Obama’s VAT Openness: An Economic Disaster In The Making



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President Barack Obama on Wednesday said that he’s open to arguments for a value-added tax.  His Administration seems to be giving mixed signals, however.  Because for days his spokesmen have said that he hasn’t proposed it and was not considering a VAT.  In an interview with CNBC he seemed to be open to the possibility.

I know that there’s been a lot of talk around town lately about the value-added tax. That is something that has worked for some countries. It’s something that would be novel for the United States. And before, you know, I start saying ‘this makes sense or that makes sense,’ I want to get a better picture of what our options are.

This would violate his campaign promise not to raise taxes on the middle class as he had made a “firm pledge” that no family making less than $250,000 would see “any form of tax increase.”

If you are not aware of what a VAT is would be a massive tax hike.  It is similar to a national sales tax.  Consumers would pay it and businesses would also pay it.  The Heritage Foundation in a memo by Curtis Dubay last summer described different forms of value-added taxes that are commonly seen.

Under the typical "credit-invoice" approach, a VAT is levied on the "value added" to goods and services as they pass through each stage of the production process. Businesses would collect the VAT on their sales to other businesses. They would then subtract the taxes they previously paid on the goods and services they bought to produce their product as recorded on their purchase invoices. They would then remit the difference to the government.

The credit-invoice VAT gets its name from the fact that businesses receive a credit for the taxes they pay as shown on their invoices. Retailers would remit the VAT collected from consumers purchasing finished products, after subtracting the tax they previously paid.

Another form of the VAT is the "subtraction method," under which businesses would pay taxes on their annual receipts after subtracting the money they spent to make their product. This is similar to the current corporate income tax, except that businesses can immediately deduct the costs of their investments. But they would not subtract their labor costs such as wages, salary, and benefits. A flat tax is a close cousin to a subtraction-method VAT.

A VAT could have some advantages similar to what you would see in a Fair Tax, but either would only work if they replaced income and payroll taxes.  Unfortunately, that isn’t what is being considered.  On their blog, The Foundry, The Heritage Foundation pointed out that the current VAT proposal being floated in DC would be an economic disaster.

A VAT would be a massive tax hike that would transfer trillions of dollars each year from the wallets of every American to Washington. It would permanently slow economic growth and lower the standard of living for generations of Americans to come. It would also be a bottomless well for Congress to go back to each time it wants more of our money to pay for new spending programs. Once a VAT is in place turning back the growth of government will be next to impossible and the efforts of President Obama and his congressional allies to recast the nation into a full state of dependency on Washington will be complete. The stakes are that high.

Pete Du Pont at The Wall Street Journal pointed to Europe as an example of what a VAT can do to the economy.

The VAT has been in use in the European countries since the late 1960s, and has had a strong, negative economic influence. Before the European VATs were put into effect, the average EU tax burden was 28% of gross domestic product, compared with the 25% in the U.S. By 2006 with the VATs EU average tax burden was 40% compared with 28% in America.

Average European government spending was about 30% of GDP when the VATs were instituted in the late 1960s. Fast forward to today, and we see European government spending has grown more than 50% and now hits 47% of GDP. And European government debt in 2005 was 50% of GDP, compared with under 40% in America.

Perhaps most important, bigger government spending and higher taxes have radically reduced job growth in Europe. Between 1982 and 2007, Europe created fewer than 10 million new jobs, vs. 45 million in the U.S. Our economic growth was more then one-third faster.

Also just as the VAT didn’t replace the income tax in Europe or if you look to our neighbors to the north in Canada who are also overtaxed with national sales taxes, income taxes and more (HT: Wintery Knight); it is unlikely that an American VAT would replace our income tax as well.

Don’t expect it until after 2012 however, President Barack Obama and Legislative liberals simply don’t have the political capital after passing the health care reform bill.  Last week, after one of President Obama’s advisors, Paul Volcker, brought up the VAT.  The Senate last week responded with a non-binding “sense of the Senate” resolution that called this tax, “a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.”

Investor’s Business Daily’s recent poll shows that there is overwhelming bipartisan opposition against a VAT being added in addition to federal taxes that Americans already pay.  Opposing the VAT by 73% to 22%, with 65% of Democrats being against such a move.

Ideas being floated and touted by the political liberal class in Washington is another reason why the 2010 and 2012 elections are critical.  Elections do have consequences, as there was a majority opposition in the public against our current health care reform law as well.

The VAT is a silent killer to our economy.  We need to send people to Washington who will be committed to cutting spending, not raising taxes to support the programs they want.  We’ve been taxed enough.

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