30 September, 2009

A VAT Tax? I Hope America Isn’t That Stupid

John Podesta is in favor of a VAT tax. Before I get into what an insanely bad idea that is, let me add a few quotes.

“There’s going to have to be revenue in this budget,” said Podesta, Clinton’s former chief of staff and co-chairman of President Barack Obama’s transition team, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing today.

A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” said Podesta. Value- added taxes in Europe and Japan encourage savings by taxing consumption.

Podesta contradicts himself between the first and second paragraph, and hopes we’re too stupid to notice. Or maybe he’s stupid enough that he didn’t notice himself, but I don’t believe that.

He correctly points out that one of the ways out of our coming financial crisis is by increasing tax revenue. Another way out is to decrease spending, but apparently he doesn’t consider that option. Actually, we’re going to have to do both.

Then he says that a VAT tax would “create a balance” with other economies which “could potentially have a substantial effect on competitiveness”. Well, yes and no. If you notice what Podesta is saying is that he wants to add a VAT tax to our existing tax code. This is another tax burden on the American taxpayer, and directly belies Obama’s promise to cut taxes for 95% of working Americans. But that’s beside the point. However, the reason the above economies are growing more than ours is not because they have a VAT tax in addition to an income tax, but that the VAT has largely replaced the income tax.

You don’t get the economic growth of a consumption tax without getting rid of the income tax. You never get economic growth by increasing the tax burden.

But, as I said, Podesta seems to think we’re too stupid to understand that contradiction.

Now if we were talking about getting rid of the income tax, then a VAT would only be a half-stupid idea as opposed to the completely brain dead idea that Podesta is proposing.

I know what you’re thinking. “But, Chris, you’ve raved about the FairTax a zillion times. Isn’t a VAT really the same thing?”

No. Not remotely. They’re both consumption taxes (and they really are consumption taxes, not “so-called consumption taxes”), but a VAT is largely a B2B tax while the FairTax is a B2C.

And this makes a huge difference. Why? Let’s go to the next paragraph from that article:

Podesta said such a tax may be regressive, but can be balanced by exempting some products and using “the money to support low-wage workers.”

Ding! Ding! Ding! Ding!!

In one sentence, we have just summed up everything that’s wrong with a VAT tax.

When you start talking about “exempting some products” and being able to “support low-wage workers”, that’s a code. And it’s code for shifting around the tax burden based on lobbyist power and shifting political winds.

See, from the perspective of politicians, VATs are wonderful. They can shift around the tax so that industries they don’t approve of are taxed more heavily, or industries in their state or district are taxed more lightly. Let’s look at the example of building a car.

Car manufacturers buy raw and manufactured materials from companies all over the world. And some of these manufactured materials (your Bose stereo system for example) are built by other companies that also buy raw and manufactured materials from other companies. These are all B2B transactions and eligible to be taxed by the VAT. Eventually, all of these materials are put together and sold to the consumer which is a B2C transaction.

Notice that by the time the car gets to you, the consumer, you don’t know how much tax was involved in the production of this car. And you’re paying the tax. You don’t even know that the reason you can’t get a Bose stereo in your Jeep is because the VAT tax has been structured to make Bose stereos artificially more expensive than JBL. You don’t know that GM has 100% UAW membership because UAW workers receive VAT tax revenue in order to “support low-wage workers”. And of course, you don’t know that your VAT is paying for that too.

Nor do you know that the $25,000 car you just bought only costs $18,000 in Europe because in order to increase international sales, the U.S. government suspends the VAT tax on the material products if the end product is sold overseas (this is a common implementation of VAT taxes in Europe).

Nor do you know why the price of that car jumped from $25,000 to $26,000 mid-year even though nothing on it changed. It was because the VAT tax code changed and some component along the way got taxed more. And the cost got passed on to you.

And you think our tax code is complicated now.

The whole point of having a B2B consumption tax (a VAT) instead of a B2C consumption tax (a sales tax) is to hide what things are being taxed and how much. The only people this benefits are lobbyists and politicians. Lobbyists get paid big bucks to get tax breaks for their constituents and politicians line their pockets with the lobbyist money.

And you, the American taxpayer, get screwed.

In contrast, a B2C tax is highly visible. You know when you’re buying something whether you’re paying the tax and how much. It’s right there on the receipt. When the cost of your item goes up, you’ll be able to see right there on the receipt that the politicians snuck in a tax increase (hopefully you were paying attention beforehand and informed your representatives that if they raised the tax, they better pack their bags for home, but I digress).

This isn’t a left/right thing, or a conservative/liberal thing, or a Democrat/Republican thing. This is a political class/average citizen thing. A VAT should get 0% support from the American public, no matter what their political persuasion. It will never help the American consumer, and will only help our “friends” in Washington D.C.

Again, Podesta hopes we’re too stupid to notice that.


  1. First time visitor to your blog, and I like your content. The background is a little too dark for black type, though, & makes it hard to read. My two cents. Otherwise, you're doing great! Thanks!

    WV: partai (Japanese-themed bash)

  2. Glad to hear that you like what you see. My apologies on the colors. I wonder if you're not seeing what I'm seeing. I have black on a pale yellowish background. I'll check into cleaning up the format.