The VAT is back!

Democrats in Congress have floated various ways of increasing taxes in their health-care reform, and have applied most of them at one time or another in the bill.  Taxes have hit medical devices, capital gains, an income-tax hike on the higher income brackets, and even taxes on cosmetic surgery — even though the current insurance model has nothing to do with the vast majority of the cosmetic-surgery market.  This constant stream of tax hikes has the electorate angry and protesting, and it has sapped all of the support from their health-care efforts.

Have Nancy Pelosi and Harry Reid gotten the message?  Not really, as the New York Times reports in yesterday’s article, “Many See VAT Option as a Cure for Deficits”:

Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.

Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

“We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.”

The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.

Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries). And also like universal health care, this once-taboo policy option has recently been invoked, at times begrudgingly, by many prominent Washingtonians, including the House speaker, Nancy Pelosi; John Podesta, who was co-chairman of President Obama’s transition team; and two former Federal Reserve chairmen, Alan Greenspan and Paul A. Volcker.

Yes, I’m sure that “many” see that as a “cure.”  On the other hand, many, many more see a reduction in spending as the more obvious “cure” for deficit spending.  It’s akin to saying that a Harvey Wallbanger is a “cure” for hangovers.  Instead of exercising fiscal discipline themselves, Congress wants a cure that allows them to continue the same irresponsible spending that put them in deficit in the first place.

Why a VAT, instead of a federal sales tax?  The government gets to wet its beak at every point in the distribution cycle with a VAT:

Let’s say the value-added tax is 10 percent. The government will collect some tax revenue in each step of the production process, from roll of fabric to cocktail-party scene-stealer, but each business in the chain gets credit for the tax already paid by other suppliers.

When selling the cloth to the tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of supplies the tailor purchases. The tailor pays the fabric store $11, and the store remits $1 to the government.

When the tailor sells his dress to Macy’s, he calculates the value-added tax as $3, or 10 percent of his $30 pretax price. Macy’s pays the tailor $33.

But instead of sending the full $3 to the government, the tailor gets to subtract the $1 of taxes he had already paid to the fabric store. So he sends $2 to the government.

When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale.

Macy’s checks to see how much the previous companies in the supply chain — the fabric store and the tailor — have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government.

Got all that?  A federal sales tax would at least have the virtue of simplicity.  In this case, the complex nature of the tax collection will require more enforcement and more paperwork for compliance.  What happens when the tailor doesn’t comply?  Is Macy’s on the hook for the whole $5 and then have to appeal to get it back?

The Fair Tax system envisions a federal sales tax that replaces the current income tax system.  Democrats want this on top of the current system, even though it would wind up being much less progressive than the current tax system.  As the Times explains, that’s part of the appeal:

Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly.

What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans.

As Democrats get more and more desperate to fund their hard-Left agenda, keep an eye out for VAT proposals.  If we’re worried about consumer confidence now, just wait until we start slapping taxes across the entire retail distribution chain.

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