A value added tax, or VAT for short, is something that has been floating around Washington for some time now as a solution to help the trillion dollar deficit woes. Most Americans probably do not know what a VAT is, considering it is a fairly recent European idea, but they are probably wondering how it will personally affect them and their families. Well, you better open your eyes and smell the taxes because a VAT is coming to a store near you.
Started by the French in 1954, a VAT has now been implemented throughout the European Union and many other countries throughout the world. It was originally designed as a way to tax large businesses, but like every other tax, the government became greedy and rolled it out to all business sectors. Unlike a sales tax, a VAT targets the profits, or value added, to a product or service through each stage of the process (here is a simple illustration).
In theory, a VAT does have some advantages over America’s income tax system. However, do not be fooled! Paul Volcker, former Federal Reserve Chairman and current economic adviser to President Obama, is not recommending that we replace federal income and payroll taxes with a VAT, but instead that we add a VAT on top of existing taxes. The Heritage Foundation, one of the country’s leading economic think tanks, has a lot to say on this subject:
If Congress adopts a VAT without abolishing income and payroll taxes, it would amount to a massive tax increase. The total value added for all the goods and services produced by the U.S. economy in 2008 was $6,300 billion.[2] Therefore, just a 1 percent VAT on all goods and services in the economy would raise $63 billion for Congress to spend each year.
All current federal taxes raised $2,524 billion combined in 2008.[3] Each percentage point of a VAT would increase this amount by 2.5 percent, increasing each household’s annual tax burden by $534.
Some suggest the VAT rate should be set as high as 20 percent.[4] At that rate, a VAT that covers all goods and services in the economy–including food, clothing, housing, and health care–would collect an additional $1,260 billion a year and cost every U.S. household $10,680 annually.
The Heritage Foundation went on to explain that with a VAT, tax transparency to the taxpayer will be lost since taxpayers will unlikely add up their total receipts to determine their annual tax liability. In addition, The Heritage Foundation claims that politically sensitive products like “food, clothing, health care, and housing” will likely be exempt from a VAT, thus causing the VAT rate on everything else to increase in order to obtain the same tax revenue. This will also lead to another form of economic distortion power in Washington, because unless a VAT is imposed equally on all goods and services in the economy, the government can use favors as a way to influence businesses.
Until recently, with the exception of Paul Volkner, the White House has been shy about admitting they are considering a VAT to help pay for the estimated $1.56 trillion 2010 budget deficit, and unavoidable future deficits due to rising costs of welfare programs. However, in an interview with CNBC on Wednesday, President Obama suggested, for the first time, that a VAT is still an option and that it “would be novel for the United States.” This comment came a week after the Senate overwhelmingly adopted a non-binding resolution opposing a VAT in the United States. Given the track record of President Obama and Congressional leadership’s ability to jam their policies through despite opposition, do not expect the Senate’s non-binding resolution to waiver any White House desires for a VAT.
It has never been clearer than now that Americans absolutely do not want any more taxes. Yet, like a determined tyrant, the White House and Congress have continentally ignored calls to cut taxes and reduce spending. Instead they have done the exact opposite, drastically increasing spending to a level where increasing taxes is required for sustainability.
Courtsey of the Cato Institute and http://www.downsizinggovernment.org/
What then is the solution to pay for the crippling deficits and mounting debt? Washington, please brace yourself for a little common sense, STOP SPENDING MONEY! That is what Americans have to do when they are in a personal financial crisis. As I explained in my article “The Crisis”, there is no difference between the simple economics of personal finance and government finance. In your own home, if you lose your job, take a pay cut, or have a very costly, unexpected expense, you have to cut your other expenses to the bare minimum necessary. It will be tough. Like kicking a cocaine habit, dramatically cutting federal spending by slashing programs and budgets in all departments will cause a lot of short-term pain for most Americans. The key word, though, is short-term.
We are still Americans and when times get tough, Americans know very well how to push through it and come out better and stronger in the end. We have done it many times before. The most compelling example is the Crash of 1920, which by many accounts was worse than The Great Depression. You probably have never heard of it, because unlike the isolationist and socialist polices laid out by President Hoover and FDR during The Great Depression, President Harding and Coolidge used drastic spending and tax cuts to allow the economy to recover in less than 2 years! By slashing federal spending by 50% and sharply lowering income taxes, unemployment dropped from 20% in 1921 to 1.8% in 1926. It was during this time, with the burden of taxes reduced, when innovation soared and low and middle class Americans experienced unprecedented prosperity.
Are we in the same situation as America was in 1920? No, we are not. We also have many other fiscal and economic problems that cannot be easily explained in few words and those issues, without question, need attention. Nevertheless, will the simple economic ideas like slashing federal spending and extensive tax cuts quickly spur the economy back to life while we work on fixing other problems. Absolutely yes!
A VAT in America is beyond a bad idea. Like Cap and Tax, it will be an economy killer. Washington may not understand this or even care about the consequences, but I have full faith and credit that the American people do. So to the American people, pay very close attention to what is being said about a VAT in Washington. If (and when) they decide drop this on the table and go for it, be prepared for the political fight of your life!
