summers was praising getting rid of regulation like Glass-Steagall. Hey there was a lot of people back then. But look at how it turned out. How do we know what the economy is going to grow at? Calculating these deficits down the road could have some very bad consequences and we have to handicap that part of it.”