The VAT is stealthy because the people who will pay him will seldom really see him, although they will definitely feel his effects. The VAT or Value Added Tax is a politician's dream. It won't be stated at the point of sale, the way, for example, your local sales tax shows up on your receipts at the cash register.
The VAT tax is added, incrementally, through every phase of production of a product - manufacturing, distribution, and retail. Items that go INTO a finished product will also have been dipped into the VAT. Politicians love it and become addicted. It tends to grow like Topsy and creates a river of revenue. If the VAT tax was proposed as a SUBSTITUTE for the income tax, it might have some merit. However, it's being considered IN ADDITION TO current taxes. Additionally, it is regressive. It impacts the poor as much as the rich. True, some things such as essential foods, baby clothes, etc. can be exempted, but the VAT would impact just about everything else we buy - not just goods we purchase, but also SERVICES.
Here are a few salient points made recently in a letter to House Republican Leader John Boehner by Prof. Allen H. Meltzer of Carnegie Mellon University, who is a prominent economist:
"When coal and iron ore are sold to a steel mill, the mill pays tax on the value of the steel it sells but deducts the amounts paid for coal and iron ore. The auto company that buys the steel charges tax on the car it sells to a consumer but deducts the cost of the steel and other inputs. The consumer pays the tax on the auto it buys and thus on all the inputs that went into its production.
The collections costs are born by the sellers and the full tax is paid by the consumer. The tax is costly to collect and to monitor. To avoid the tax, people pay for services in cash. The service provider does not report sale and also avoids income and other taxes. The so-called underground economy grows. Because the VAT raises the price faced by the consumer, spending declines.
VAT is a common form of taxation in many countries. It raises huge amount of revenues. Estimates are that each one percent VAT tax in the United States raises $50 billion in revenues. A five percent VAT would add $250 billion to Federal tax receipts. To close the projected budget deficits, the tax rate would have to be substantially higher than 5 percent.
The VAT is a regressive tax; it takes a larger share of low incomes because it taxes spending and average spending declines as incomes rises. To compensate, many countries rebate income tax to low income earner. In the United States, low income earners pay little to no income tax.
Passing a VAT not only locks in place the current welfare state by financing the increased current and future share of government spending and transfers. The VAT would pay for part of the unfunded liability for health care including the large costs added by Obamacare. Passing a VAT would mean that the unfunded Federal liability would be paid mainly by tax increases with few to no reductions in spending.
European experience suggests that the VAT is a largely hidden tax that can increase with less political opposition than increases in the income tax. The European welfare state is a main reason that since about 1980 Europe's growth rate has fallen below the U.S growth rate, and reported European unemployment rates have been well above U.S. rates on average. The United States should avoid locking the country into a low growth future.
The VAT violates fiscal federalism, the tacit agreement that leaves some sources of revenue to state and local governments. Traditionally, sales taxes have been reserved for the states. VAT, like a sales tax, falls on consumer spending. State governments are a likely source of opposition to a Federal VAT. State and local governments have large unfunded liabilities for pensions and health care, so they will need their sources of revenue."
Prof. Meltzer concludes by urging that all Republican candidates for Congress in the coming election should pledge to vote against a VAT.
When the VAT was introduced in Europe several decades ago, it was 2 to 3 percent. Today, across Europe, it ranges from about 17 percent up to 25 percent.
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