The Tax Man Cometh

Today is the day many in America have dreaded for months: It's tax day. Time to pay the piper. Well, for roughly half of Americans, that's true. Because only 47 percent of Americans owe no income tax for 2009. Meanwhile, the top 10 percent of wage-earners paid about 73% of federal income taxes, and a family of 4 can make as much as $50,000 and still not pay one penny in income taxes. No wonder Congressional Budget Office (CBO) Director Douglas Elmendorf recently proclaimed that our nation's "fiscal policy is unsustainable, and unsustainable to an extent that it can't be solved through minor changes."

Elmendorf goes on to make some pretty good points that many Conservatives, myself included, can agree with, like:

• "Obama's policies would produce deficits averaging $1 trillion for the next decade"
• “Government would need to make changes in some set of the large programs, large parts of the tax code that we think of as the fundamental parts of the budget.”
• "Spending on Medicare, Medicaid and Social Security, plus defense programs and debt interest, will exceed the rest of the federal budget in 10 years if most of the 2001 and 2003 tax cuts are extended, as President Barack Obama has proposed."

But it's that last comment that makes me uncomfortable, as Elmendorf has advocated a tax increase in the same sentence as the suggestion of a massive overhaul of our nation's tax code. If that's not bad enough, couple it with a similar suggestion of a massive tax code overhaul by Paul Volcker, a former chairman of the Federal Reserve, and that makes me very uncomfortable.

While political spectators can't decide whether Volcker was speaking on behalf of the Administration (he chairs the President's Economic Recovery Advisory Board), or himself, I believe this was a test balloon sent up by the Administration. Obama doesn't want to get out there and champion another unpopular idea, nor does he want to directly ask what the American people think, so he gets Volcker to make an off-handed remark about it, while he sits back and watches the reaction. Thus far, since the remark was made on April 6, the reaction hasn't been all that bad, except in the Conservative blogs.

I predict to you that the idea of introducing a VAT will come back as an official policy suggestion by the Administration or one of the Democrat lackeys over in Congress. Therein lies the motivation behind this post: The VAT is perhaps the most nefarious of all the forms of taxation that can be proposed. For Americans, who are not accustomed to the VAT, the concept can be difficult to understand. Moreover, most people who attempt to explain the VAT oversimplify it, and miss some of the worst aspects of the VAT. Let me attempt to explain.

VAT stands for Value Added Tax. And, like a sales tax, it is a consumption tax. (Instead of taxing your income as it is earned, the goods that you consume are taxed as you spend your income.) In this regard, a VAT is similar in concept to a national sales tax. That's where the similarity ends: the entirety of an assessed sales tax is collected when the goods are purchased by the consumer. An assessed VAT is collected in "pieces". As the name implies, a VAT is a tax on the value added to goods at every single step in the manufacturing and distribution process. When a manufacturer purchases raw materials that are then turned into a final product, the difference between the price at which they sell the final product and the price they paid for the raw materials is the value added. The manufacturer pays a percentage tax on the value that they added to the goods. When a wholesaler then purchases the goods from the manufacturer and sells them to a distributor, they will sell these goods at a profit, and so they pay a tax on that value added. This process continues until a retail outlet sells the goods to the consumer (and they pay a tax on the difference in final sales price and the price they paid for the goods). The final tax is a percentage of the value added at every stage in the manufacturing process. However, the nefarious aspect is that the final tax is paid by multiple people and is built into the purchase price paid by the consumer. Neither the consumer, nor anyone else knows the total tax paid on the goods. Additionally, since a VAT is essentially a tax on the profit at every step along manufacturing/distribution chain, it discourages profits. (Aren't profits what we need to grow the economy?)

That is the real problem with the VAT. It makes it easy for the government to collect massive amounts of tax revenue, as nobody knows exactly how much is paid in taxes. Additionally, a small increase in the tax rate goes largely unnoticed because every individual who pays the tax perceives only a small tax increase. While I can agree that America's current fiscal policies do need some drastic changes to reduce the deficit, those changes need to involve cuts to wasteful spending, not massive tax hikes or yet another tax that the average American can't understand. A VAT may be right for a European-style Socialist government, but it's not right for America, and even as the tax man comes to collect today, we need to send him away as he seeks this new tax.