Value-Added Tax Would Be a Big Disaster

Value-Added Tax Would Be a Big Disaster
April 18, 2010

John Nothdurft

John Nothdurft (jnothdurft@heartland.org) joined the staff of The Heartland Institute in May 2008... (read full bio)

The idea that the Obama administration wants to make the United States more like France can no longer be considered a black-helicopter conspiracy theory concocted by Tea Partiers and “right-wing extremists.” It is, in fact, a serious possibility.

White House adviser Paul Volcker went on the airways recently to resurrect the idea of implementing a value-added tax (VAT). He did this after the president signed a massively expensive health care bill that will soak “the rich,” tax the Jersey Shore’s tans and add other burdensome taxes and regulations.

VAT — a national sales tax applied at each stage of production rather than all at once at the point of final consumer sale — can be raised without the true cost being readily apparent on a consumer’s receipt, the way a state or local sales tax is. Embedding the cost of taxation in the price of goods and services tricks the consumer into paying nearly the entire tax in the form of higher prices. Even if income tax or corporate tax rates are lowered slightly to offset some of a VAT’s burden, this tax swap is a Trojan horse that will make raising taxes far easier in the future.

Several countries around the world have both a VAT and a personal income tax. Their experience shows VAT revenues are seldom used to pay down deficits. A U.S. Chamber of Commerce study found government spending grew 45 percent faster in VAT nations than in non-VAT nations. The prospects of having both an income tax and a VAT should be downright horrifying to the taxpaying public.

“A 10 percent VAT would raise about $500 billion a year in the United States, or about $4,300 from every household. Obviously such a huge tax hit would fundamentally change the American economy and society, and for the worse,” notes Chris Edwards, director of tax policy studies at the Cato Institute.

Instead of focusing on imposing new taxes, ostensibly to pay down the deficit and fund unsustainable entitlement programs, policymakers should focus on right-sizing government and reforming these programs’ inherent flaws. Social Security and Medicare were originally set up to be self-sustaining benefits, but their costs were grossly underestimated.

Although they won’t admit it, President Obama and his supporters really want a VAT in order to cover up the true cost of the president’s health care overhaul. Once the “doc fix” is passed in order to reimburse doctors more properly for their services, the new health care law will increase the federal deficit by many billions of dollars, and likely much more, over 10 years. That’s in addition to any future bailouts, stimulus plans or spending sprees Congress decides to go on.

What the United States needs is not a new apparatus for government to siphon even more money from taxpayers, but a rollback of exaggerated promises from both the current and former administrations. Real entitlement and spending reform is the only way to get our national debt in check while keeping taxes down.

If a value-added tax is passed, U.S. taxpayers will be forced to say au revoir to jobs and bonjour to ever-higher taxes.

John Nothdurft (jnothdurft@heartland.org) is budget and tax legislative specialist for The Heartland Institute in Chicago.

This op-ed was originally published in the Pueblo Chieftain.

John Nothdurft

John Nothdurft (jnothdurft@heartland.org) joined the staff of The Heartland Institute in May 2008... (read full bio)