April 21 2010

Tax Me Once, Shame on You, Tax Me Twice...

Nicole Kurokawa Neily

Question: what do boiling oil and a new scheme to further fleece the American people have in common?

Answer: they're both administered by a VAT.

With a $1.4 trillion deficit in 2009, a national debt of $12.8 trillion and counting, and inflation looming, the nation's economic situation is dire. Yet rather than cutting spending or actually enforcing PAYGO rules (how quaint!), it appears that the Administration would rather float a new consumption-based national sales tax, known as the value-added tax - or VAT - to address its cash flow problem. Through a VAT, companies pay taxes for the value "added" to a product at each stage of production. But eventually those costs just get passed on to consumers, so ultimately you and I will pay the VAT. Take, for example, building a chair. One man hammers a few pieces of wood together to make the seat and back: value added. The next guy puts on the legs? Value added. A third man attaches a cushion before it's sold? Value added. If something so simple can be subject to three taxes that easily, you can only imagine the number of additional layers of unseen taxes that consumers will have to fork out their hard-earned money for.

A national sales tax has been promoted by some conservatives as a "Fair Tax," and a way to improve how the government collects revenue. Yet there's an important distinction between the Fair Tax folks and those you are pushing a VAT today: Fair Tax supporters want to replace the federal income tax with a sales tax, while the VAT proposed by Madame Speaker and friends would add to Americans' existing tax burdens (which is already about to grow considerably as a result of the new health care law and the pending expiration of the Bush tax cuts.) CBO director Doug Elmendorf recently acknowledged that his office has received several questions on the VAT - certainly a precursor to a bill being proposed in Congress.

On April 6, White House advisor Paul Volcker, former chairman of the Federal Reserve, tacitly endorsed the idea, asserting recently that it was "not as toxic an idea" as it once was.

Yet the idea should be toxic: For starters, it's doubtful whether additional resources would even be used to pay down our debt. As we saw in the health care debate, policymakers are willing to game numbers in an attempt to appear fiscally responsible, but ultimately the new law added numerous new programs which will add to the federal government's already massive unfunded liabilities. It's clear Washington is focused on growing government, not paying down debt.

The VAT is also likely to become yet another pressure point for lobbyists. The British VAT is a labyrinth of exemptions; any American system is certain to become similarly complex in a short period of time. Think the stimulus package has created a boom in the lobbying industry? You ain't seen nothing yet Most fundamentally, the VAT will be a vehicle to transfer more money from individuals to the government. You can see how this works in Europe. As Dan Mitchell of the Cato Institute writes, "in 1965, before the VAT swept across Europe, the average tax burden for advanced European economies (the EU-15) was 27.7 percent of economic output, versus 24.7 percent of GDP in the United States. But the Europeans began imposing VATs in the late 1960s, and now the European Union requires all members to have a VAT of at least 15 percent. Good news has not followed. By 2006, the average tax burden for EU-15 nations had climbed to 39.8 percent, versus 28 percent in the United States." It's naïve to think that American politicians will be sated once they receive just a tiny bit more of Americans' hard-earned money. Why would elected officials here be any different from their colleagues across the Atlantic?

This tax burden has acted as a draft on European economies. According to the Bureau of Labor Statistics, the U.S. created 45 million new jobs from 1982 to 2007, compared to fewer than 10 million in Europe. Although weak at the moment, U.S. economic growth has historically been much more robust than the European Union - in no small part because more Americans are employed, and they work more hours, and they get to keep more of their money so they have more to spend and invest.

Instead of finding new ways to take money from American's pockets, government should focus on cutting spending. And there is plenty to cut. The Heritage Foundation's Brian Riedl notes, "Simply bringing real federal spending back to the $21,000 per household average that prevailed in the 1980s and 1990s would balance the budget by 2012 without raising a single tax on anyone. Even returning spending to the pre-recession level of 20 percent of GDP would eliminate two-thirds of the projected 2019 budget deficit without raising taxes."

Cutting spending may seem like medieval torture to politicians, but it is far better than creating a new tax system that will burden already cash-strapped families and our already fragile economy.

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