VAT: The Quintessential Issue Of Our Time

By George Noga

In the end everything, America’s future along with that of its sons and daughters, comes down to whether or not there is a VAT (value added tax). Seriously! No exaggeration! The facts and logic underlying this assertion are unimpeachable as presented in the remainder of this posting.

“Without a VAT it is impossible for America to become a European style socialist welfare state.”

The fundamental thesis is this. First, the existing tax system, although it can redistribute the tax burden among taxpayer cohorts, is incapable of raising more aggregate tax revenue. Second, The USA cannot morph into Europe without a vast new revenue source. Third, VAT is the only realistic new tax capable of generating the necessary revenue to fund a welfare state.

Conclusion: America cannot possibly become a European style welfare state absent a VAT. Quod erat demonstrandum.

Regular readers understand the existing tax code raises no more than 18%-19% of GDP in tax revenue regardless if marginal tax rates are 28% or 92%. True, we might be able to eke out some incremental revenue by eliminating all deductions and raising marginal rates. Additional tax revenue would be minor, as higher rates incentivized taxpayers to go to ever greater lengths to reduce taxes.

When rates are raised, people work, save and invest less; they retire earlier; they hide, defer and under-report income; they convert income to capital gains; they don’t sell appreciated assets. They employ tax shelters; they shift income to lower bracket family members; they seek tax-free income. They change the amount, location and composition of taxable income. They exploit ambiguities and loopholes and move into the occult economy. Americans are not sheep docily waiting to be shorn.

The current structural budget deficit is over $1 trillion. The only tax capable of raising anywhere near that amount is a VAT. I note for the sake of completeness that, in theory at least, some form of cap and trade scheme also could raise considerable new revenue; however, that is much less likely to happen than a VAT.

For a VAT to raise $1 trillion per year, the rate would have to be over 20% and would suck over $14,000 annually from each taxpaying household in the USA. This would eviscerate families and turn America into statist Europe. It was the imposition of VATs (initially at low teaser rates) beginning in the late 1960s that enabled Europe to become the socialist welfare state it is today.

“VAT is big government’s only hope. If government can’t raise more money from either new taxes or borrowing, the only alternative is to cut spending.”

Without VAT, government will have no choice other than to slash spending because its ability to borrow more and more money is finite, already approaching its limit and eventually will be impossible.

Therefore, if government can’t raise money to cover its deficits from either taxation or borrowing, there is no alternative but to cut spending. VAT is big government’s only hope. Without VAT, a redistributive welfare state becomes impossible. Why is it then that some Republicans support VAT?

VAT is Impossible Without Republican Support

Mitt Romney refuses to disavow a VAT, averring that it could be used to finance other tax cuts. One of the three nines in Herman Cain’s 9-9-9 plan was a VAT. Even Paul Ryan’s Roadmap contains a VAT to fund reforms and elimination of the corporate income tax. Some features of VAT can be seductive such as using it to eliminate other taxes.

VAT also doesn’t affect savings and investment, is a single-rate (flat tax) system and and isn’t easy to game. It putatively has less potential for demagoguery and class warfare. A VAT undoubtedly will be sold based on a very low teaser rate – say 3% to 5%. It is precisely these sirenic aspects of VAT that present grave danger and beguile Republicans into a lethal trap. In the end however, a VAT means nothing less than the destruction of America.

“VAT would be the death knell for America as we
know it and a one way ticket to European oblivion.”

VAT is impossible without Republican backing. There likely never again will be a filibuster-proof majority in the Senate and the House should retain its Republican majority for the next few election cycles. The greatest peril comes when the debt crisis goes thermonuclear – likely within the next 3-5 years; that’s when pressure to pass VAT will be at its fevered peak.

Under absolutely no circumstances ever, even in the throes of a debt meltdown, should we entertain the possibility of VAT. It is the death knell for America as we know it and a one way ticket to European style oblivion.


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