Posted on 04/15/2010 6:32:05 AM PDT by SeekAndFind
Recently, progressives have made noise about introducing a value-added tax (VAT) in the United States. The VAT is an indirect tax—that is, Americans wouldn’t pay the tax directly to government, but would pay it to businesses as part of the retail price of things we buy, and businesses would then remit the tax to Uncle Sam.
A VAT is set at a fixed rate—say, 10 or 15 percent—added to the price of a good at every step of production, with a deduction allowed for the amount of VAT paid during earlier stages of production. The more steps there are in transforming raw materials into complex consumer goods, the higher the resulting consumer price as a result of those multiple layers of taxation.
Many countries have VATs, including Canada, Mexico, and the European Union. One might say that a VAT is an emblem signifying that a country’s government consumes a large percentage of its GDP, for VATs seem to go hand-in-hand with big-budget nanny states.
The reason for this phenomenon is simple: Any government that seeks to be all things to all people, and therefore seeks to spend ubiquitously, must inevitably seek to tax ubiquitously. Such governments have insatiable appetites for revenue. Because VATs are cash cows, diverting huge sums of money from consumers to government, they are favorites of big-spending governments.
Unfortunately, though, VATs have significant negative economic consequences.
Because they inflate consumer prices, quantities demanded fall. Most often, the marginal buyers who can no longer afford to pay the higher price are poorer citizens. When government policy raises prices (see “Government Intervention and Higher Prices”), the first victims are poor people.
The second victims of a VAT are the workers who will lose their jobs as a result of falling demand for the newly higher-priced goods.
Many affluent Americans may not curtail their consumption, but because more of their money is diverted to the government treasury, their savings must correspondingly decline. This results in decreased capital accumulation, which, in turn, slows business expansion, development, and formation. It also slows the growth rate of labor productivity, hence retarding economic progress for workers.
The desire of today’s big spenders in Washington to greatly increase their revenues is reminiscent of how FDR financed his spending binge during the Great Depression. During the 1930s, federal revenues from the income tax fell the more tax rates were raised. (Congress, take note.) To raise more revenue, FDR and Congress increased excise taxes—taxes embedded in the price of common consumer goods like gasoline, milk, and cigarettes. The effectiveness of those taxes as generators of government income derived from the fact that those taxes are difficult to avoid, unless you can live without milk, gasoline, etc.
VATs are essentially excise taxes. They are economically destructive and hit society’s most vulnerable members the hardest. Here let me offer both a political strategy to resist the imposition of a VAT and an alternative proposal for opponents of a VAT to rally around:
The strategy is a recommendation to Republicans to not obsess about or campaign for balanced budgets. This is not to say that deficits don’t matter. They do, and they’ve got to go.
The problem with focusing on a balanced budget is that it sets up a dynamic of balancing spending cuts and tax increases. Tax increases, as we have already seen, depress economic conditions. Who can get excited about that kind of economic plan? Deficits need to be eliminated by cutting spending, however unpopular that may be in certain quarters.
As economists for the past two centuries have made plain, the real burden of government is not what it taxes but what it spends, because whatever it spends comes at the expense of citizens, whether via taxes, borrowing, or creating additional Federal Reserve Notes. Reducing the burden of government means slashing government spending, not raising taxes.
Here is a counterproposal: Instead of adding yet another “stealth” tax—the VAT—to the many excise taxes already in place, let’s have Congress pass a truth-in-labeling law.
Let’s require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.
What’s holding you back, Congress? You aren’t afraid of the truth, are you?
-- Dr. Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision & Values at Grove City College.
The US has the best innovation for ‘alternative markets’ to thwart this when it comes.
If you’re not networking with a barter and trade group, you should start.
http://www.freerepublic.com/focus/news/2493444/posts?page=1
This table ought to cool the ardor of those who believe European Socialism is fabulous.
Denmark looks like a great place to live. You get to pay a 25% sales/VAT tax and a top income tax rate of 60%.
And, of course, gasoline taxes are $5.00 per gallon in Denmark.
And another great thing about Denmark is the Muslims who will cut your head off for drawing cartoons of Mohammed.
No wonder Shakespeare said there was something rotten in Denmark.
Let’s require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.
What’s holding you back, Congress? You aren’t afraid of the truth, are you?
Hey, that was my idea years ago. heh
VAT, or some other tax only on products consumed, instead of the income tax system, would tax everyone that consumes, rather than just those who produce.
Women, children, minorities, illegal immigrants and homos hardest hit!...........
A VAT tax is for suckers.
VAT is a highly regressive tax that will hit the low income hardest. Do these idiots in Congress think a VAT will sell well with the voters?
It also being sold under a completely false pretense.
A VAT tax will not reduce our debt 1 dime. EVERY single place from Greece to Great Britain that has a vat also currently has a debt crisis. Anyone buying the notion that a VAT would fix anything has to be wonderfully ignorant of the facts.
All adding a VAT does is encourage the politicians to keep spending. It is the fiscal equivlent of giving drug users free drugs thinking it will curb their drug use.
As with any income stream, the urge to spend always is greater then the amount of revenue generated. No matter how much money you give DC, they will always have some reason they need to spend more.
There is a simple solution to our debt problem. Freeze Federal spending to the rate of inflation for 3 years. The problem is not that we don’t tax enough, the problem is we spend it far faster then we take it in.
Thank you. And folks, remember that just because a VAT hits consumption doesn’t mean that they are ever going to drop income taxes.
I love that revealing chart. It shows me that there is a 20 percent difference between US federal taxes and Canadian federal taxes.
I personally would rather see all taxes cut, and NO NEW TAXES!
So? No new taxes. If Republicans savaged him to put in Clinton, then the same needs to be done to Obama.
I would prefer a flat tax but the administration will be pushing a VAT. Letters and emails I send to my congressmen will all find me for the VAT AND repeal of the 16th.
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