After running up more than $3 trillion in debt in just two years, the federal government is looking for new ways to raise money. Promised future entitlement spending in the tens of trillions of dollars has put the government’s AAA bond rating in jeopardy, so borrowing all that money could be an expensive proposition. That means a tax hike is coming.
One popular idea in the White House is the value-added tax, or a VAT. It’s a tax on each stage of production, calculated according to how much value each producer adds to its products. It is also a terrible idea.
The root cause of the deficit is too much spending, not too little taxing. Putting a new tax on top of what we already pay is the wrong approach. Last year, Americans paid $989 billion in income taxes alone. We spent even more than that on sales taxes, gas taxes, electricity taxes, and more. Enough is enough.
As far as taxes go, the VAT is especially destructive. For one, it would require roughly doubling the current size of the IRS. Sixteen years ago, CBO estimated compliance and administrative costs for a VAT at $8.5 billion annually. That figure can safely be placed at more than $10 billion by now. The IRS’ entire budget is currently $12.1 billion. All of this is in addition to the 16,000 new IRS employees needed to enforce the health care bill.
VATs also lack transparency, making abuse almost inevitable. When traditional sales taxes are added to the goods we buy, we know what we pay simply by looking at our receipts.
But VATs are hidden. Since manufacturers pay them in advance, they are factored into the prices consumers pay. VATs do not show up on receipts.
Knowing how much we are taxed is a fundamental right that preserves our ability to challenge excess government in a constitutional republic. A VAT would take that away.
Americans worked until April 9 this year to pay their taxes before keeping a dime for themselves. We can still know, to the penny, how much we pay by looking at our pay stubs and old 1040 and state income-tax returns.
This transparency is one of the few checks that citizens have against runaway tax increases. Because a VAT is so easily hidden, consumers can shoulder a massive tax burden and not even know it. VATs are fundamentally unfair.
They are also needlessly complex. The U.S. tax code is already over 100,000 pages. The last thing taxpayers need is another layer of complexity. We need simplification. International experience with VATs shows that, even if they are simple at first, they quickly grow into Hydra-headed monsters.
Not too long ago, France was roiled with controversy over whether dandruff shampoo constitutes a medicine taxable at 5.5 percent, or a cosmetic taxable at 18.6 percent. There are more pressing issues that deserve our attention.
Most countries with VATs have at least three different rates. Politically incorrect products are hit with punitive rates. Danish car buyers, for example, pay the standard 25 percent VAT, plus a special 105 percent VAT on the first $11,000 of the car’s value, plus a third VAT of 180 percent on any remaining value.
All in all, Danes pay roughly triple retail price for their cars. An American VAT would make it easier for environmental activists to give U.S. car buyers similar treatment.
VAT rates also tend to go up over time, not down. Twenty-nine OECD countries currently have a VAT; 20 of them have increased their VAT rate over time. The average rate for newly introduced VAT rates in Europe was 5 percent. Now the average European VAT is more than triple that—17.7 percent.
Taxpayers are overburdened as it is. The best way to reduce budget deficits is to cut spending. VATs are complex. They are untransparent. They are hidden. They are vulnerable to special interest tinkering. They are prone to increases. They should be rejected.
Wayne Crews is Vice President for Policy at the Competitive Enterprise Institute in Washington, D.C., and the author of the 2010 edition of “Ten Thousand Commandments.” Ryan Young is CEI’s Warren T. Brookes Journalism Fellow.