The VAT is an excellent idea. The VAT is a terrible idea.
Morphine is a wonder drug. Morphine is a dangerous drug.
A Value Added Tax, properly constructed and applied can be both a fair and reasonable method of taxation to raise the funds to provide for NEEDED government services. 1. It is relatively simple to apply. When a value is added (when the chick grows to a hen and is sold to the butcher and again when the butcher prepares the bird for the table and sells it) a tax is applied to the amount of the value added. In many European countries that is in the 15 – 20% range. 2. It taxes production but most of that is at the point of consumption so it is almost like a consumption tax (read “sales tax”). I like consumption taxes more than income taxes because income taxes punish productivity.
A Value Added Tax needs to be a substitute for other types of taxes. If it can be imposed, in place of income and sales tax, it can dramatically streamline and simplify taxation. Unfortunately, we have a huge infrastructure and lobby that would fight this. For this reason, I cannot imagine a VAT could be used here as a substitute. It would, almost certainly, be used as an ADDITIONAL method of taxation. Since most special interests have paid lobbyists working to protect their tax breaks, almost all would fight any change that would deny them the special treatment that they get in the current tax code. My guess is that closed to half the revenue of most CPA firms is based on tax preparation and tax advice. If that is the case, you can bet the CPA lobby would frown on replacing the current system with VAT.
So what are the chances that we will get a Value Added Tax to replace either or both of Income and Sales taxes? In a word: ZERO.
What are the chances of seeing a VAT proposal in Congress to add another source of tax income for our government to spend? In my opinion, it is almost 100%. Our Members of Congress have spent every penny they have seen for years and are recently showing signs that what they have is not even close to satisfying their hunger for power/money (about a trillion dollars to supplement the last budget; a trillion dollars for “stimulus”, etc.).
Congress and the President will point to Europe as a shining example of how great a VAT is. They will suggest that a 15% tax on value added is far better than a much higher tax on incomes and sales. What they don’t tell you is the huge increase in taxes paid by the people and the economic death spiral that accompanies such a tax system. Here is what you need to know:
1. A little over 40 years ago (1967), pre-VAT in Europe, the average tax burden for European countries was just a bit higher than in the USA: In Europe, pre-VAT, the typical tax burden of government was 30% of the gross domestic product while in the U.S. government absorbed about 27% of the gross domestic product. VAT invariably increase overall taxes.
2. When the VAT started in the U.K. in 1979, the rate was 12.5%. Today it is 17.5%. When first instituted in Germany in 1974 (?), the VAT was 13%. It is currently 19% and there is an active proposal in Berlin to raise it to 25%. My point is that a VAT of even 1% is a foot in the door and it is sure to rise.
3. Lawmakers have shown they can’t control the desire to do social engineering with tax code, even with the VAT. Much like our convoluted income tax code that favors some types of income over others, or, our sales taxes that impose different taxes on different items, the VAT is subject to “modification” to exempt certain items and lower or raise rates on others. As it stands in Europe, today, the VAT has near the complexity as our own IRS code.
4. VAT is invisible. It is built into the price of the good or service so you don’t recognize it as a tax. Much like withholding tax that you don’t pay from money in your pocket, you hardly notice when rates are raised. This means that there are few protests when rates are hiked. The VAT, like income tax with mandatory withholding, becomes a magical money machine for government.
5. Today in the U.S. our government (federal, state, and local) still takes about the same as 40+ years ago – 27% of the gross domestic product to provide services to all of us. In Europe, where the VAT is almost universal, government now eats up over 40% of the domestic output. European products become less competitive daily and governments have been forced (????) to step in and take over large portions of the economy (read “nationalize”). Sound familiar?
In my opinion, our government has no intent to replace any other tax with the VAT. The sole purpose of a VAT in the U.S. will be to take more money from the productive sector of the economy to build an even bigger and more controlling government. It is in the interest of the governing class to take as much money and control from the productive sector as they can. The VAT will be a formidable weapon in that battle.
Morphine can control pain and help patients recover when used as directed by a competent physician. If used by people without will power, it can become an addictive killer.
The VAT, as a replacement for other taxes, shows promise to simplify taxation. When added on to other taxes it has proven to be very dangerous, building ever-larger government bureaucracies and killing economies. The European experience has proven that lawmakers cannot resist the power and money brought to them by a VAT. The last thing we need is for our government to add on another way to tax our productivity.