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Posted: November 09, 2009

VAT chance

Instead of taxing -- get a grip on spending

Jeff Thredgold

No shortage of really bad ideas find(s) their way around the nation's capital on a regular basis. One of the worst is now rearing its ugly head again.

The VAT, or value added tax, has been mentioned by all too many American politicians and Democratic political advisors in recent weeks as one way to help address the incredible surge in government spending scheduled to take place in coming years

In the eyes of long-time politicians, what could be better than a nifty way to raise a vast amount of new tax revenue without having to raise income tax rates? (Note: income tax rates are already scheduled to climb over the next few years as the Administration lets most of the 2001 and 2003 tax cuts expire for families making more than $250,000.)

What could be better than a tax where it is very simple to raise the tax rate at any time, without most taxpayers noticing?

A Largely Hidden Tax

A VAT tax is a tax on consumption similar to a national sales tax. But it's not just paid at the cash register. It's levied at every stage of production. So all businesses involved in making a product or performing a service would pay a VAT. And then the end-user-such as the retail customer-ponies up as well (CNNMoney.com).

Stated another way, the allure of a VAT for politicians is that it applies to every level of production or service, rakes in piles of money, and is largely hidden from those who ultimately pay it-namely, consumers (The Wall Street Journal).

Proponents

House Speaker Nanci Pelosi, U.S. Treasury Secretary Tim Geithner, and former Federal Reserve Chairs Paul Volcker and Alan Greenspan have suggested now may be a good time to consider implementation of such a program. John Podesta, an Obama advisor and president of the liberal Center for American Progress, has been as vocal as any calling for the implementation of a "small" VAT tax.

Much of the current discussion about the VAT suggests a rate near 5 percent might provide sufficient funding to help meet some of the needs of rapidly expanding government. Using 2008 data, that  would equal a tax increase of $315 billion on all American consumers, or roughly $2,670 on every household, including the poor and middle-class (Investor's Business Daily).

Once in place, a VAT can be increased without much fanfare.

European nations are well-known for their high VAT taxes, with most nations in a range of 15 to 25 percent. Larger European nations have VAT rates around 19 percent. These rates are in addition to income tax and corporate taxes.

Any wonder why the European economy typically trails that of Asia and North America in economic vibrancy?

Federal Government spending has averaged 20.2 percent of GDP over the past 20 years. Federal tax receipts have averaged 18.2 percent during that same 20-year period. The 2 percent average difference has been the budget deficit.

Various forecasts have federal spending approaching no less than 25 percent of GDP in coming years, tied in large part to surging health care costs.

A VAT is not the answer. The answer is for national politicians to get a grip on spending.

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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

OK Michelle I am confused "We have to pay for the huge credit card bill the Republicans have run up over the last 8 years" - and yet "get a grip on spending." is somehow inappropriate ? I see few proposals to reduce government spending - so how is this administration any better than the one you decry? Sure VAT alone is not sinking Europe. Oppressive employment legislation which makes it almost impossible to fire incompetent employees, a 22 language administrative system, lowest-common-denominator policies across many country boundaries, uncontrolled immigration and over-generous social security systems all help contribute. VAT is just symptomatic of government excessive spending, something you (when blaming the last administration) and the author appear to agree is a problem! By Nigel on 2009 11 09
"Any wonder why the European economy typically trails that of Asia and North America in economic vibrancy?" Seriously, all of the European economic differences can be blamed on a simple VAT? Wow, you just solved the world's economic problems! Due to the invasion of Iraq and the fact that Reagan created a haven for militants by not providing $1m in aid to Afghanistan, we are blowing through federal funds to support the military effort like candy. In addition, during the Bush years they cut taxes to get Republicans re-elected which blew-up the the debt spending for 8 years. Now we have to pay the piper or the value of the dollar will tank which means the cost of goods that we import (which is most of what we consume on a daily basis) will skyrocket and the cost of the US Government to borrow to pay debts will increase. We have to pay for the huge credit card bill the Republicans have run up over the last 8 years, so if you have a better idea than "cut spending" please share it. I'm tired of people slamming all the solutions this administration is proposing, but supplying no solutions of thier own. If I had an employee working for me that did that they would be quickly looking for a new job. BTW, when the government spends money and puts folks to work while buying goods/services form businesses it has a true trickle down effect in that people have jobs, consume more goods, ultimately driving the economy. Look at what the CCC did back during the Depression. There is a great special on PBS that covers it: http://www.pbs.org/wgbh/americanexperience/ccc/. By Michelle on 2009 11 09
You are SO right that VAT is no answer. In the UK this creeping tax has gradually afflicted most things. One thing which is slightly misleading in your depiction on VAt (at least as applied in the UK) is that while VAT is due at all levels of production - only the final consumer actually pays it. Business does not pay VAT in addition to the final consumer - at least they do, but can reclaim it, unlike sales tax in the US. That said, the US is already saddled with a very expensive (to administer) sales tax system - adding federal VAT will surely drive the US uncompetitive in a matter of a few years. And you are very right about the ever increasing nature of VAT, whether it is the headline rate - or finding new goods or services to apply it to! By Nigel on 2009 11 09

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