The VAT Tax Is A Great Idea
A new tax debate is about to begin. Recently, the White House advisor Paul Volcker proposed that a VAT tax would help reduce the budget deficit. He further indicated that other taxes, such as taxes on carbon would could also help reduce the deficit.
A Value Added Tax (VAT) is a tax that is paid by each seller for products sold. A VAT is basically a sales tax that is collectable each time a product is sold from each step in the process of bringing a product to consumers. However, unlike a sales tax, the VAT is a tax on the “value” that is added at each step.
For example, a pet rock. I take a rock and sell it to you so that you can sell pet rocks. With a 10% VAT, I sell the rock to you for $1.10 ($1.00 + $1.00 x 10%). I pay the government 10 cents in VAT. You turn around and clean up the rock and sell it to somebody who wants to have a pet rock for $1.65 ($1.50 + $1.50 x 10%) and as the seller you pay the government 5 cents. The 5 cents comes from taking the 15 cents you collected minus the 10 cents you I paid when I sold the rock to you.
The VAT is a great idea as it will collect revenue for the government and everyone has a vested interest in the tax since all Americans will pay into it. It would be political suicide for a politician to suggest raising the VAT since all Americans would be impacted.
However, the problem with the VAT as proposed by Volcker is that this is not a replacement for the income tax or other taxes. The VAT is in addition to all of the existing taxes we already pay.
It seems that the government believes that the federal budget deficit can only be reduced by raising taxes. What the government seems to forget is that the deficit can be reduced or entirely eliminated by reducing spending.
This year the government expects to spend over $1.35 trillion more than it takes in and predicts similar deficits next year. Does the President and his advisers really believe that the American economy could absorb an additional $1.35 trillion in new taxes? It would take almost a trillion dollars in new taxes to return the yearly deficits back to the levels of the Bush administration. Which, then Senator Obama decried as reckless and irresponsible.
Taxes like a national Sales Tax or a VAT would be excellent way to collect revenue for the federal governement. However, these taxes only make sense if the VAT is put in place in conjunction with the elimination or drastic reduction of income taxes.