EurObama

With the stunning emergence of the consumption-based Value Added Tax (VAT) as a legitimate public policy option, the Obama administration has now all but made it official: There is no European economic idea too extreme for 21st century America. Even if the Europeans themselves are largely headed in the opposite direction.

VAT, first rolled out in 1950s France, is a sales tax on everything that every person or entity buys within a country, with exceptions or reductions carved out for things like food, newspapers, or various links along the industrial supply chain.

Compared to the H&R Block subsidy program that is the US tax code, the VAT is a straightforward way for governments to skim 20% or so off the top of every transaction. By penalizing consumption and not earnings, it encourages savings and resists gaming by well-connected special interests. In an ideal world, you could enact a VAT while slashing America’s corporate income tax rate, which is the globe’s second-highest.

But as the last 18 months of federal misgovernance has aptly demonstrated, we do not live in anything like an ideal world.

The only reason VAT is even on the table right now is that bureaucrats like VAT enthusiast Nancy Pelosi have an appetite for spending that far outpaces Americans’ willingness to cough up their hard-earned dough. Every statehouse and city council across the land is literally out of money, and turning to the only people who can print the stuff: Washington.

http://mises.org/daily/4296

Interesting and relevant article (even if dated) on the VAT by economist Murray Rothbard. From the conservative/libertarian magazine “Human Events”, 1972:

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The VAT is essentially a national sales tax, levied in proportion to the goods and services produced and sold. But its delightful concealment comes from the fact that the VAT is levied at each step of the way in the production process: on farmer, manufacturer, jobber and wholesaler, and only slightly on the retailer.

The difference is that when a consumer pays a 7 percent sales tax on every purchase, his indignation rises and he points the finger of resentment at the politicians in charge of government; but if the 7 percent tax is hidden and paid by every firm rather than just at retail, the inevitably higher prices will be charged, not to the government where it belongs, but to grasping businessmen and avaricious trade unions.

While consumers, businessmen, and unions all blame each other for inflation like Kilkenny cats, Papa government is able to preserve its lofty moral purity, and to join in denouncing all of these groups for “causing inflation.”

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes — and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

The VAT is, in short, a looming gigantic swindle upon the American public, and it is therefore vitally important that it not pass. For if it does, the encroaching menace of Big Government will get another, and prolonged, lease on life.

One of the selling points for VAT is that it is supposed only to replace the property tax for its prime task of financing local public schools. Any relief of the onerous burden of the property tax sounds good to many Americans.

But anyone familiar with the history of government or taxation should know the trap in this sort of promise. For we should all know by now that taxes never go down. Government, in its insatiable quest for new funds, never relaxes its grip on any source of revenue.

You know and I know that the property tax, even if replaced for school financing, will not really go down; it will simply be shifted to other expensive boondoggles of local government. And we also know full well that the VAT will not long be limited to financing the schools; its vast potential (a 10 percent VAT would bring in about $60 billion in revenue) is just too tempting for the government not to use it to the hilt, and, in the famous words of New Dealer Harry Hopkins, “to tax and tax, spend and spend, elect and elect.”

Let us now delve more deeply into the specific nature of the VAT. A given percentage (the Nixon administration proposal is 3 percent) is levied, not on retail sales, but on the sales of each stage of production, with the business firm deducting from its liability the tax embodied in the purchases that he makes from previous stages. It is thus a sales tax hidden at each stage of production, from the farmer or miner down to the retailer.

But the VAT is in many ways far worse than a sales tax, apart from its hidden and clandestine nature. In the first place, the VAT advocates claim that since each firm and stage of production will pay in proportion to its “value added” to production, there will be no misallocation effects along the way.

But this ignores the fact that every business firm will be burdened by the cost of innumerable record keeping and collection for the government. The result will be an inexorable push of the business system toward “vertical mergers” and the reduction of competition.

Suppose, for example, that a crude-oil producer adds the value of $1,000, and that an oil refiner adds another $1,000, and suppose for simplicity that the VAT is 10 percent. Theoretically, it should make no difference if the firms are separate or “integrated”; in the former case, each firm would pay $100 to the government; in the latter, the integrated firm would pay $200. But since this comforting theory ignores the substantial costs of record keeping and the collection, in practice if the crude-oil firm and the oil refiner were integrated into one firm, making only one payment, their costs would be lower . . .

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(see link above for complete article)

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