Commentary: VAT Would Be Disastrous

The headline in the newspaper had to be wrong. It read “Obama Appears Open to Value Added Tax.”

Could the President really be considering a value added tax or VAT, as it is usually referred to?

Perhaps, like most Americans, Obama doesn’t know what a VAT is. Maybe he’s just heard that the VAT is used in several European countries and that sounds appealing.

Let’s be clear, however. The VAT is a consumption tax, levied on consumers. It is just a fancy name for a national sales tax (also known as a “FairTax”) and is designed to shift most of the tax burden from income to consumption, or in reality, from wealthier Americans to poorer ones.

The main difference in the VAT and a sales tax is the VAT would be far more complicated for businesses – especially smaller businesses – that would have to calculate exactly what amount should be placed on each item.

It would also be far more difficult to police and would add hours of record keeping for every business, not to mention the IRS.

That’s mainly what you need to know about the VAT. A more complex explanation is that it is a tax on the value added to an item at each stage of its production, starting with the raw material delivered to a mill and on down the line to the consumer, who would presumably pick up the entire bill. In some countries, the value added tax is as high as 16 percent of the final price.

Of course, while the VAT would be a nightmare for small businesses and customers, it would be a windfall of incredible proportions for lobbyists and congressmen, who could haggle endlessly over the details, such as which items would be taxed and how much each item should be taxed.

Fortunately, rumors of a VAT prompted the U.S. Senate to vote not long ago on a non-binding “sense of the Senate” resolution that calls the value added tax “a massive tax increase that will cripple families on fixed income and push back the nation’s economic recovery.”

After Obama’s remark that “the VAT is on the table,” and a favorable remark by Paul Volcker, his economic adviser, a spokesman said the White House “is not considering a VAT.”

The Senate vote and the White House statement are comforting, but stronger reassurances are needed. Even the remote prospect of a VAT is enough to shake the confidence of consumers, and consumers have rescued the U.S. economy from every recent recession.

It is troubling that even 13 senators voted against the resolution, and that Volcker, a former Federal Reserve chairman whose policies contributed to Jimmy Carter’s defeat in 1980, spoke favorably of the VAT.

The first hints that a VAT might be the answer to the nation’s economic problems actually came from conservative talk shows, several of which have long advocated a national sales tax, or as they call it a “FairTax” (one word in their parlance), which would be a straight sales tax on all items and would replace the income tax.

According to Neal Boortz, the Atlanta talk show host who wrote a book on the FairTax with retiring Rep. John Linder, the tax would have to be about 23 percent to raise as much money as the income tax, the payroll tax and other federal taxes. It would be added, however, to the sales tax of the individual state, which would push it up to 30 percent or more in some states.

Like the VAT, the FairTax would most affect consumers who have to spend nearly all their income each week. Had these taxes been in place during the past two years, the U.S. economy would be even more desperate for revenue, a fact so obvious that it is remarkable that proposals for such taxes are taken seriously.

Since 1913, the dream of wealthier Americans (and some not so wealthy) has been to repeal the national income tax and replace it with a consumption tax, thus shifting more responsibility to those with lower incomes.

That was a bad idea in 1913 when the nation mainly used high tariffs to raise revenues, and it’s a disastrous idea in 2010 when the nation and the world have dramatically changed.

President Obama needs to state emphatically that, by whatever name, a national sales tax is not on the table.