To VAT or not to VAT? - Trade Only Today

To VAT or not to VAT?

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All the news about passage of the small business lending bill or the ongoing debate over the Bush tax cuts is blurring the real elephant in the debt and deficit deliberation: President Obama’s deficit reduction commission.

This 18-member commission is slated to come out of the shadows with its report on how to deal with the nation’s $13 trillion debt, but not until after the November elections (go figure). However, early comments by commission leaders indicate that restoring fiscal balance will require slashing government spending — this Congress will never do that — along with implementing major tax increases (surprise, surprise!). In addition, the commission is also reportedly eyeing the elimination of hundreds of individual and business tax breaks to reduce the $1.4 trillion federal budget deficit.

But let’s get real. Both this Congress and the administration advocate more spending, not less. Truth is, right now, all federal revenues are being consumed by just three programs: Social Security, Medicare and Medicaid. The rest of the government — funding for two wars, veterans, homeland security, education, cultural arts and everything else in the discretionary budget — is being financed by borrowing from China and other countries. You’d have to be in a coma to believe Congress will slash spending (borrowing) for these programs. So what’s left but raising revenue.

Enter the Solomonics who will proclaim in their report, “Let there be VAT!” They’ll have little choice, really. Dumping tax deductions won’t raise nearly enough to fund our government’s bloated spending. Moreover, a VAT — or value-added tax — is a politician’s dream. It’s expedient, it’s essentially hidden, and it will generate a river of revenue. Experts say every 1 percent VAT can deliver up to $1 trillion a decade. Say cash cow!

If our government didn’t need trillions more in revenue before, it does now. Obamacare alone is the largest entitlement expansion in 40 years and, by far, the most expensive. Welfare-state programs like that are why all of the members of the European Union have a VAT ranging from 15 percent (5 percent on some reduced items) up to a whopping 25 percent.

In effect, then, a VAT is essentially the same as a national retail sales tax. And while from time to time the idea of imposing a national sales tax has been trial ballooned, it has always been shot down. So politically speaking, that won’t sell. Ah, but a stealthy VAT — well, that could play.

Now, as a replacement for our income tax, a VAT might be a welcome idea. After all, taxing consumption is an idea that makes a lot more sense than taxing our work, which is what our income tax does. In fact, Erskine Bowles, co-chair of the debt commission and former chief of staff for President Clinton, has said he favors putting in a tax on consumption. But no one here is talking about replacing the income tax. No, a VAT would be on top of our income tax.

So if a VAT is in our future, how will it work? What effect will it have on our industry? Is it something to love or to hate, to fight or accept? I’ll have some answers in Thursday’s Dealer Outlook.

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