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Here it comes: the VAT

The direction the fiscal winds are currently blowing is not good for the Obama Administration's massive spending plans:

So what is the Obama Administration seriously considering in order to offset income tax shortfalls, in the face of a wobbly bond market? You guessed it -- more taxes, specifically a national sales tax in the form of a "value added tax" or VAT.

Sales taxes have always been problematic for liberals because they are considered "regressive." Poor people spend a higher percentage of their income on staples like food, clothing, and fuel, which translates into a bigger tax impact for the poor. The regressive nature of the VAT would have to be balanced by additional income tax levied on "big money" earners, perhaps starting with families that earn more than $100,000 a year. But VAT advocates believe that a VAT would raise enough revenue to completely eliminate the need for families who earn less than $100,000 a year to pay any sort of income tax. The Washington Post explains:

What would it cost? [Ezekiel Emanuel, brother of White House chief of staff Rahm] Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, [Leonard Burman, co-director of the Tax Policy Center] suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

So that's the sales pitch -- if you are "poor" or "middle class", you'll pay the VAT instead of income tax, and (presumably) you'll be free from Federal withholdings so you'll get more take-home pay, or if you live at or below the poverty level, your VAT payments made on staples like food and clothing will be refunded. Even though you'll (presumably) lose a lot of specific tax credits and deductions, in the end you will pay less tax and get more free stuff from the government. If you are "rich," your income tax will be substantially less, the VAT will be manageable, and you'll get more free stuff from the government. How state and local income and sales taxes would be affected by this plan still remains to be seen.

The biggest disadvantage of value added taxes is the way they are calculated. VAT for a particular item are based on the "value added" (an amount generally equivalent to the profit margin) to each individual component of that item, as each component is manufactured, distributed, and then finally assembled into the resulting item. Tracking the value basis for consumer goods is a complicated process, and depends a great deal on voluntary compliance from manufacturers and distributors. Businesses are allowed to recover some of the VAT portion of raw goods costs, but this also requires a lot of expensive inventory and cost tracking. The other problem with VAT is that the consumer has no way of knowing exactly how much of an item's price is tax, since "value added" is a complex calculation based on the particular supply and distribution chain for any given item.

The politics involved in passing a national VAT could be very interesting. People in general usually balk at more taxes, but if the "you'll pay less taxes overall" sales pitch proves to be a big enough carrot on the end of the government's big stick, then public support may reach a high enough level to give lawmakers the confidence to vote "yes." Also, national sales tax plans have periodically enjoyed bipartisan support, most notably Republican Mike Huckabee's recent proposal to abolish income taxes and replace them with a 23% national sales tax. Still, the opportunity for government to continually tack additional taxes on top of a VAT, combined with the fact that consumers will never really know how much tax they are actually paying, should make us think long and hard before we embrace a new national sales tax.


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Comments (26)

I have 2 large purchases I ... (Below threshold)
retired military:

I have 2 large purchases I have been putting off. If the VAT looks like reality I will be making them sooner than I have planned.

How about a Value Lost Tax ... (Below threshold)

How about a Value Lost Tax Rebate?

So, shorter:Step 1... (Below threshold)

So, shorter:

Step 1: VAT
Step 2: ???
Step 3: Profit!

Instead of adding more conf... (Below threshold)

Instead of adding more confusion with VAT vs Income Tax, just go the full monty and go with no income tax and a national sales tax? The Fair Tax plan would actually HELP Obama reduce his debt! It would grow the tax revenue into the treasury instead of what is happening now with it contracting.

Ohh the hell with it..Why d... (Below threshold)

Ohh the hell with it..Why does'nt Obama just admit Hes a greedy liberal that wants all that everyone else has earned.

It would be a lot easier to take then all the double speak and red values.

And does anyone think that ... (Below threshold)

And does anyone think that a VAT wouldn't piggyback on the current income tax?

Talk about a party living u... (Below threshold)

Talk about a party living up to it's well deserved reputation, these tax and spend liberals are going off the deep end.

It really is incredible.
Whether here in Ma. (again I apologize for Kennedy/Kerry) or nationally, their only solution is more taxes.

Does it ever end?

It does'nt matter how much ... (Below threshold)

It does'nt matter how much Obama brings into the treasury..The more power and money this guy takes the further trillions of debt are added to what We have to finance and payback.

His ego trip is costing the next generations a massive burden to carry. All the while sitting with that dumb grin on his face.

Please keep in mind, when c... (Below threshold)

Please keep in mind, when considering any means for increasing government revenue, that They NEVER Get ENOUGH! They Will ALWAYS Need MORE.


Pretty sad the news about M... (Below threshold)

Pretty sad the news about Maryland's Millionaires is making the rounds, but it proves what I had said all along. Liberals are in complete power here, and look how they run things.

Those lost tax revenues are now being examined as new taxes to be passed on to the rest of Marylander tax payers.

Paul HenryYour abo... (Below threshold)

Paul Henry

Your about due?

Also, national sal... (Below threshold)
Also, national sales tax plans have periodically enjoyed bipartisan support, most notably Republican Mike Huckabee's recent proposal to abolish income taxes and replace them with a 23% national sales tax.

This is also known as the Fair Tax that Neal Boortz and John Linder came up with. To credit Huckabee with this idea is incorrect.

I propose a special 80% inc... (Below threshold)
James H:

I propose a special 80% income tax on people named "Michael."

