VAT Would Be One Big Tub of Trouble

VAT Would Be One Big Tub of Trouble

November 17, 2009
Originally published in The Investor's Business Daily

Ask a man on the street what VAT means. After giving you a strange look, he'll probably give an answer along the lines of "a large tub." In a way, he'd be right: America's on-again, off-again move towards a Value Added Tax (VAT) is a metaphorical large tub, into which huge but nearly untraceable amounts of money will disappear.

A VAT is a tax on each stage of production, calculated according to how much value each producer adds to its products.

In the search for ways to reduce the record $1.4 trillion federal budget deficit, the VAT has occasionally popped up. In May a spokesman for President Barack Obama's budget director, Peter Orszag, expressed openness to the idea. Just last month, House Speaker Nancy Pelosi said on "Charlie Rose" that a VAT was "on the table."

It should be taken off. The root cause of the deficit is too much spending, not too little taxing. Putting a new tax on top of what we already pay is the wrong approach.

As far as taxes go, the VAT is especially destructive. If Congress is going to increase taxes, installing a VAT is one of the worst options.

For one, it would require roughly doubling the size of the IRS. Fifteen years ago, CBO estimated compliance and administrative costs for a VAT at $8.5 billion annually. That figure can safely be placed at more than $10 billion by now. The IRS' entire budget is currently $11.4 billion.

VATs are also untransparent. When traditional sales taxes are added to the goods we buy, we know the amount simply by looking at our receipts.

But VATs are hidden. Since manufacturers pay them in advance, they are factored into the prices consumers pay. VATs do not show up on receipts.

Knowing how much we are taxed is a fundamental right that preserves our ability to challenge excess government in a constitutional republic. A VAT would take that away.

Americans work more than one-third of the year for federal, state, and local governments before keeping a dime for themselves. We can still know, to the penny, how much we pay by looking at our pay stubs and old 1040 and state income-tax returns.

This transparency is one of the few checks that citizens have against runaway tax increases. Because a VAT is so easily hidden, consumers can shoulder a massive tax burden and not know it. VATs are fundamentally unfair.

They are also needlessly complex. The U.S. tax code is already over 100,000 pages. The last thing taxpayers need is another layer of complexity. They need simplification. International experience with VATs shows that, even if they are simple at first, they quickly grow into Hydra-headed monsters.

Not too long ago, France was roiled with controversy over whether dandruff shampoo constitutes a medicine taxable at 5.5%, or a cosmetic taxable at 18.6%. There are more pressing issues that deserve our attention.

Most countries with VATs have at least three different rates. Politically incorrect products are hit with punitive rates. Danish car buyers, for example, pay the standard 25% VAT, plus a special 105% VAT on the first $11,000 of the car's value, plus a third VAT of 180% on any remaining value.

All in all, Danes pay roughly triple retail price for their cars. An American VAT would make it easier for environmental activists to give U.S. car buyers similar treatment.

VAT rates also tend to go up over time, not down. Twenty-nine OECD countries currently have a VAT; 20 of them have increased their VAT rate over time. The average rate for newly introduced VAT rates in Europe was 5%. Now the average European VAT is more than triple that — 17.7%.

Taxpayers are overburdened as it is. The best way to reduce budget deficits is to cut spending. VATs should be avoided at all costs. They are complex. They are untransparent. They are hidden. They are vulnerable to special-interest tinkering. They are prone to increases. They should be rejected.