Brace Yourself for Yet Another Tax: the European-Style Value Added Tax

Recently, former Federal Reserve Chairman, and now top member of President Obama’s Economic Council of Advisors, Paul Volcker, has admitted that the implementation of a Value Added Tax (VAT) is likely to soon become law. Remember, this will be in addition to the various tax hikes that will be imposed on taxpayers through the newly enacted health care bill.

Senior fellow, Dan Mitchell of the Cato Institute, explains the VAT:

The VAT is a type of national sales tax, levied on the value-added at each stage of production. Consider a piece of furniture: The VAT would be imposed when the raw timber is sold, when the sawmill produces lumber, when the manufacturer builds a chair, a tax at the wholesaler level and then when a retailer sells the chair to a consumer.

Furthermore, Mitchell explains:

To avoid double taxation, each seller along the way gets a credit for taxes paid at earlier stages of the production process. So the final tax to the consumer, at least in theory, is the same as a retail sales tax of the same amount.

This value added tax would be in addition to our existing income tax rates. As Mitchell points out, if this value added tax were to instead completely replace the Internal Revenue Code, then it would be a different story. As a complete replacement for the current code, Mitchell says:

The VAT has its virtues: As a single-rate, consumption-based system, much like the flat tax or national sales tax, it would introduce far fewer economic distortions than today’s income tax — and a heckuva lot less paperwork.

However, as Mitchell points out, European trends have shown that the implementation of a value added tax inevitably leads to “higher overall tax burdens and more government spending.” 

In an effort to communicate the economically burdensome consequences of a value added tax in addition to already high income tax rates, Mitchell states:

But the Europeans began imposing VATs in the late 1960s, and now the European Union requires all members to have a VAT of at least 15 percent. Good news has not followed. By 2006, the average tax burden for EU-15 nations had climbed to 39.8 percent, versus 28 percent in the United States.

Mitchell puts a finishing touch on his rational behind the impracticality of future tax increases, including the VAT, as he states:

Today’s income-tax system is a nightmarish combination of class warfare and corrupt loopholes. But adding a VAT solves none of those problems, it merely gives politicians more money to spend and a chance to auction off a new set of tax breaks to interest groups. That’s good for Washington, but bad for America.

In an effort to caution taxpayers, Charles Krauthammer of the Washington Post states that we should “get ready for the VAT. Or start fighting it.”  We say fight it—and have the tools here for you to do so.

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