Value Added? Hold on to your Wallet

The Drudge Report today linked to an article in the Washington Post discussing the growing murmurs on Capitol Hill about a national value added tax (VAT). Already levied in a number of countries around the world, this tax is the equivalent of a sales tax. Currently, only state and local governments levy sales taxes while the national government has abstained from doing so.

The purpose of the VAT is, like all taxes, to raise revenue for our ever-growing national government. This tax, like all taxes, is paid by consumers. Unlike the corporate tax, this is not even a deceptive way to apply a regressive tax to the American people. Corporate taxes are passed on to the consumer by means of higher prices, corporations do not just absorb the blow themselves.

So, the value added tax, for which a rate has yet to be determined but lies somewhere in the range of 10% to 25%, will simply be added on top of the price of the purchased good. The tax is regressive because it will disproportionally affect the poor who, as a percentage of their income, spend more on essential goods than wealthier Americans.

Somehow, Democrats have found a way to explain that the VAT will actually be of more benefit to the poor than a negative. Talk is that the tax will be levied as a means to pay for the massive expansion of government healthcare that the Obama Administration is proposing. As such, the healthcare insurance that the poor would receive, liberal Democrats argue, is a net positive. Basically, this is the government claiming that the poor are not nearly as effective at spending their own money as mother government would be.

Another explanation as to why the VAT is not a bad idea is that other countries have it, and we do not. Seriously, a co-director of the Tax Policy Center used this to defend his VAT proposal. Since when has any proposal been good enough for our country simply because other countries are doing it? If we want to continue to be exceptional, we cannot accept as a legitimate argument that “other countries are doing it…” That is childish.

Brilliant economists have noted that the introduction of an impending sales tax may drive people to stores to buy goods before the sales tax is implemented and help us pull the country out of recession. While that may be true, it will only be a temporary jolt to the economy that will subside immediately when the sales tax is implemented and, in the long run, the economy will suffer because of a decrease in purchasing power.

Some Democrats say that to ease the blow, income taxes might be lowered slightly, especially for the poor, resulting in an increasingly progressive income tax. However, the fact remains that even if income taxes are lowered, the liberals are not introducing new taxes to ease the tax burden; they are introducing new taxes to raise more revenue. That money must come from somewhere and our economy will suffer.

Growing in popularity on the conservative and libertarian front is the FairTax. The FairTax, if implemented, would do away with income taxes all together by repealing the 16th amendment, which allows the national government to levy income taxes, and would impose a 23% sales tax. The argument is that if the national government does not tax investment, as it does via the capital gains tax, and did not tax corporations that more people would invest and save and, in turn, boost economic output. The FairTax also advocates a rebate program that compensates the poor for essentials like food to ensure that the tax does not place a disproportionate burden.

The bottom line is that liberals are trying to raise revenue by adding a national sales tax, on top of the current tax system, that will hurt long term economic prosperity. FairTax advocates want to replace the current tax system by implementing a VAT and repealing the income tax amendment, thus shutting down the IRS. For liberals, the plan is to take more of your money away from you. For conservatives and libertarians, the FairTax is about choice. If you want to pay lower taxes, you buy fewer goods and you are not punished for making more money by a progressive tax system or punished for saving and investing by the burdensome capital gains tax.

The contrast is clear. I hope that the liberal Democrats attempt to implement the VAT because the political backlash will be swift and strong. Another round of tea parties might be in order because the VAT will only fuel the anti-tax fire and give conservatives more motivation to rally. Go ahead, liberals, make my day.

Link to story:
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/26/AR2009052602909_pf.html