How Obamacare’s small business paperwork lays VAT groundwork

Jeremy Weltmer Contributor
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Contained within the mammoth Obamacare legislation that Pelosi instructed legislators to pass in order to find out was in it later, one finds a seemingly innocuous change in the conditions that require a business to submit a Form 1099 to the IRS. However minor this change may seem, it makes doing business prohibitively expensive, and, worse, it lays the groundwork for a Value-Added-Tax (VAT).

Before this change takes effect on January 1, 2012, companies will do as they have done for years: submit a 1099-MISC for each outside person to perform more than $600 of work in a year, such as a consultant or temporary worker. In that case, companies send a copy to the IRS and give a copy to the non-salaried person who performed work.

But as soon as this onerous provision of Obamacare takes effect, it will require companies to send 1099-MISC forms to each and every supplier with whom they transact more than $600 of business annually. Just consider the volume of forms that will have to be sent: every gas station at which trucking companies buy more than $600 of gas annually, every office supply store from which companies buy more than $600 of merchandise, every utility company from which a corporation buys services, and the list continues. The volume of forms will be unprecedented, and it will require massive amounts of time and effort from each and every company to send a copy of the form to each supplier and to the IRS.

To make matters worse, the IRS does not permit the form to be e-filed, and the IRS has said that it cannot presently cope with the deluge of forms that it will receive.

As expensive and onerous as this burden will be unless Congress acts to stop the change in rules, the new reporting requirement lends itself to far more nefarious uses. In order to enact a VAT and tax production at every step, the IRS would need to have granular enough information to track payments from each purchaser to each supplier. Only with that information could they assess the VAT accurately, and this change in 1099 reporting requirements coincidentally gives the IRS exactly that information.

A VAT, or “value-added tax,” works by taxing the value that each step of a production process adds. So, in the production of a loaf of bread, a VAT would be levied on the markup between when the farmer sells his wheat to a mill, when the mill sells the wheat to a commercial baker, when that baker sells the loaves of bread to a wholesaler, when that wholesaler sells them to a supermarket, and when that supermarket sells it to a consumer. Moreover, because the tax liability comes at every stage of production, consumers have essentially no way to evaluate the tax burden that they shoulder.

As consumers lack awareness of the true cost of the tax, lawmakers find the rate exceedingly easy to increase; as opposed to getting a smaller paycheck because of more taxes, consumers are proverbially “nickeled and dimed to death”.  For proof, one need look no farther than Europe. According to figures from Dan Mitchell at the Cato Institute, a VAT always results in a higher aggregate tax burden as governments never enact the proposed corresponding cuts in income taxes yet they surreptitiously raise the VAT rate. For example, in 1967, the U.S. had an aggregate tax burden of about 26 percent of GDP, which rose to about 26.5 percent of GDP by 2002, whereas the aggregate tax burden of the EU 15 countries rose from 29 percent in 1967 to 41 percent in 2002. In short, the VAT leads to nothing other than higher taxes.

While this change in policy does not signal the creation of a VAT, it represents precisely the sort of incremental change that one would want if a VAT were the end goal. The Left understands that the best way to pursue radical change is through incremental steps, by forcing businesses to grow accustomed to this onerous paperwork essentially identical to that required by a VAT.

Higher taxes invariably lead to lower growth, and Europe again proves the point. From the 1960s until now, the U.S. economy has boomed and resulted in higher living standards across the board while Europe has stagnated. The U.S. presently faces a choice that Obamacare has crystallized: it is time to choose the degree to which the U.S. should foster economic growth. To pose the question another way, the U.S. must choose if its tax policy should strive to spur growth or to extract more from a stagnant economy,

Weltmer is a federal affairs associate at Americans for Tax Reform.