Monday, April 19, 2010

What's V.A.T. You Say?

With the national debt already huge beyond comprehension, and predicted to grow only more unbelievable still, it should come as no surprise to learn that the political classes are searching desperately for new sources of revenue. And I suppose if we could ever believe that those new sources might actually be used to retire the debt, we just might be persuaded to help them in their search. But as I'm no fool, for now I'll let'em look for themselves. (You can speak for yourself.) Nevertheless, search they do and it is in this context that a new, to Americans anyway, term has been foisted upon them: V.A.T.

What's V.A.T.? It stands for Value Added Tax and the short answer is that it's simply a sales tax of sorts, in this case a national sales tax. Believe it or not, it does have something to recommend it. But before you climb on board the band wagon, know a few things about it.

First, as a supplement to the existing income tax, not to mention the other almost uncountable taxes, fees, tolls, etc., that we are routinely charged by government at every level, it would be an abomination. To use the overused, but no less apt, simile, the federal government spends money like a drunk consumes alcohol. You shouldn't give more booze to a drunk, nor should you supply more cash to the feds. As I already mentioned, you simply cannot trust them with money. Giv'em more and they'll waste more. (If you still believe otherwise, then you suffer from the secular equivalent of what is called in Catholic theology, invincible ignorance. Stop reading here. May God help you.)

Second, but in lieu of the federal income tax, as I say, it has much to recommend it. As a sales tax, you would only be charged if and when you made a purchase. Hence, frugality, self-discipline, and delayed gratification would be rewarded, encouraged even. And perhaps just as significantly, the end of the income tax would remove it as the disincentive to produce it presently is. Simply, with no tax on income, then the more you produce, the more you earn. As such, it just might usher a return to what we used to believe, and also say because we believed it, "It's yours, you earned it."

Third, typically the "value added" part means that the tax is levied on the sale of the good or service at the point of each and every transaction. That is, the tax is levied when the producer sells to the wholesaler, then again when the wholesaler sells to the retailer, and then yet again when the consumer buys from the retailer. Obviously, this raises the price with each transaction. But much more important to understand is that YOU, the final consumer, pays every bit of the tax no matter where it was initially levied.

Before you flinch too much at that last sentence, please know that this is the only way it can be. To think it possible for it to be any way other than that, is to believe also in the illusion that is the current "corporate" income tax. Politicians may call it a corporate tax, and even levy it as such, but in the final analysis, it is you, the consumer of whatever the corporation produces, that pays the tax. It is impossible for it to be any other way. (Sorry for the digression. No, not really, you need to know this.)

Fourth, some V.A.T. advocates champion it as a relatively uncomplicated taxing scheme and as such, much less susceptible to political meddling. But I'm afraid that, too, is an illusion. Think about the state and local sales taxes you already pay. Are some items taxed at higher rates than others, or not at all? Food and medicine, for example. The decision to exempt those items from taxation, or tax them at a lower rate, is a political one. Now, imagine the imposition of a national V.A.T. and imagine also that the Democrats retain control of the Congress. Do you think that just maybe they'll be moved to tax SUVs at a higher rate and windmills at a lower? Hmm? Political meddling is inescapable. (However, I do believe that, as a matter of principle, one party is more constrained in its meddling than the other. I'll let you guess which one is which.)

Fifth, and this aspect is the most worrisome, a V.A.T. is a "hidden" tax. What is meant by that? Consider, for example, the price you currently pay for gasoline. You no doubt know that at least 40 cents of the price of every gallon you buy is a result of the addition of state and federal sales taxes. (In some states it's much more than that.) But does that fact enter into your decision-making process in any meaningful way when you actually purchase the gas? Or, do you, like me, just look for the sign with the cheapest regular unleaded and pull in and fill'er up? The sales tax has simply become part of the overall price and in that way is "hidden" from you the consumer.

Can you imagine, as a result, legislators, almost by nature forever prospecting for more sources of revenue, being in any way constrained in their fiscal habits by the prospect of a taxpayer revolt unleashed because they raised the V.A.T. by one-half of one percent? Not likely. The amount, as a percentage anyway, is small, and therefore not immediately objectionable to the public. Moreover, the cost, as I've explained, will be hidden in the price anyway. With a V.A.T. we could end up with ever higher taxes and ever bigger government and never really be wise as to how we got there. I don't know about you, but that prospect makes me shudder.

In his famous Farewell Address, George Washington commented on more than just the proper direction for the foreign policy of the United States. Among many other things, he also offered some timely advice on the national debt and how best to service it. He wrote that "it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate. (my emphasis)

Frankly, that which ought to vex us the most is the amount of tax revenue raised, and much less so the manner in which it is accomplished. But as taxes are with us no matter what, there are better and worse ways to raise them. The V.A.T. is an interesting proposal, but...well, I'm not so sure. In any case, before we nod in agreement to any new proposal, we ought to ensure, as old George suggested, that we do so with both eyes wide open.

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