This is a warning: Not only Democrats like taxes.
It's true, only Herman Cain came right out with a recommendation for a Value Added Tax (VAT), and he's gone. But Mitt Romney has not categorically come out against it, according to an interview appearing in the Wall Street Journal last December. This may seem strange for a Republican, but perhaps he's just patterning his thoughts on those of Paul Ryan, another conservative who has outright advocated for the VAT in his Roadmap Plan.
Such a tax would supposedly help eliminate other deleterious taxes. But I know otherwise. I have spent many years living in Europe. The Value Added Tax is - how shall I put it - an abomination worse than death. Here are a few reasons in simple words:
(1) Any moral argument about the preference for a tax on consumption because it represents what we "get" from society, as opposed to what we put into it, is specious. Whether the tax is on income or consumption, it is on the same thing: the product of our labor. We "get" nothing that we have not earned by sharing in production.
In other words, our salaries represent our share of what we and our employers produce. Whether the tax is on our income (delayed consumption) or our spending (current consumption), the tax is on the exact same thing: production. Remember the equation, Income = GDP (in its abstract form).
(2) Because the VAT tax is so huge, retailers will quickly decide to incorporate it into the total price without the gory details. (That's what they do in Europe.) As a result, people will soon forget how much they are paying to the government. This is a terrible mistake, just as it was an error for Friedman to recommend withholding income taxes at the source. (He came to regret this. Let's learn from his mistakes.)
(3) Putting the VAT open faucet of future funding in the hands of Congress is like giving your credit card to a shopaholic.
(4) The VAT, if all other taxes were eliminated, might rid us of a few accountants; however, most of the H&R Block people will simply change their job description from income tax filers to VAT tax filers. The burden is every small businessperson's worst nightmare. The paperwork is unimaginably time-consuming, and it is repeated at every level of production, which can be dozens for a single item. It's as wasteful as digging holes and filling them again, and it diverts much energy and resources to bureaucratic silliness. Plus, don't forget you need the VAT police to keep people in line.
(5) A VAT tax unfairly penalizes the very poorest people who cannot save, who have no choice but to spend 100% of their income on the necessities of life. Currently, these people in the US pay little sales tax on food, but they pay it on other household and common consumer items at a rate of 9% max. You want to hike this up to 20%?
(6) Congress and state governments will get the last laugh, because they will not eliminate other taxes but simply add the VAT to the existing ones (if not initially, eventually).
(7) Some VAT advocates like The Lindsey Group want to remove the current split tax on employees and employers for Social Security/Medicare (7.5% each), and add back a 20% tax "on employers" for salaries. If you add this tax "on employers," you will be giving 15% to employees with one hand and taking away 20% from the same employees with the other.
Explanation: When you think of it, employees already pay both their own and the employer's share of social taxes, because the split is only smoke-and-mirrors. It's a ploy to make us think that the big-bad-employer is paying half. In fact, the market-price/budget for labor is the market-price/budget for labor, with little flexibility. This means that the taxes already come out of labor's wage. So what you would be doing, in effect, is eliminating the current 15% on employees, and replacing it with a 20% on employees. This 20%, plus the 20% VAT on consumption, makes a 40% tax on the working public - outrageous.
(8) The Lindsey Group will tack the 20% on everything. A 20% tax on dividends is, no matter how you slice it, still a double taxation of profits earned at the corporate level that are merely passed on to the original owners of the capital used to produce the profits. Again, that's 40% tax on one item of production. Dividends are not extra rent (in the public-choice sense). They are a share of already-taxed profits. Furthermore, the more you tax dividends, the less capital will be available. Also, the more you tax dividends, the more you tax lower-income retired people who rely on these for their everyday living expenses (remember: that's 40%).
(9) The Lindsey Group would put a 20% tax on capital gains (higher than the current 15%). Any tax on capital gains is still just as unfair at it has always been, because the pretax gain is not adjusted for inflation. And here again, the more these gains are taxed, the less there will be to tax (or to invest in production or in venture-capital projects).
(10) People are not stupid. Everywhere governments confiscate one-fifth of a product or service's sales price, the black market thrives. Europe has two markets: the legal one, and the illegal one. This goes for many things - many products, many services. And it encourages criminal behavior. I'll never forget the consul of France in Los Angeles who once said to me, "Actually, Italy has the most healthy economy in Europe: Their black market is thriving." He was more than half serious (which is surprising coming from an avowed socialist).
(11) A VAT tax will not make any foreign trade more fair. Many foreign countries charge their people a VAT tax on all goods, foreign and domestic, but exonerate exports from the tax. Americans currently do not pay a VAT on imports, only a domestic sales tax in some states (but they pay this on domestic products also). If America puts a VAT in place, the situation will simply increase our current sales tax to the VAT tax level. It will not affect imported products any more or any less than it will affect domestic products, and because exports will be exempted from the VAT tax, it will not affect exports either.
(12) Last but not least, I will quote Daniel J. Mitchell from his article in the Wall Street Journal:
There is no way to turn America into a European-style welfare state without this new source of revenue.
I could go on. The truth is that it is impossible to tax producers of wealth sufficiently to pay for the welfare state we have now (never mind the one we have prepared for ourselves) without destroying that wealth in the process. We need politicians who will make us take the Reality Pill, reduce expenditures, and eliminate the destructive marginal taxes, period. If we do this, we have a chance of surviving the current episode. Otherwise, we're dead.
We can't afford all the goodies we want, and government cannot provide them efficiently even if we could. This is the fundamental issue. Not to face this reality, but rather to meander hither and yon with ideas about how best to slaughter our last lamb, is wasteful and even harmful. We need tax reform, of course; indeed, get rid of loopholes, and give us a flat tax. But please, don't give the bums this dastardly VAT tool.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.