In the event that doesn't fly, one big sales point to the VAT is a lot of people would find mid-April a lot less of a headache ...

You're making the assumptio... (Below threshold)

You're making the assumption that the VAT would replace the income tax, James H - where it's much more likely that it will be seen as a SUPPLEMENT to it.

So under Obama we still hav... (Below threshold)
Mac Lorry:

So under Obama we still have the income tax, plus a new carbon tax, plus a new VAT tax, plus the income tax may be extended to include the value of the health insurance people now get tax free from their employer, and then Obama will either increase or extend the top limit on payroll taxes. At some point people will have to quit working and take the government handouts to better their lifestyle. The downside of that is Obama will then tax happiness.

However, Obama is not a tax and spend liberal, he's a spend and tax liberal.

The "crisis" of a rather or... (Below threshold)

The "crisis" of a rather ordinary recession is already ending...no wonder everything is now in 'hurry up' mode before the rest of the 'crisis' goes to waste. Hike taxes (despite saying the poor and middle class would pay no more taxes, why not, you've alredy broken that promise). And hurry, hurry, get socialized medicine passed! AP reporting:

"President Barack Obama warned Thursday that if Congress doesn't deliver health care legislation by the end of the year the opportunity will be lost, a plea to political supporters to pressure lawmakers to act.

"If we don't get it done this year, we're not going to get it done," Obama told supporters by phone as he flew home on Air Force One from a West Coast fundraising trip."

This article might be cmore... (Below threshold)

This article might be cmore convincing if there was a shred of evidence that the adminstraiton is actuallyconsidering a VAT tax, but there isn't.

Instead, if you follow the link in the article it leads to this

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

The author has posted nothing that supports his headline.

The author has pos... (Below threshold)
Mac Lorry:
The author has posted nothing that supports his headline.

Sure they did. Obama is a liberal who admires Europe and VAT is popular with European governments. That combined with Obama's record of coming to like taxes he opposed in his campaign and you have all the support you need. Of course the author could just quote an anonymous source and it would be up to NYT standards, and thus, beyond question by liberals.

As Chris Bergin just noted ... (Below threshold)

As Chris Bergin just noted with respect to the VAT at Tax.com

"Most of the folks currently in charge of our government don't just want big government, the want HUGE government. President Obama's proposals currently would add almost $10 trillion to the national debt in ten years. And that buys a lot of government. And it's probably just a start. But I'm not buying that they're principled progressives who never inhale."

I couldn't agree more.

Michael, while I completely... (Below threshold)

Michael, while I completely support the FairTax, Mike Huckabee is only a proponent of it. It is not his proposal. For information on this go to:


Fauxbama the teleprompter i... (Below threshold)

Fauxbama the teleprompter in chief is just like all the rest of his kind, NO personal responsibility no respect/regard for money, and when they run out of it, they look for someone else to pay the bills.

Sieg Heil! I don't think th... (Below threshold)

Sieg Heil! I don't think they can manufacture as many brown shirts as these fascist bastards are going to need. Welcome to commie hell you bunch of morons.

It's a regressive tax on th... (Below threshold)

It's a regressive tax on the poor, period. The earned income child credit and a host of other deductions will be lost, the poor will pay more while the Rich pay less.

Further, there's going to be a fist fight on the floor of congress to get exceptions added for every possible reason you can imagine.

Example: In Australia wimmenz were in an uproar over vatting tampons. It seems this is sexist.

It's an unholy mess that punishes commerce.. which is only 3/4 of the American economy.

It has trade implications as well. Depending on who you ask, it gets credited at the border or not, or maybe it should for some things.. Blah, blah. A legion of devils lurk in these details.

It turns every retailer into a tax collector and (This goes for the "Fair Tax" too, btw) WILL NOT ELIMINATE THE IRS. (One of their biggest false notions, and the most oversold.)

Frankly, tax revenue isn't the problem - Spending is. Military spending is off the chart. We spend a trillion bucks a year to chase vaporware around Mesopotamia and incinerate children. Big government is also the problem. Remember, a government big enough to give you everything you want, can also take everything you have.

How's about a wealth tax? Oh no! We can't do that! After all, the job of government is to keep people from getting there. You know, knock them off the ladder on their way up. Once they arrive, we protect them at all costs.

So that's the sales pitc... (Below threshold)
James Cloninger:

So that's the sales pitch -- if you are "poor" or "middle class", you'll pay the VAT instead of income tax, and (presumably) you'll be free from Federal withholdings so you'll get more take-home pay, or if you live at or below the poverty level, your VAT payments made on staples like food and clothing will be refunded.

Bull. Shit.

Look at every European country that has a VAT (including my old stomping grounds, the UK). Not only do they have a VAT, they also pay an NHS tax AND Inland Revenue.

You can bet your last farthing/penny that not only would they try a VAT, it will added ON TOP of your current State Sales Tax AND you will still pay all your other taxes to boot.

Tax and spend, tax and spen... (Below threshold)
Jerry Horton:

Tax and spend, tax and spend, spend and spend, tax some more. The more things change, the more liberals stay the same.

In the spirit of "openness"... (Below threshold)

In the spirit of "openness" that the President has talked about, how about providing the American people with financial statements and projections, just like the private sector must do. Even better, maybe we can sell stock in the government - the liberals can double down on their belief that government is great and we Republicans can hold on to our money and buy it up cheap when it collapses!






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