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Big-spending Dems have a surprise for you: the VAT

Dr. Mark W. Hendrickson's picture

Recently, progressives have made noise about introducing a value-added tax (VAT) in the United States. The VAT is an indirect tax — that is, Americans wouldn’t pay the tax directly to government, but would pay it to businesses as part of the retail price of things we buy, and businesses would then remit the tax to Uncle Sam.

A VAT is set at a fixed rate — say, 10 or 15 percent — added to the price of a good at every step of production, with a deduction allowed for the amount of VAT paid during earlier stages of production. The more steps there are in transforming raw materials into complex consumer goods, the higher the resulting consumer price as a result of those multiple layers of taxation.

Many countries have VATs, including Canada, Mexico, and the European Union. One might say that a VAT is an emblem signifying that a country’s government consumes a large percentage of its GDP, for VATs seem to go hand-in-hand with big-budget nanny states.

The reason for this phenomenon is simple: Any government that seeks to be all things to all people, and therefore seeks to spend ubiquitously, must inevitably seek to tax ubiquitously. Such governments have insatiable appetites for revenue. Because VATs are cash cows, diverting huge sums of money from consumers to government, they are favorites of big-spending governments.

Unfortunately, though, VATs have significant negative economic consequences.

Because they inflate consumer prices, quantities demanded fall. Most often, the marginal buyers who can no longer afford to pay the higher price are poorer citizens. When government policy raises prices (see “Government Intervention and Higher Prices”), the first victims are poor people.

The second victims of a VAT are the workers who will lose their jobs as a result of falling demand for the newly higher-priced goods.

Many affluent Americans may not curtail their consumption, but because more of their money is diverted to the government treasury, their savings must correspondingly decline. This results in decreased capital accumulation, which, in turn, slows business expansion, development, and formation. It also slows the growth rate of labor productivity, hence retarding economic progress for workers.

The desire of today’s big spenders in Washington to greatly increase their revenues is reminiscent of how FDR financed his spending binge during the Great Depression.

During the 1930s, federal revenues from the income tax fell the more tax rates were raised. (Congress, take note.) To raise more revenue, FDR and Congress increased excise taxes — taxes embedded in the price of common consumer goods like gasoline, milk, and cigarettes. The effectiveness of those taxes as generators of government income derived from the fact that those taxes are difficult to avoid, unless you can live without milk, gasoline, etc.

VATs are essentially excise taxes. They are economically destructive and hit society’s most vulnerable members the hardest. Here let me offer both a political strategy to resist the imposition of a VAT and an alternative proposal for opponents of a VAT to rally around:

The strategy is a recommendation to Republicans to not obsess about or campaign for balanced budgets. This is not to say that deficits don’t matter. They do, and they’ve got to go.

The problem with focusing on a balanced budget is that it sets up a dynamic of balancing spending cuts and tax increases. Tax increases, as we have already seen, depress economic conditions. Who can get excited about that kind of economic plan?

Deficits need to be eliminated by cutting spending, however unpopular that may be in certain quarters.

As economists for the past two centuries have made plain, the real burden of government is not what it taxes but what it spends, because whatever it spends comes at the expense of citizens, whether via taxes, borrowing, or creating additional Federal Reserve Notes.

Reducing the burden of government means slashing government spending, not raising taxes.

Here is a counterproposal: Instead of adding yet another “stealth” tax — the VAT — to the many excise taxes already in place, let’s have Congress pass a truth-in-labeling law.

Let’s require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.

What’s holding you back, Congress? You aren’t afraid of the truth, are you?

[Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City (Penn.) College (]


Is the most conservative college (politically) of all of them.
It doesn't allow the students to apply for or get anything grant, scholarship, or otherwise connected to the federal government.
The students must attend "chapel."
Mark Hendrickson is an "adjunct" employee there of a rather strange organization.
To them Franklin D. Roosevelt was the devil, incarnate.
The are great believers of the "dribble down" theory of economics, where corporations are much favored over government.
But they wouldn't mind a flat tax on goods sold, but despise a VA tax (value added), the same thing.

We need such people and organizations in the USA to combat extremes in other areas, but I don't care to read their selfish dribble, no more than I do such people as Jessee and Limbaugh.

Just check who what you read is by before you take it for Gospel.

JeffC's picture

Another right wing lemming spouting the line. There ain't gonna to be any VAT tax just like there ain't gonna be gun control and there ain't gonna be any banning of talk radio. It's the talking point du jour and they all have to write or talk about it, lest their secret TEA Party decoder rings get taken away.

It reminds me of kids frightening each other about going into a haunted house. Such scary talk about nothing.

Next thing you know, they'll be raising money to stop it. LOL.

