VAT or FairTax

Date: Sat, 30 May 2009 02:31:30 -0400

Subject: VAT or FairTax

Phil,

I liked your article, below. It points out the danger that a Value Added Tax (VAT) poses for America. There is one point in your article that touches on something generally missed. We often hear that the 16th Amendment must be abolished before the FairTax is adopted because we could end up with both the income tax and a sales tax. The fact is that we already have a national income tax and a national sales tax. The income tax we are all too familiar with. The current "sales tax" is the "business" taxes and other taxes that are imbedded in the price of all goods and services produced in America. Studies by Dr. Dale Jorgensen and Dr. Laurence Kotlikoff and others conclude that an average of ~22% of the retail price of all goods and services produced in America are taxes buried/imbedded in the price. This is, in essence, a 22% hidden sales tax.

This results in American labor and business competing here and abroad at about a 20% competitive disadvantage. Unlike ALL of our trading partners with their VAT taxes, we have no mechanism to identify or back out these imbedded taxes. Whenever our government tries to mitigate this inequity the WTO slaps a fine on American products. The WTO allows the foreign governments to rebate to their producers the VAT taxes paid when the products are exported, but disallows income tax or other credits for American exports. An American VAT would solve this problem, however, as you well pointed out, the hidden nature of VAT taxes results in runaway government. Another real disadvantage of VAT taxes is the cost to comply with the tax at every step of the production and delivery process and this tax compliance cost adds to the price of the product.

A simple solution, as you mentioned, is the FairTax. Tax compliance cost and tax efficiency cost (loss of economic efficiency due to the impact of tax consideration on financial decisions) currently is estimated at $500 billion to $700 billion annually. The FairTax replaces the income tax and virtually eliminates tax compliance and efficiency costs for individuals and businesses. Because the FairTax is a retail sales tax it is 100% visible, and therefore, has the natural restraint on the size of government as intended by our Founding Fathers when they twice prohibited income type taxes in the Constitution.

Americans would be able to see their true tax burden for the first time in generations. In addition, the FairTax is automatically border adjusted because American products would have no taxes imbedded in their prices that would otherwise have to be backed out when exported. The result is that with the FairTax American produced goods and services (or labor and capital) would be able to compete with foreign competition on a level playing field, rather than one with a 20% uphill climb. Is it any wonder that we are exporting our companies and jobs rather than our products?

Roger Buchholtz

FairTax Director (volunteer)
Business owner & economist

P.O. Box 141 / 5620 Clato St.
Kalamazoo, MI 49004
phone/fax: (269) 345-0950
cell: (586) 530-3298

May 27th, 2009 5:15 PM Eastern

PHIL KERPEN: Be Afraid, Be Very Afraid of the Obama Administration's Scary Trial Balloon

By Phil Kerpen
Policy Director, Americans for Prosperity

In today's Washington Post, the White House floats a really scary trial balloon—a new national Value-Added Tax (VAT) to pay for out-of-control spending and a Washington take over of health care. Senate Budget Committee Chairman Kent Conrad appears to be on board. So does Ezekiel Emanuel, brother of White House chief-of-staff Rahm Emanuel, who has been hired by the White House budget office to help design the health care plan and whose book on health care uses a VAT to fund the new government program. Obama economic adviser Paul Volcker is also on-board the VAT-train.

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We need to draw a clear line in the sand that no new national taxes will be put in place without eliminating—not cutting, but permanently eliminating—our existing income tax.

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What is the VAT? It's a type of national sales tax that is collected in pieces throughout the production chain, instead of being collected all at once at the cash register like a retail sales tax. In theory, sales taxes like the VAT are pretty good taxes because they are broad-based, difficult to evade, and minimize economic distortions. In practice, they are the ATM machine for runaway government growth, because they are largely invisible to the public and they can raise huge amounts of money in very small chunks, thus minimizing the effective political opposition that generally keeps taxes in check.

A couple of years ago Dan Mitchell wrote a great summary of the VAT experience in Europe that explains how the VAT was the key policy change that moved Europe to a much higher level of taxes and spending than the U.S. Because the tax is difficult for the public to see, it's very easy for politicians to raise, and VAT rates in Europe have steadily increased since the tax was first introduced. With the VAT tax weapon in hand, European governments have grown to more than 40 percent of GDP, a level unknown in the United States outside of world wars. Now that scary scenario could, unfortunately be in store for us if the White House pursues a VAT in the U.S.

The U.S. tax system is clearly a mess, and badly in need of meaningful tax reform. That reform, however, needs to in the direction of simplicity and lower rates. Many conservatives believe, with good reason, that we should abolish the IRS, end income taxation, and adopt a national sales tax of some kind—most would prefer a national retail sales tax, which is the heart of the Fair Tax proposal. Some, perhaps, would be happy with a VAT, which functions much like a sales tax. Such a proposal is not without its virtues, but the enormous risk associated with it is that we end up with a national sales tax on top of our existing income tax system.

Based on the European experience, accepting a VAT in exchange for reductions in taxes on income and capital would be a foolish bargain, because once politicians have all the taxes on the books they would steadily increase the rates over time, leading to a much higher overall level of taxes and spending than would otherwise have been possible. We need to draw a clear line in the sand that no new national taxes will be put in place without eliminating—not cutting, but permanently eliminating—our existing income tax.

Trillions of dollars of bailouts, stimulus, spending, unfunded entitlement obligations, and an appetite for a Washington takeover of health care have us on a collision course for a national bankruptcy unless we adopt a huge new tax (cap-and-trade is another one, by-the-way, although the VAT could be even more expensive) or finally start to get a handle on runaway spending. The current tax system simply will not bear enough revenue to pay for these trillions of dollars of obligations. If we don't want to accept a European-style nanny state and the lower standards of living that come with it, we need to cut all this spending and forget about a Washington takeover of health care. And we need to shoot this VAT trial balloon down, quickly.

Mr. Kerpen is director of policy for Americans for Prosperity. He can be contacted through www.philkerpen.com. He records a free daily Podcast and today's is on the subject of the VAT. Listen here.MI

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We need to draw a clear line in the sand that no new national taxes will be put in place without eliminating—not cutting, but permanently eliminating—our existing income tax.