For years I have heard of the proposal to impose a Value Added Tax (VAT) on the American people. While this sounds logical, it is fraught with many dangers.
What is a Value Added Tax?Under the VAT everything is taxed. Everything. There is a tax on goods and services, but also VAT on your utilities, food, entertainment (movies, shows, etc...), your mortgage or rent is taxed, your gas will be taxed, doctors visits, I believe that you get the point.
A Value Added Tax is a consumption tax levied on value added. In contrast to sales tax, VAT is neutral with respect to the number of passages that there are between the producer and the final consumer; where sales tax is levied on total value at each stage, the result is a cascade (downstream taxes levied on upstream taxes). A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the tax.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT on the materials and services that they buy to make further supplies or services directly or indirectly sold to end-users. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. VAT was invented because very high sales taxes and tariffs encourage cheating and smuggling. It has been criticized on the grounds that (like other consumption taxes) it is a regressive tax.
The groups that get hurt the most from a VAT are the ones who can least afford to pay it: The Poor and Middle Class.
Yet the Democrats, those champions of the downtrodden poor, are now considering this:
As lawmakers toy with the idea of an across-the-board sales tax on just about everything, tax reform advocates are starting to drum up opposition with the same fervor they employed during last month's anti-tax tea parties.Every nation that has a Value Added Tax has no Income Taxes. The VAT replaces the Income Tax. Except for the US, here it would be in addition to the Income Tax. A 10% tax hike would go into effect.
The idea of a national sales tax was once unlikely. But now that the federal government is doling out billions in stimulus spending and bailouts, and looking for billions more for health care reform, the prospect could be gaining some traction.
The frenzy over the idea kicked up after a Washington Post article Wednesday reported that Congress is starting to pay closer attention to this largely academic proposal and that the Obama administration, though shushing speculation, is soliciting advise from supporters of the idea.
"It should certainly raise alarm bells that they think they can inject it into the debate," said Phil Kerpen, policy director at Americans for Prosperity.
The value-added tax, or VAT, as it is called, amounts to a tax-on-everything -- or TOE, for the acronym-inclined. It's a tax on goods that's applied in pieces throughout the chain of production and distribution and results in an increase in the cost of virtually everything you buy.
Aside from raising revenue for the government, the move could have a number of things going for it, say proponents -- it's tough to evade, it's simple by comparison to the income tax and it encourages saving.
Some conservatives have called for something similar -- the so-called Fair Tax -- that would replace the federal income tax system with a national retail sales tax.
But critics of the VAT say it would almost certainly not be implemented as a replacement for the income tax system -- rather, it would be just another tax, on top of the income tax, the state sales tax and everything else.
"This isn't a tax reform proposal that the White House is talking about. This is a new source of income for the government," said Max Pappas, public policy vice president at FreedomWorks. "The government needs big taxes and we've got big government, so now they're trying to decide how to pay for it."
View a list of nations with a VAT here.
So much for promises of no tax hikes. Here comes the biggest tax increase in the last 60 years. Hold on to your wallets, for the US will get a Value Added Tax on top of our Income Taxes.