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...