FRED WOLFERMAN: Taxing It All: Will U.S. Follow Europe's VAT Example?
Why is it that sometimes the most obvious solution to a problem completely escapes your notice? Maybe it's because you just can't imagine it happening. Maybe it's because obvious isn't necessarily good.
I underwent just such a forehead-smacking moment this week, when I read a column in Fortune magazine by Shawn Tully. Its subject? The value-added tax, or VAT.
Invented in 1954 in -- naturally -- France, the VAT is basically a national sales tax. It is widely used in most of the world -- particularly those parts with stagnating economies -- as a means to increase state revenues far beyond what is possible with an income tax alone. Travelers abroad, who are not required to pay this tax, will fondly recall the inconveniently located VAT refund counters at airports and the paperwork required to get their money back.
The VAT is subtler and more complicated than a simple sales tax, in that it is levied at all levels of production and distribution. Tully's example explains it well: A $30,000 car uses $8,000 worth of parts (excluding labor). The manufacturer pays a 10 percent, or $800, VAT to its suppliers, who then pay it to the government. A dealer buys the car for $25,000, paying $2,500 in VAT. The manufacturer collects the $2,500, receives an $800 credit for the VAT it paid, and sends $1,700 to the government. A consumer buys the car for $30,000 and pays $3,000 in VAT. The dealer takes a $2,500 credit and sends $500 to the government.
I'm not quite sure what all those levels of collection accomplish, except employing bureaucrats. It seems to me that the consumer is paying the whole nut anyway, but then I'm not a French economist.
In any case, Tully's point is not the mechanics of collection. His view is that there is almost inevitably a VAT in our future, because it is the only way the government can possibly raise enough money to deal with our deficits, spending proclivities and unfunded liabilities. Unfortunately, he makes a lot of sense.
Under our present tax system, receipts currently run at 18 percent -- 20 percent of GNP -- and are projected to do so pretty much indefinitely, no matter how much tinkering occurs to the tax code.
Expenditures, on the other hand, are projected to increase to nearly 30 percent in the next 40 years as a result of all those things we know about: Social Security, Medicare, Medicaid. This does not include the things we don't know about, like health care, wars, collapsing infrastructure, trips to Mars.
The bottom line is that we can't possibly borrow that much money, nor can we squeeze it out of the income tax. We will have to bleed it out of the consumer.
The VAT is insidious because, though ultimately paid by the consumer, most of it is collected from manufacturers and distributors before the retail sale. This makes it difficult to avoid and easy to increase, once it is established.
It is not hard to imagine a political scenario enabling its establishment. First, a promise will be made to reduce income taxes -- except, of course, for the highest brackets-- along with a guarantee that the VAT will never increase beyond some level. (The same sort of guarantee was made in 1913, when a constitutional amendment was passed to authorize the income tax.) Then, to provide some progressiveness, staples, such as food and toothpaste, will be exempted, and rates will be ratcheted up on yachts and Cadillacs (if there are any).
You know what will happen next. Income tax and VAT rates will creep back up, commissions will squabble over what rates to set on what products and a whole new bureaucracy will grow, parallel to the IRS.
The VAT is not terribly dissimilar to the currently vaunted "FairTax" that is receiving so much attention on talk radio. They are both consumption taxes. There is nothing wrong with the concept of a consumption tax; the problem lies in maintaining an income tax as well. I understand that the proposed FairTax plan requires the constitutional elimination of the income tax. Ain't gonna happen.
If Tully's argument that we can't operate on an income tax alone is accurate, then we certainly won't make it on a consumption tax alone, either. The government must find more ways to pluck the goose or restrain its profligacy. That horse, to mix metaphors, is already out of the barn.
Fred Wolferman lives in Southern Pines. Contact him by e-mail at firstname.lastname@example.org
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