Here it Comes: Volcker Floats the Idea of Increased Taxes and a VAT

Our current set of politicians seem to be hellbent on dragging the country down the road to European-style socialism. Instead of enrolling in a 12-step program to cure their compulsive spending habits with other people's money, they sent out Paul Volcker yesterday to begin floating the trial balloons and laying the groundwork for higher taxes. Of course, these ideas will be sold as the only way to close the massive federal deficits caused by overspending, and the naive may fall for it. But any observer of political behavior knows the politicians will spend every dime of revenue that comes in plus whatever they think the public will tolerate above that. Let me repeat: any observer of political behavior knows the politicians will spend every dime of revenue the government receives plus whatever they think the public will tolerate above that. Don't be tricked into falling for the ruse that increased taxes are necessary to reduce the deficit. Increased taxes are necessary to support a permanent increased level of government spending, and that is the real objective. Make no mistake about the intention. The bully state is in ascendancy at the moment. Forced cradle to grave nannyism is the order of the day.

For the investor, tax efficient investing is more important now than ever since the big hand of government is preparing to dig deeper into everyone's wallet. On the income side, it is vitally important to max out 401k and IRA contribution (if tax deductible), minimize capital gains distributions through index investing, and tax manage the income portion of the portfolio so that taxable bonds are held in retirement accounts and tax-free bonds are held in regular accounts. If a VAT becomes law (and the tax and spenders are drooling over the prospect because it is hard for the average person to see and understand this tax), everyone should expect an across the board increase in the costs of all goods. There are few options to avoid this type of tax except through reduced consumption.

People should keep some things in mind when evaluating the wisdom of all this proposed tax and spending. A few pictures are worth a thousand words:

It's not the revenues.  It's the spending, stupid.  We live in the age of government greed where the federal Leviathan keeps growing faster than the economy and individual incomes, where federal worker salaries and benefits far outstrip that of the private sector and their numbers just keep growing.  The Leviathan needs to be starved, not fed, if there is any hope of preserving the American dream for generations to come.  Otherwise, we are just stealing from the future to pay for the foolishness of today.