Sunday, April 18, 2010

A VAT to Boil the Frogs

I admit when I'm wrong...  And man was I ever wrong! 

I made a BIG mistake last month when I endorsed the idea of a VAT tax in a post about deficit reduction ideas.  Christopher of Conservative Perspective tried to point out the error of my ways, but I wouldn't listen.

He did cause me to go back to school (the Austrian School of Economics) to learn all about it.  So now, with my head screwed on straight (or as straight as it can be screwed on), here is why a VAT is a terrible idea.

VAT's A Bad Idea!
Reason has the most straightforward explanation:
AVAT is aconsumption tax which is levied at each stage of production basedon the value added to the product at that stage.
Governments love it because they collect if from producers by permanently planting their fangs in the neck of every business (employer) in the nation.  Businesses simply passes the cost on to consumers (as they do the cost of all government taxes, fees, and regulations) so it can't be easily dodged.

Austrian School economists hate it because it adds cost and bureaucratic overhead to each stage of production, acting as a drag on economic activity (You try getting any work done with a vampire clamped onto your neck!)  For a more scholarly critique, see Eric M. Steib's treatise, Mises - The Folly of The National Sales Tax

Tax Reform is Too Important to be left to Democrats
Individual income tax accounted for around 45% of federal revenue in 2008, according to the Tax Policy Center.  It is the single largest source of federal revenue.  

We need tax reform, but the Democrats want to double the stupidity by adding this VAT onto our existing tax structure.  Perish the thought that government should instead simply spend less.  Liberals estimate a 10% VAT would be required just to pay for health care, so imagine what it would take to fund the government Full Monty (estimates are around 30% with the current tax code left in place.)

National Sales Tax, Flat Tax, Fair Tax, Whatever
I say scrap the current system and replace it with a national sales tax.  Sounds regressive, but exempting basic food staples would make it less so.  Think about it:  Rich people spend more money and they buy more expensive stuff, so they would pay much more that those who have less money.  You pay when you buy something and you are no longer penalized for saving and investing, which benefits our economy because those activities contribute to capital formation.

A Flat Tax and a Fair Tax have also been posited as an escape route from the inefficient bureaucratic snarl our politicians have created.   Finally, for the curmudgeonly hard core libertarians, Lawrence M. Vance explains how The Flat Tax is not Flat and The Fair Tax is not Fair.  So there!

What would it take to erase the deficit?
The Tax Foundation estimates everyone's income tax rate would have to double just to close the annual budget deficit (which would only hold the national debt steady, not reduce it.)  New rates would be in the neighborhood of 20% for lower income earners, shooting up to 80% for high income earners!

Liberals breezily remind us that this was the level of taxation before President Kennedy cut them, but that was the post WW II economy when we enjoyed global economic dominance and tax avoidance was more difficult.  This static model also assumes no one will alter their behavior due to these new burdens.  Would you continue on as normal if Uncle Sam took 80% of your pay?   

Doing nothing is not an option
The entitlement bubble is growing thanks to the pie-in-the-sky promises our liberal government must now make good on to the aging hippie generation.  Something's gotta give, and it will be us if we fail to elect more imaginative politicians...


Christopher - Conservative Perspective said...

Silverfiddle, It is never wrong to do research and in doing so change your position. This is the reason for spirited and well-meaning debate. Realize I too had to research it to take my position on a VAT.

Great post and thanks for the link.

Fredd said...

In its simplest terms, a national consumption or sales tax would spread the cost of government to all in the 'fairest' manner possible.

That, of course, assumes that the entire IRS tax code is tossed into the dumpster, and that dumpster's lid is welded shut, and then the dumpster is loaded aboard a Saturn V rocket and launched into the Sun.

With those who consume (buy/use/etc) any product or service would pay a SMALL portion of the purchase price in tax (not greater than 17%), and no other taxes could ever be introduced by Congress (a Constitutional ammendment would be required).

Let the revenues flow, and whatever they turn out to be, government at all levels trims their budgets accordingly, and within that Constitutional ammendment is a mandate that no deficit spending is allowed under any circumstance.

Anonymous said...

I manufacture products at my company. I'm seriously thinking not to charge VAT to my customers if it comes about.

There's also privacy implications to VAT.

Think about this: if the income tax was instituted this year (vice 1913) would you pay it, knowing how it would be used for socialist engineering?

Capt. Fogg said...

"Would you continue on as normal if Uncle Sam took 80% of your pay?"

That's the same question Joe the Plumber posed and of course the answer is that 80% of what you earn over some large number is not 80% of your "pay."

Certainly making that figure much, much lower does cause behavior change as I can testify from personal experience. What do you do with the bonus? Oh, a New York condo for one kid, a house on the golf course for the other, a new yacht -- fires up the economy for sure, but the bulk of it goes into hedge funds, unregulated derivatives (I'm still crying myself to sleep about it) and historically, it seems to lead to a bubble and bust scenario. Look at the prices on yachts and real estate now! On the other hand the idea that giving me extra bucks "created jobs" is hard to sustain. Perhaps, if I was still an employer, I'd have kept the money in the business and drawn down less, which you might describe as capital formation. Who knows? That blue and white elephant floating at the club dock is hardly capital, now is it?

But what do I know? I'm just a liberal and liberals created extremism, after all.

Christopher - Conservative Perspective said...

To Anonymous said...

If true you own a company then it is obvious by your statement you have no business sense.

On the other hand if you meant you would not pass on the VAT to the consumer being you were now out of business due to the VAT it makes sense.

WomanHonorThyself said...

Something's gotta give, and it will be us if we fail to elect more imaginative politicians... good point my friend!..Happy SundaY!:)

Anonymous said...


You completely miss my point. I value liberty over prosperty. There comes a point to man-up and say "No More!"

I've counted the cost of resistance. I'm willing to pay that cost. Have you? Is peace and prosperity so desireable to be purchased with chains? If so, bow down and lick the jackboots that are offered you. Everyone else seems to be doing it.

In this case, if I were caught, I would be willing to lose my business. The same goes for any cap and tax scheme.

Our country was not founded by the well behaved.

Christopher - Conservative Perspective said...

To Anonymous,
Your words:

"I'm seriously thinking not to charge VAT to my customers if it comes about".

Hardly a point to be missed in that.

I stand by my words.

Christopher - Conservative Perspective said...


Let me clarify my point based on your word's;

To remain in business with a VAT in place and leaving the legality of it aside, you would have no choice but to pass on that VAT to the customer/consumer of your product no matter what that may be.

This is basic economics 101.

How can one absorb the VAT that suppliers,vendors and utilities charge to you plus the VAT charged to you by the government and NOT pass those on in the price of said product and yet remain IN business?

I assume if true you own a business (I have) you are in it to make a profit. Where can a profit be achieved in the above scenario?

Silverfiddle said...

Captain: You make a classic argument for government policy to "steer" money to publicly "productive" pursuits. A noble ideal, but who decides what is best for us all?

As for the "buy a condo or buy a yacht" conundrum, I don't have those kinds of problems...

Leticia said...

51-90 points: [I scored 78] You are a medium-core libertarian, probably self-consciously so. Your friends probably encourage you to quit talking about your views so much.

Looks like we are on the same boat.

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