The “Value Added” Tax: Just Another Step Toward Socialism

Talk of a Value Added Tax (VAT) is in the air. This should come as no surprise as politicians have to focus on correcting their extreme fiscal mismanagement. Budget deficits and increases to U.S. sovereign debt levels now threaten our triple AAA credit rating.

But why a VAT?

Simple.  The political class considers it an “invisible tax” because the government levies it at every level of production. Unlike other taxes, a VAT is not collected on income like income or payroll tax or at the cash register like sales tax. Instead…

The tax is built into the cost of everything we buy.

Best of all for politicians, each 1% VAT collects some $50 billion dollars leading to a veritable flood of new money for politicians to spend.

Experts have computed that – in addition to all the other taxes we already pay  – the U.S. would initially require a value added tax rate of 18% to close the budget deficit to a manageable level. However, if the experience in other countries is any barometer, these rates will only rise over time. The political class understands that they can only wring so much revenue from the rich and therefore they have to get new revenue from the middle class and the poor. The best way to get money from the middle class is through a broad based consumption tax such as the VAT.

Support for a VAT is now coming from so many members of the political class that one has to wonder if this is not a fait de accompli. On the right, Bruce Bartlett, former Reagan economic advisor supports the VAT, as does Alan Greenspan, who considers the VAT “the least worst way” to narrow the budget deficit. Academia has also weighed in: “There is no way we’re going to be able to pay our bills without a VAT,” said Len Burman, an economist at Syracuse University. On the left, Paul Volcker, the Economic Recovery Board Chairman for President Obama said recently that a value added tax is less “toxic” than it once was.

Speaker Nancy Pelosi, speaking on The Charlie Rose Show, said that the VAT has to be on the table for discussions as to how to deal with financing the health care bill. She quickly added that such a tax would not raise taxes on the middle class. However, this is simply not true as any tax expert knows that the majority of the revenue generated by a VAT will have to come from the poor and middle class as it comes from every purchase any of us make. Just because the VAT is “invisible” does not mean that the consumer will not feel it.

So, why is the VAT suddenly so popular?

And why now?

Simply put: the dramatic rise in government spending and our new structural budget deficit of a trillion dollars (at least as far as economists can project). Proponents argue that a new VAT would dramatically narrow the deficit resulting in less government borrowing and a lower national debt. However, as The Wall Street Journal recently pointed out, that has rarely been the case in Europe. From 1980 through 2005, sovereign debt averaged 50% of GDP in Europe compared to less than 40% in the United States. The reason is simple:

All new tax revenue raised by the VAT was met by an even larger amount of government spending.

We all know this in our own life experience: expenses always rise to meet income.

European countries such as Denmark and Sweden have VAT taxes that approach 25% which are built into the cost of their products. Throughout all of Europe, the average VAT tax is just under 20%. As practiced in European countries, the VAT is also on top of income taxes.

The VAT generally means:

• lower levels of income growth
• job losses.
• a lower standard of living.

In the current political climate, we see a real tax-and-spend philosophy at work. The political discourse centers on how to finance increasingly expensive government programs. Absent in these discussions is how to stimulate innovation, entrepreneurs, real private sector job creation, self-reliance, savings, developing a strong work ethic and responsibility for taking care of one’s own needs. We are ignoring the caveats of the United States Constitution and are patterning ourselves after failed policies in the countries that our ancestors fled to escape. They lived the European way and fled the type of thinking that prevailed in their times. They came to America because of what the Constitution and the Bill of Rights promised. We should learn from their experience and stop emulating failed policies. The value added tax is just the next domino to fall. We must push back against it.

Is the value added tax another step towards Socialism?

Paul Volcker, the Economic Recovery Board Chairman for President Obama said recently that a value added tax is less “toxic” than it once was.  Peter Orszag, budget chief for Obama quickly backtracked on Volcker’s comment in his address to the Economic Club of Washington saying that Volcker was not speaking for the administration. According to The San Francisco Chronicle this was a classic Washington gaffe:  a politician accidentally telling the truth.   This statement picked up momentum when Douglas Elmendorf, director of the Congressional Budget Office, told reporters he was directing his staff to determine how a value added tax would work in trying to deal with the additional $1 trillion in debt the government is accruing each year.

Experts already have computed that we will require a beginning value added tax rate of 18% and if the experience in other countries is any barometer, these rates only rise over time.  “There is no way we’re going to be able to pay our bills without a VAT,” said Len Burman, an economist at Syracuse University.

A value added tax adds an additional level of tax at each level of production.  Its advantage to politicians is that it is an invisible tax. European countries such as Denmark and Sweden have almost a 25% value added tax built into the cost of their products. Throughout all of Europe, the VAT averages just under 20%.   In the United States, such a tax would be on top of local and state taxes, which in some cases are already almost 10%.  As practiced in European countries, the VAT is also on top of income taxes.

Proponents of the VAT say that it would result in less government borrowing, but, as The Wall Street Journal recently pointed out, that has rarely been the case in Europe.  From the 1980s and throughout 2005, debt averaged 50% of GDP in Europe compared to under 40% in the United States.

The attraction of the VAT to liberal intellectuals and politicians is the vast amounts of revenue that it generates.  The liberals understand that they can only wring so much more revenue from the rich and they have to get it from the middle class as the poor offer no revenue opportunities.  The best way to get money from the middle class is through a broad based consumption tax such as the VAT. But, the VAT generally means lower levels of income growth and job losses.  This all leads to a lower standard of living.

This past week, the Senate passed a non-binding vote by 85-13 that they were opposed to a value added tax.  This is called a “sense of the Senate” position, although many critics just called it grand standing so that the Senate could play to both sides of the issue in upcoming campaigns.

Speaker Nancy Pelosi, on the Charlie Rose Show, said that the VAT has to be on the table for discussions on how to deal with financing the health care bill.  She quickly added that such a tax would not raise the taxes on the middle class.  This in spite of all estimates of tax experts that the majority of the revenue for the VAT will have to come from the middle class.  Perhaps Speaker Pelosi is banking on the fact that the VAT is buried in the cost of the goods and is not collected at the cash register as a separate sales tax, so the consumer will not readily be able to identify the VAT portion of the cost.

Support is coming from so many camps that one has to wonder if this is not a fait de accompli.  Bruce Bartlett, former Reagan economic advisor, supports the VAT.  The Congressional Research Service estimates that each one percent of a VAT would raise $50 billion.  Alan Greenspan considers the VAT “the least worst way” to narrow the budget deficits.

Chris Edwards of the Cato Institute, in opposition, says that the United States has prospered because the general level of taxation has been lower than Europe.  This is the reason so many Europeans come to New York and other American cities to shop: because products, especially branded items, are so much cheaper here than in their home countries.

In the current political climate, we see a real tax-and-spend philosophy at work.  All of the major legislation deals with increasingly expensive government programs and secondly how to deal with the tax revenue to pay for them.  Gone are the discussions to stimulate innovation, entrepreneurs, real job creation, self-reliance, savings, developing a strong work ethic and responsibility for taking care of one’s own needs.  We are ignoring the caveats of the United States Constitution and are patterning ourselves after failed policies in the countries that our ancestors fled to escape the type of thinking that prevailed in their times.  They came to America because of what the Constitution and the Bill of Rights promised. They lived the European way – and fled – we should learn from their experience and stop emulating failed policies.  The value added tax is just the next domino to fall.  We must push back against it.