The Wedge's picture

I view all of this talk of a value-added-tax as a trial balloon to gauge public reaction. IIRC the senate voted 83-17 in rejection of a VAT on principle. Of course, just a non-binding resolution. Why is it coming up and who is bringing it up? To state that it is a right wing ploy is false as I view this as a the first pass. It is a tried and true way of getting unpopular ideas implemented. and realistically, it would be implemented during a period of liberal political domination, not conservative.

The reality of the situation is that we are on an untenable course. We are addicted to entitlement spending, but also unwilling to confiscate enough wealth to make a governmental heaven on earth. When are we going to make the choices necessary-- to wit,
1) reduce SS payments and increase the retirement age to 70 and have the hope of the government that most pensioners will die before they hit 75. that is how it was originally set up when the age expectancy was a decade lower.
2) Decrease healthcare payments to providers and implement a rationed care approach-- face it, that is where we are going.
3) decrease spending on entitlement programs or at least freeze payments at current rates for the next decade or so
4) Drastically increase taxes (probably a VAT) to increase governmental revenue to recover from the national debt

or we can just do what we are likely going to do anyway: print money as it is fiat currency anyway and ride the increase of the money supply. Of course this will completely devalue our currency, but it will help our debt
or just default on our creditors-- watch Greece do it soon.

S. Lindsey's picture

They will just do it if they want to. Healthcare showed them how it's done. Anyone who believes that they can spend Trillions and lower the deficit and not raise taxes... well let's just say that I have some prime bottom land in Florida I would like to sell..

Sniffles, DM it's cheap!!!

"Whoever claims the right to redistribute the wealth produced by others is claiming the right to treat human beings as chattel."

-Ayn Rand

was McCain.

The Wedge's picture

not that I stated Liberal vs Conservative as far as who pushes a VAT. I still stand by my statement and knew about McCain

answering your question of "who is bringing this up?"

The Wedge's picture

I meant to say Note.... and you are right. McCain is not a conservative, no matter how many times he goes into his chrysalis.

You guys are delusional as David's Mom if you think the libs and the Obumbles administration won't impose a V.A.T. -

<a href="">Obama suggests value-added tax may be an option</a>

<cite>WASHINGTON – President Barack Obama suggested Wednesday that a new value-added tax on Americans is still on the table, seeming to show more openness to the idea than his aides have expressed in recent days.</cite>

Obama - he's craptastic!

JeffC's picture

It's never going to happen. Talk is cheap but it could never pass in the House and it will never even come up for a vote, if it is ever actually introduced; which it won't be.

But, it is a great talking point!

And I strenuously oppose it, so y'all don't stop inciting against it.

Cyclist's picture

I agree, I don't think it would pass in the immediate future. However, there's some interest in a fuel tax as part of the Climate bill. According to Reuters, Senators Kerry, Graham and Lieberman had been looking at a "linked fee" on motor fuels, applied after oil is refined, as a way of handling the transportation part of the climate bill.

Gee what a nifty thing you'll pay more at the pump and you'll feel oh so good about it because you are doing your part in becoming "green". (eyes rolling)

Caution - The Surgeon General has determined that constant blogging is an addiction that can cause a sedentary life style.

Welcome home! Did you get the first flight out of CDG?

Cyclist's picture

I hitched a ride home Wednesday. CDG was an absolute ZOOOOOOOO! Stand in one line and then get directed to another and then later be told you're in the wrong line. It's good thing I got to the airport about 4 hours before the flight. Anyways, I was so tired of watching French TV.

I did see flim flam man Geithner on CNN International squirm in his seat when challenged about what kind of taxes President Obama would support. When an energy tax was mentioned he really danced around the issue and finally said he was unable comment.

The French pay about $7 a gallon (most of that is in taxes) and drive little cars that go beep, beep. I guess that could be the shape of things to come for us.

Caution - The Surgeon General has determined that constant blogging is an addiction that can cause a sedentary life style.

We will only have to drive "little beep, beep" cars if we keep insising on drill, baby drill!

Need a ten year program like NASA had for going to the moon to use renewable forms of energy.

I know it would be difficult to cut out the oil companies, their stockholders, and their riches, but it must be done.

The French also have much public transportation and do not own three cars each family! What they do have is mostly electricity generated by atomic energy.

However I don't like the French philosophy of us. (ugly Americans).
(That is until Germany attacks them again)
Glad you are home.

S. Lindsey's picture

Drilling for our own resources.. putting AMERICANS to work providing a cheaper source of ENERGY until our Natural ingenuity can provide a better source.

That's bad?

"Whoever claims the right to redistribute the wealth produced by others is claiming the right to treat human beings as chattel."

-Ayn Rand

JeffC's picture

Green with envy that we still have two dimes to rub together.

Cyclist's picture

Shhhhh. Don't say that too loudly. They'll take the dimes as well.

Caution - The Surgeon General has determined that constant blogging is an addiction that can cause a sedentary life style.

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