In 1993, the Clinton administration suggested instituting a value added tax (VAT) in order to pay for the creation of Hillarycare. The idea was not received well. Larry Kudlow wrote a scathing piece in National Review explaining why this was a bad idea.
Today, the Obama administration finds itself in an eerily similar situation of having more promises than money. To fix this, the canaidate of change has dusted "off Bill Clinton's 1993 playbook."
The Washington Post reported on Wednesday that the VAT was being considered as a solution to "budget deficits" and a way to fund "a trillion dollar plus expansion of health care."
The VAT, also known as a tax on everything (TOE), because it's a tax imposed on every level of production. The European Commission explains it on their webpage, "How VAT Works":
The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union .
Value added tax is
- a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
- a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.
- charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
- collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
- paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.
This would cause an increase in prices on everything consumed, "from a carton of eggs to a visit with a lawyer." It is also widely acknowledged that VAT taxes are regressive, meaning the burden falls mainly on the poor.
Advocates say this increase in tax expenditures would be offset by the lack of spending on health care. The same advocates cannot, however, tell you exactly how much that federal health care is going to cost. It's modeled on the Massachusetts plan, and the cost for that has doubled in two years.
For the sake of argument, let's accept that the VAT pays for the federal expansion of health care. If the federal government is willing to operate with budget deficit projects reaching into the trillions, do you honestly believe that an influx of new money will solve the problem, or is it more likely that Washington will find more and more ways to spend money?
It's easy to see the latter happening before the former, especially when you see how the European countries who have adopted the VAT have behaved. In 2005, when the VAT was being considered by some in the Bush administration, Daniel Mitchell described what happened in Europe:
For politicians, the VAT was great news. Besides being a new source of revenue, the VAT has been a disturbingly easy tax to increase since it’s built into the price of products and hidden from consumers. Moreover, even small increases generate a big pile of revenue because the tax base is so broad. The tax has become so easy to raise that VAT rates in Europe average more than 20 percent.
For taxpayers, however, the news has been disastrous. Thanks to this levy, the burden of government in Europe today is much higher than it is in the U.S. On average, taxes consume about 41 percent of Europe’s economic output. While other taxes have also climbed, the VAT certainly has helped finance the explosion of social welfare spending that creates such a drag on European economies.
Investor's Business Daily describes the VAT "as a piggy bank by profligate politicians, who keep raising the VAT whenever they run short of cash."
He's right. Over the years, the VAT in Europe has increased.
Ryan Ellis at Americans for Tax Reform liken them to "a gateway drug to more government spending."
That's not exactly the solution to our problems right now.
Adding more burden to the taxpayer while expanding the federal government is not the solution. Lower taxes and lower spending are key components to fixing the state of America's economy. Reagan taught us exactly how to do it:
He cut spending and slashed taxes 25% across the board, dropping the then-70% top tax rate ultimately to 28%. He also lowered taxes on capital.
Predictably, the media and Keynesian-trained economists forecast disaster. Instead, the economy boomed. Not only did unemployment plunge, but household wealth exploded by $17 trillion — more wealth creation in one decade than in the previous 200 years.
And contrary to popular myth, federal revenues surged — by 25%, or $262 billion, from 1982 to 1989 after adjusting for inflation.
There is one way of making the VAT acceptable. Abolish all income taxes. Repeal the 16th Amendment. Without that, this is a bad deal for everyone. It will result in higher government spending and lower standards of living.
Duane Lester's Bio
Duane Lester is a former Navy journalist turned blogger and podcaster. He also writes at All American Blogger and hosts All American Radio on RFC Radio . You can follow him on Twitter at @bodhi1 .
Posted
06-01-2009 11:03 AM
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