Is the VAT Coming to the USA?

When talking with friends or acquaintances who express a desire for increased personal income, I often ask them if they’ve already pared down their expenses to the minimum. The reason for this is simple: It is usually easier for a human being to spend less than to make more. After all, making more requires that others are convinced of one’s worth–spending less requires that one is less convinced of the worth of goods or services previously desired. I fully grant that this comparison does not work for the extremely poor, but most of us do not fall into that category.

Government–in particular our federal government–does not function quite this way. Because it has the power to tax, those who run it find it much simpler to “earn” more than to spend less. After all, the people must be happy.

Of course, at the levels of spending we’ve seen, the government is (unsurprisingly to those of us living in Reality USA) looking at yet another form of taxation to help make the books slightly less unbalanced–since it would appear that many Americans are less than happy with both the deficits and the actual national debt. With this in mind, one of the taxes being talked about is the VAT or value added tax. Here’s one definition as it applies to the VAT used in the EU:

Organisations with turnover above a certain threshold are obliged to charged VAT on all their sales. If they sell to another business, that organisation is entitled to reclaim the VAT that is has paid, but must in turn charge VAT on its sales.

For example a toy manufacturer sells to a retailer, charging $1 plus VAT per toy. If the rate of VAT is 10% the manufacturer must charge the retailer $1.10 per toy. It must then pay $0.10 per toy to the tax authorities.

The retailer sells the toy to the public for $2 plus VAT, charging $2.20. They must pay the tax authorities $0.20 per toy, but can deduct the $0.10 they paid when buying the stock. So they make a net payment of $0.10.

The result is that the end user, or consumer, pays the tax in full.

By the way, that last sentence is key. Oh, and did you know that the French invented this particular type of tax in the 1950s? While the VAT is indeed a consumption tax (not an income tax) and would therefore be appealing to some, it is not at all likely that a VAT would become the primary tax here in the US. Therefore any comparison with the FairTax (also a consumption tax) is poor. Rather, what we are seeing with the VAT is another extremely cumbersome type of taxation (as you can see from the above example) which would simply be added on top of the existing sales taxes in an effort to increase the federal government’s revenue.

The sad thing is that if the VAT is packaged correctly, then no one even realizes it is there. Instead, the higher prices are blamed on any number of things, including inflation. The reason for this is that the end consumer does not see the VAT as an line item on the receipts–as is currently the case with sales taxes.

Paul Volcker (who is President Obama’s economic advisor and was previously Chairman of the Federal Reserve) had this to say about a VAT today:

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves.

If this is what the President’s apparent right-hand man on the economy is saying, then I will be surprised if legislation is not soon proposed to take us down this path.

One more thing. I would like to say that while the VAT may not be “as toxic an idea” it is fully as toxic a component of economic policy as it has ever been–particularly if one is desirous of flatlining GDP.

2 thoughts on “Is the VAT Coming to the USA?

  1. The VAT will run concurrently with the income tax and this is designed to prevent having to pass higher marginal income tax rates. The vat though has one perk, it could become so hard for Congress to push more taxes on Americans and with the ease of collecting a vat relative to the highly complex and inefficient net income tax, there could be an opening to phase out the income tax with a 24% value added tax in the united states. After a few years of paying the vat, americans might decide the vat is better than income taxes and pay roll taxes, more efficient, and it would obviate the necessity of high compliance costs in preparing a tax return or even having to deal with the irs on any substantial level. but, running the income tax and vat together, is a nightmare worst case scenario. we get the worst of both worlds there. Time will tell. Maybe Americans will wake up to being fleeced and demand one or the other in time. Cross your fingers.

    1. Troy,

      Thank you for your thoughts. While the VAT may be simpler than our hugely complicated income tax system, it seems that calculating and tracking compliance with all of the payments can be complicated in and of itself.

      I would very much prefer a flat tax or the FairTax–since either approach does away with complexity (which costs me, the taxpayer, even more).

      An income tax plus the VAT is quite properly the “worst case scenario.” Unfortunately, that would seem to be the direction that Volcker would tend to take us–as he made no mention of changing out the tax system, but rather spoke to adding a VAT and/or a carbon tax.

      Indeed, let us hope and work toward our fellow Americans waking up to the reality that the levels of taxation which are ahead will do much to destroy the prosperity for which we are almost uniformly not grateful.

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