More Taxes – Are We Gonna See a Value Added Tax (VAT)?

Could we see a National Sales Tax or maybe a Value Added Tax

What are the chances of Americans paying a national sales tax?  Will a Value Added Tax (VAT) become reality?  What is a VAT tax?  Who pays it?  What is the affect on our economy?  Is it good or Is it bad?  What else can they come up with? An Internet tax? An Energy Tax?  First, let’s talk about the VAT tax.
Value Added Tax (VAT)

How do you pay down an $8 trillion debt?   The Obama administration needs an answer, as the non-profit Congressional Budget Office says America’s debt could rise to $20 trillion by 2020.  One possible answer has a very European ring to it: a VAT, or value-added tax.

What is a Value added Tax?

A VAT of bubbling controversy. Last year, Obama administration economic adviser Paul Volcker mentioned the possibility of a value-added tax. The CBO is now studying the idea.

India and the member states of the European Union have VATs: sales taxes imposed on producers, distributors and consumers as a product makes its way through the marketplace.  VATs collect a great deal of state revenue while discouraging tax fraud.  In France, the VAT is 20%;in Germany, 19%.

Will a VAT Tax replace the Federal income Tax?

That is an easy answer … NO!  The VAT would not replace our federal income tax, just supplement it.  So the furor we saw over health care reform might pale in comparison to the protests over this.  Volcker thinks a VAT is “not as toxic an idea” to America in 2010 as it might have been decades ago.  White House budget director Peter Orszag thinks it will never fly, calling it “popular with academics but not seriously considered by policy makers.”  Let’s hope the latter is right.

A VAT could generate trillions. The CBO says each percentage point of VAT could bring in $1 trillion in the next ten years. It also projects that the health care reforms will cost $2 trillion or more over that period.

Who Pays the VAT tax?

One major gripe about VATs around the world is that they burden the poor.  Certainly, poor people in America would be pinched by a VAT, possibly to the point of federal subsidy.  But the truth is everyone pays it.  It basically adds tax at every level of production and delivery of a product.  What that does is raise the cost of those products at every stage, which in turn increases the cost of living for all without increasing their income.  That is also called inflation!  The consumer pays 100% of it in the price of the products that are taxed.

It works much like Cost of Living Allowances (C.O.L.A.).  The cost of living goes up due to increase cost of products and services people must buy.  As the cost of living index goes up, people get cost of living increases … which raises the cost of the products they make … which in turn causes the cost of living index to go up again … which means they need another cost of living increase just to maintain where they were … which again causes the cost of products they make to go up again.  No one ever really gets ahead or a real raise. Cost OLiving  Allowances are guaranteed inflationary and destructive to any economy.  In Papa B’s opinion they should be illegal!

The VAT tax does the same thing.  It guarantees a rise in the cost of living by raising the cost of the products and services people purchase.  Who pays?  We do in the increased cost of every product we purchase.

Some economists and political analysts think a VAT is inevitable. Why?

Peter Orszag’s office, the Office of Management and Budget, has projected federal government expenses of $5.7 trillion for 2020.    However, it estimates that the government will only collect $4.7 trillion in total taxes in 2020, meaning a deficit of $1 trillion.  Well, at least that’s better than the 2010 shortfall of $1.6 trillion, right?  Yes, but … the OMB projects income tax receipts of just $2.3 trillion in that year.  So if Washington wants to wipe out a 2020 deficit using its #1 revenue generator, it would have to collect 44% more in income taxes, which is unthinkable.

Rather than trying to do that, it could put a VAT in place – a major tax to be sure.  Think double digits.  By federal projections, if the government charged Americans a 7% national sales tax on everyconsumable in 2020, then it could raise $1 trillion.  If it spared essentials like food and clothing from VAT (it likely would), then the VAT would need to be higher than 7%.

However, the government needs a lot of money in a short window of time, and the VAT is beckoning, with voices such as Volcker, Nancy Pelosi, and John Kerry bringing up the idea.

An Internet tax?

Back in 1998, President Clinton signed the Internet Tax Freedom Act into law, which prohibited federal, state and local governments from charging bandwidth taxes, email taxes and Internet access taxes.  It was extended in 2007 with President Bush’s signature.

However, the National Broadband Plan out in April from the Federal Communications Commission contains Recommendation 4.20: “The federal government should investigate establishing a national framework for digital goods and services taxation.” It also says, “Recognizing that state and local governments pursue varying approaches to raising tax revenues, a national framework for digital goods and services taxation would reduce uncertainty and remove one barrier to online entrepreneurship and investment.” (Huh?)
So far, this is as far as this idea has gotten. The governments of the United Kingdom and Canada are currently considering Internet tax proposals.

An energy tax?

In an interview with Charlie Rose on PBS last year, Volcker floated the notion of “a tax on carbon, tax on energy, that’s a big revenue producer if you’re willing to do it. Not very popular to say the least.” It was part of a roster of potential tax code changes presented to the President in December, and he brought it up again in April in New York City.

Just remember this.  Taxes are paid for by individual tax payers.  You and Me.

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