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Revenue shortfalls are a taxing dilemma

The long tug-of-war between those who favor taxation of income and those who support the taxing of consumption may soon require a thicker rope.

Governments at every level are short of money. Citizens ask for more but pay for less. Almost one-half, for example, do not pay federal income tax but are defended by the same U.S. armed forces funded by those who do.

The state of Washington pecks at the solutions to its revenue problems by expanding the sales tax to include chewing gum and bottled water, meanwhile shifting an ever greater share of higher education costs to students.

The state also balanced its budget on the premise $600 million will be forthcoming from the other Washington, effectively transferring a state deficit to the federal ledger.

What to do?

Inside the Beltway, there are whispers of a value-added tax like those long used in Europe and much of the rest of the world. The VAT is kin to the sales tax, except producers pay as materials and goods work their way to consumers. The ultimate buyers may not pay a sales tax – some jurisdictions add one – but nevertheless absorb the VAT at the cash register.

Among its drawbacks are the extra responsibilities and paperwork imposed on business. The beauty is its invisibility, except as it inflates the cost of automobiles or greeting cards. And therein lies the source of suspicions that, once in place, the VAT becomes the stealth revenue generator of choice, easily raised without producing a huge voter outcry.

House Speaker Nancy Pelosi has said a VAT is “on the table” as Congress looks for ways of closing the nation’s hideous budget gap.

Last week, in response to a question, President Barack Obama said the VAT was a “novel idea.” But Treasury Secretary Timothy Geithner quickly clarified the VAT was not a novel the administration will include in forthcoming proposals for addressing the deficit.

Those should be quite a read.

Meanwhile, the senior Bill Gates is again promoting an income tax for Washington, one of only seven states without one. Gates and other advocates last week launched a petition drive for Initiative 1077, which would impose a 5 percent income tax on individuals making more than $200,000, or couples earning more than $400,000. The rate would increase to 9 percent at $500,000 for individuals and $1 million for couples.

The tradeoff would be substantial cuts in property taxes as well as in a business and occupations tax often toxic to young businesses. The state would net an estimated $1 billion in new revenues. The sales tax, disproportionately burdensome on low-income residents, would be unchanged.

So, potentially, we have a federal government moving toward a tax on consumption just as Washington citizens consider petitions calling for an income tax. To do so, they may have to step around, or up to, signature gatherers for another round of Tim Eyman-sponsored initiatives to repeal the tax on bottled water, etc.

The alternative is pushing back the incomes of government workers and the entitlements consumption of the hardest of hard-core voters, the elderly.

Easier to tug on taxpayers.