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Will Obama commission on federal deficit mean a new tax?

At the first meeting of the bipartisan commission to tackle the federal deficit Tuesday, nothing was taken 'off the table' – not spending cuts, higher tax rates, or a 'value-added tax.'

By Staff writer / April 27, 2010

President Obama is joined by the chairmen of the National Commission on Fiscal Responsibility and Reform, former White House Chief of Staff Erskine Bowles (c.) and former Wyoming Sen. Alan Simpson (r.) Tuesday in the Rose Garden of the White House.

J. David Ake/AP

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As his fiscal commission begins to considers ways to rein in the federal deficit in the future, President Obama says "everything has to be on the table."

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That means considering things like unpopular spending cuts, higher tax rates, and even a new tax – the value-added tax or VAT – that many Americans have never heard of.

"[The recession] has aggravated an already severe fiscal crisis, brought on by decades of bad habits in Washington," Mr. Obama said as he ushered the bipartisan commission into its first meeting Tuesday.

The crisis isn't an immediate one. US Treasury bonds can still be issued at low interest rates and find plenty of buyers. But spending is on course to outpace revenues by a large margin in coming years, putting America's top-flight credit rating at risk.

A host of factors are causing high annual deficits. The big issue is entitlement spending, as Social Security and Medicare are poised to push government spending up as a share of the US economy in coming years. The recession is also a significant factor in the shorter term. "Emergency measures [to support the economy] have added about $1 trillion to the deficit over the next ten years," Obama said.

What can be done?

Congress could cutting spending, boost tax revenues, or strike some balance between those options. Fostering a stronger economy is part of the answer (so the government can draw tax revenues from a bigger financial base), but economists say the nation can't simply "grow its way out" of the fiscal challenge.

Bernanke: Federal budget 'unsustainable'

"Even after economic and financial conditions have returned to normal, in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path," Federal Reserve Chairman Ben Bernanke said Tuesday in a statement presented to the commission. "As debt and deficits grow, so will the associated interest payments."

The commission, with members appointed by Obama and by Republican and Democratic leaders in Congress, will make recommendations that attract bipartisan support from within its own membership. It's not clear whether the value-added tax will be a favored proposal. European nations use a VAT, akin to a sales tax levied as goods and services are being produced, as a significant source of revenue.

But while many Democrats support the idea, Republicans are fighting back even before it is proposed.

"The value-added tax is the worst kind of tax imaginable – it’s hidden, it’s complex, it’s easily susceptible to special interests, and it’s always getting bigger," House minority leader John Boehner of Ohio said in a statement last week, after the issue came up on Sunday talk shows.

He cited evidence that a VAT, even if it starts small, often grows over time.

Congress has the last word

With or without a VAT, the commission faces a tough job in finding politically palatable solutions. Obama named two experienced Washington hands, former Republican Sen. Alan Simpson and former Clinton administration official Erskine Bowles, to lead the panel. Any commission proposals will only become law if Congress supports them.

"I want this commission to be free to do its work," Obama said. Trying to rule ideas in or out is "an old Washington game – and one that has made it all but impossible in the past for people to sit down and have an honest discussion about putting our country on a more secure fiscal footing."

Related:

Top question for fiscal commission: Are Americans better than leaders ask us to be?

Can Obama's deficit commission work, as partisanship rages?

Obama commission won’t cut deficits. Congress will.

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