Here Comes the VAT

When I was a youngster, I went to see Cecil B. DeMille movie  The Ten Commandments.  I was captivated by one character in particular.  This was the Angel of Death.  For those unfamiliar with the story Moses is attempting to convince the Egyptian Pharaoh to free the Israelites from bondage.  He brought down nine plagues upon the Egyptians due to the Pharaoh’s intransigence.   Actually, God brought forth the plagues; Moses was just His mouthpiece.  Finally, God gave the Biblical equivalent of the nuclear option: death to the first-born of the Egyptians.  He instructed Moses to mark the doorways of the Israelites’ homes with lamb’s blood so the Angel of Death would pass by these dwellings.  This is the origin of the important Jewish feast of Passover.  (In the movie  the special effects team used  dry ice to portray the Angel of Death.  They created a mist-like cloud that wound its way through the streets wreaking its vengeance on the Egyptians.) The angel  was a silent, insidious killer.

What does that have to do with the VAT, value-added tax, you may ask?  In my mind, the VAT is a silent, insidious killer, too.  While the Angel of Death was doing God’s work, though, the VAT is more akin to Satan’s.

The incessant rumblings about considering the imposition of a VAT in the US are due to the federal government’s need for staggering sums of tax revenue.  I’m not engaging in hyperbole here.  Even eighteen months ago the sums required would have been inconceivable; not so, today.    Congress and the president have obligated the US taxpayer beyond what is collectible from the income tax code.  The irony here is delicious: the pock-marked (read: loophole or exemption ridden) code will now prevent the government from generating sufficient revenues.  A simpler tax code, a flat tax would be best, would generate the most revenue, and allow the economy to produce at its maximum capacity.  Unfortunately, a flat tax eliminates the ability of politicians to buy votes by granting exemptions for whatever “worthy cause” is groveling for favors.

A good tax needs to have three characteristics: 1) it needs to be transparent; that is, one should be able see the amount of the taxes collected.  The income tax code is the exemplar.  Nothing is hidden; the code may not make any sense but one can easily see what he is paying; 2) it should be broad-based so that arbitrary exemptions are eliminated; and 3) it’s rates should be low so as to minimize the distortions that any tax will cause.  The VAT fails completely on the first characteristic.  It is the Angel of Death: a silent, insidious tax.  It is nigh onto impossible for a consumer to determine how much of the price of a good he is buying represents taxes.  This is one reason politicians like it; it is hard to trace it back to them.  It is broad-based but for the wrong reason; it is such so as to collect as much revenue as possible.  Given our political will it will become pock-marked, too.  Finally, it won’t be low.  It will generate scads of money and this will enable politicians to engage in their favorite pastime: buying votes.  The politicians won’t be satisfied with funding the current panoply of programs that are bankrupting us, they will conjure up new ones.

It is important to realize that it will NOT replace the income tax, especially considering that 50% of Americans pay zero, or less, in federal income taxes.  As such, it will be a close to a 20% decrease in the standard of living, if we use the average European rate.   I say close to because it will fund the many goodies that emanate from D.C.  If Americans were given the opportunity to buy these goodies from Govt. Inc. they would, in many (most) instances opt not to buy them or buy them in vastly reduced quantities, but they would buy some of them.

Let’s look at the comparative economic performance of the European community, specifically: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovak Republic, and Spain; with that of the US over the 18980-2008 period.  In 1980 the European community, VAT taxers par excellence, had 118 million people employed.  Twenty-eight years later employment was 143.2 million, an increase of 25.2 million.  Germany and Spain accounted for 11.8 million of this increase.  The percentage increase was 21.4%.  Turning to the US, its employment was 90.5 million in 1980 and 136.8 million in 2008, an increase of 46.3 million, or a 51.1%.  In the US tax rates were cut over most of this period, while the Europeans continued to levy the insidious vat.  It doesn’t take a social scientist to be able to discern which one did better.  Spectacularly better, I might add.

Raising tax rates has never reduced the deficit.  The budget surplus in the Clinton years was due to the decrease in the capital gains tax rate, which Clinton opposed by the way, that generated a veritable gusher of revenues.  In the Reagan years the tax rate cuts increased the tax revenue substantially, even though Congress couldn’t resist spending even more.   Similarly, Margaret Thatcher’s tax rate cuts in the UK brought prosperity.  Politicians don’t like self-generated prosperity since no one will turn to them for help.  They will have become redundant at best.

An unintended consequence of imposing a vat in the US is that it will make foreign goods cheaper.  You may counter,”no, they will be taxed at the checkout point, too.”  Ah, yes, those goods that are imported to the US will be but not those consumed outside the US.  We can expect to see fewer vacations to Florida or other US destinations and an increase in trips abroad, since the latter will now be relatively cheaper.  Never underestimate a politician’s ability to not think ahead and examine the secondary impacts of decisions.

I think it goes without saying that I’m not a fan of a VAT.  In order for the US to continue to prosper and grow, it needs to reduce tax rates and cut spending across the board.

Posted by Jim

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