A Voice in the Wilderness In Defense of "Mere Conservatism"

To VAT, or not to VAT…

The Value-Added Tax (or VAT) is some expert's solution to our national budgetary and fiscal woes.  Here's a pithy description of what the term "VAT" even means, as well of some its immediate implications for society:

A VAT, used in 100 countries around the world, is essentially a sales tax but one collected at every stage of production.

Take bread, for instance.

“When the farmer grows the wheat, sells it to the baker, there's value-added tax on that. When the baker makes something and sells it to the grocery store, there's value-added tax. When the grocery store sells it to the individual, there's value-added tax,” said William Gale of the Brookings Institution.

But a VAT is regressive, meaning the poor and the wealthy pay the same tax on every product, which is why liberal analysts say a VAT would have to be on top of the current income tax.

“You would not want the value-added tax to replace the income tax. If you did that you would have huge tax increases on middle income people and on the working poor and massive tax cuts for the richest people in the country, ” said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities.

But others say adding VAT on top of the income tax, rather than replacing the income tax with it would make the total tax burden far too great and put a dent in economic growth.

“You don’t want a value added tax on top of the income tax otherwise the total tax bite of the government is huge. You'll have individuals who are paying tax rates on their income of 25 and 28 and 30 percent and then going to the grocery store and paying a 20 percent tax on whatever money's left over,” said Brian Reidl, lead budget analyst at the conservative Heritage Foundation.

Many impressive writers/thinkers of our day have weighed in on the matter.  George Will, of The Washington Post, and Robert Samuelson, writing in Newsweek, are two worthy examples.  Both men foresee a necessary national dialogue regarding the appropriate (and desired...and Constitutionally-allotted) size of government that MUST occur before we take drastic measures to fix the mess we're most certainly in.  

Will adds:

When liberals advocate a value-added tax, conservatives should respond: Taxing consumption has merits, so we will consider it -- after the 16th Amendment is repealed.

A VAT will be rationalized as necessary to restore fiscal equilibrium. But without ending the income tax, a VAT would be just a gargantuan instrument for further subjugating Americans to government...

Money is time made tangible -- the time invested in the earning of it. Taxation is the confiscation of the earner's time. Although some taxation is necessary, all taxation diminishes freedom.

Adding a VAT without subtracting the income tax would constrict Americans' freedom much more than the health care legislation does. Because the 16th Amendment will not be repealed, adoption of a VAT would proclaim the impossibility of serious spending reductions, and hence would be the obituary for the Founders' vision of limited government.

I doubt I could agree more. 

Samuelson, with whom I often disagree, hits the nail on the head as well this time out:

The value-added tax has become the designated panacea for massive federal budget deficits. It's touted by think-tank economists and mentioned by congressional leaders. A VAT could, it's said, raise stupendous amounts of money, which, Lord knows, are needed to cover projected deficits. A VAT is likened to a "national sales tax," so once in place, most Americans would barely notice it -- just as they barely notice state and local sales taxes. How's that for friendly politics? A VAT would also discourage consumption and encourage saving and investment, making America richer in the future. What's not to like?...

The basic budget problem is simple. For decades, the expansion of Social Security, Medicare and Medicaid -- programs mostly for the elderly -- was financed mainly by shrinking defense spending. In 1970, defense accounted for 42 percent of the federal budget; Social Security, Medicare and Medicaid were 20 percent. By 2008, the shares were reversed: defense, 21 percent; the big retirement programs, 43 percent. But defense stopped falling after Sept. 11, 2001, while aging baby boomers and uncontrolled health costs keep retirement spending rising.

Left alone, government would grow larger. From 1970 to 2009, federal spending averaged 20.7 percent of the economy (gross domestic product). By 2020, it could reach 25.2 percent of GDP and would still be expanding, reckons the Congressional Budget Office's estimate of President Obama's budgets. In 2020, the deficit (assuming a healthy economy with 5 percent unemployment) would be 5.6 percent of GDP. To cover that, taxes would have to rise almost 30 percent.

A VAT could not painlessly fill this void. Applied to all consumption spending -- about 70 percent of GDP -- the required VAT rate would equal about 8 percent. But the actual increase might be closer to 16 percent because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. Together, they account for nearly half of $10 trillion of consumer spending. There would also be other upward (and more technical) pressures on the VAT rate.

Does anyone believe that Americans wouldn't notice 16 percent price increases for cars, televisions, airfares, gasoline -- and much more -- even if phased in? As for a VAT's claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment. That's unlikely because it would require implausibly steep VAT rates. Chances are we'd pay both the income tax and the VAT, making the overall tax system more complicated.

The reality is this: we have some tough decisions ahead of us in this country.  We've been putting them off for too long, and allowing our emotions to be manipulated by people and policies that count on Americans NOT knowing the facts and the options.

Don't let our leaders sell you a bill of goods (i.e. "Taxing the rich will solve everything", or "Big Brother will always be able to bail you out").  It is because of a pervasive lack of personal responsibility and fiscal discipline, at every level of the government, and in far too many homes and businesses, that we are where we are today.

There is no quick fix.  There is no free lunch.