With passage of health care “reform” now complete, many are speculating about the remaining political – I’m sorry, I mean legislative – agenda for the 111th Congress. Well, if you want the truth, here it is: there really isn’t one! If history serves as a judge, Congress is rarely as productive during election years – and sometimes not at all. While we will see some action, likely in the form of financial services regulation legislation and a few appropriations bills, we must think past the midterm elections to find many of the more controversial issues hiding in the wings and preparing to take center stage. The Value-Added Tax, or VAT, is one of those issues.
White House Economic Advisor Paul Volcker came out yesterday and propped the notion of a VAT as the solution to our nation's economic woes. His reasoning? According to the New York Post, he told the global economic panel that the VAT is "not as toxic an idea as it has been in the past." He went on to say that "if we need to raise taxes, we should raise taxes." Yikes. Well, at least he's being honest about his opinion. Volcker is not the first individual to weigh in on the VAT debate. Syndicated columnist Charles Krauthammer had a piece in the Washington Post two weeks ago on the same topic, albeit from a different point-of-view.
The fact of the matter is that VAT would be a huge mistake, resulting in even more jobs lost and slower economic growth in a time when we cannot afford either. For those of you unfamiliar with the concept, VAT is a type of national sales tax levied on the "value added" to goods and services as they pass through each stage of the production process. While the VAT is a fixed percent of the final price, just like a retail sales tax, it differs from the current system because the cost of the VAT to consumers would be hidden. That's right. You, the buyer, would be unable to differentiate between the price of a good and the amount you are paying for its tax. Not exactly the transparency we were promised by President Obama. Furthermore, the VAT would lead to even bigger government (if you can imagine), as we see in Europe, and increase potential for special exemptions and hidden tax breaks by well-connected industry lobbyists. Cato's Dan Mitchell points out that the VAT is "linked with higher overall tax burdens and more government spending." Europe's income taxes are higher today than when VATs were implemented, and its collective tax burden has increased to 40%. Similarly, government spending in EU-15 nations hovers around 47% of GDP, compared to 30% in 1965.
NTU has been a staunch supporter of other consumption-based, national sales tax efforts, such as the FairTax – a fee, primarily administered by the states, that would generate faster revenue growth, spending restraint, and therefore achieve true tax reform that encourages accountable, limited government. However (and this is a big however), the FairTax would be a COMPLETE replacement of the current tax code. The VAT would be added on top of existing burdens! Taxpayers would undeniably suffer for the poor economic policy decisions of a desperate administration. It might be different if Congress repealed all income taxes and put a VAT in their place, but that is not realistic thinking, nor what Volcker was suggesting.
Is the VAT inevitable? Maybe, but let's hope not. As Krauthammer put it, "Get ready for the VAT. Or start fighting it." Rest assured we will continue to do just that.