Very Aggressive Tax (VAT) comes with costs

It isn’t surprising that the latest fix for the spending addiction in Washington has surfaced in Congressional discussions. It is called the VAT, the value added tax. It would operate similar to a national sales tax placed on every step of commerce from production to transportation to final sale. There is no doubt that a VAT could raise huge sums of money. But, like all “quick fixes,” it comes with consequences.

Perhaps a VAT would make sense if it were designed to replace our convoluted income tax method for generating federal revenue. The income tax is so rife with confusing exemptions, credits, deductions, and alternative minimum tax elements that it is much too difficult for ordinary taxpayers to compute their own taxes. Unfortunately, proponents of the VAT discuss it in terms of supplementing the income tax, not replacing it. Consumers would quickly see the cost of every product (and perhaps services as well) increase if a VAT becomes law.

Perhaps the interest in a VAT comes from our current attempts to emulate Europe. The European nations began adopting VATs 50 years ago. They are so ingrained in their economies that the European Union now requires a VAT of at least 15 percent for all of its member nations. The use of VATs in Europe led to an explosion of government spending as the Europeans transformed their economic systems away from basic capitalism and more toward welfare states.

Unfortunately, even the VATs couldn’t keep up with the spending in those countries and now they find themselves burdened with extremely high tax rates and burgeoning national debts.

It would take an extreme Pollyanna not to believe a similar fate would happen to the U.S. if the European experimentation with the VAT is adopted here.

It isn’t surprising that some in Congress are looking for a “magic bullet” to help wrestle with the budget crisis. The next federal budget will carry with it an unprecedented $1.8 trillion deficit. Federal Reserve Board Chairman Ben Bernanke is sounding the alarm to Congress that the deficit problem needs to be addressed and that the federal government can’t simply borrow to address the deficit. He warns of hyper-inflation and serious damage to the dollar if the red ink pouring out of Washington isn’t addressed and addressed soon. He is, of course, correct.

In a rational world, one would hope that members of Congress would reduce out-of-control federal spending to help alleviate the adverse economic consequences soon coming our way due to burgeoning deficits. Unfortunately, Washington isn’t a rational world. It is a realm populated by lobbyists, interest groups, and spin doctors who raid the future economy to over spend in the current one.

That being the case, Americans should take the talk of adopting a VAT seriously. If one is enacted, it would come into being right about the time inflation is likely to be galloping back. It would then serve as a powerful enhancement for inflationary pressure since, by definition, it will increase the cost of everything consumed and sold at every step of the process.

Our country does not need an exotic new tax to help fuel even more out-of-control spending. It needs a healthy dose of budgeting within the parameters of existing revenues. As was the case with Europe, if a VAT is adopted here, it will not serve to eliminate deficits and drive down government debt. It will be the next narcotic used to satisfy our addiction to spending. Hopefully, the VAT won’t go beyond the discussion stage in Washington.

But don’t count on it.

 

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