Wednesday, March 31, 2010

Washington Wants a VAT... What They Need is a Twelve Step Program

After passing the health care bill that raises taxes on earned income, dividends, suntans, medical devices, capital gains, and pharmaceutical companies, not to mention the cost of health insurance for those of us able to afford it as well as those who can't, you may be asking what Congress plans to do as an encore. Well, just like the drunk who's waking up from a three day bender, they're going to reach for another nip of their favorite hooch, another shot of taxes so to speak. Just so they don't leave anything out this time, their next tax will be on everything. That's right, the same folks who are bringing European style health care to America are beginning to talk up that other European favorite: the Value Added Tax as a way to pay for their unbridled expansion of the welfare state.


What's a Value Added Tax ( VAT) you ask? Well, like I said, it's a Tax on everything.
VAT is a tax assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges the VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference, in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
It's looking like 2010 may yet be the year we try to tax ourselves into prosperity. You can do that, can't you? Just think of how much better off you'll be once this new tax is imposed; think of all the additional revenue your government will be able to squeeze out of you. The proponents of the VAT say it will enable us to once again restore order to our fiscal house and close the gaping trillion + dollar hole that they've created between what the government collects in tax revenue each year and what it spends. Won't that be great? Can't wait till it happens, right? Well, don't hold your breath. The VAT won't even come close to living up to it's advance billing. How do I know this, you ask? Just have a look at the current budget deficits of any of the European governments who already have a VAT Tax.

According to the European Commission, the average budget deficit for 2010 will likely be 7.5% of GDP, a percentage point or two below what the US deficit will be without a VAT. As we've seen, folks drunk with power, just like those overly lubricated with alcohol, can make all kinds of promises that are quickly forgotten as soon as they need their next drink. I'm sure you recall that no one making less than $200,000 would pay a nickel more in taxes and that health care reform would reduce the cost of health care. If eliminating the deficit was really a national priority, the folks who decide what the government is going to spend each year would be in a massive belt tightening mode; but government giving up the sauce just isn't in the cards. Instead, their attitude is why should we cut our budgets, when it is within our power to make you cut yours?

So, if it won't do away with the deficit, and it's as unlikely to restore fiscal discipline in Washington, as one more drink is to sober up the drunk, then what can we expect from the VAT tax, aside from more welfare programs? For starters, you can expect to pay higher prices for everything you purchase, and as a result of increasing the price of everything, you should expect the demand for everything to fall and along with it the volume of all goods and services produced. How many additional employees do you need to produce less? This sounds to me like a recipe for an economy on the rocks, with even higher unemployment than we are currently choking on. Maybe we can make our chronic unemployment rate permanent like our brothers and sisters in Europe have done. They seem to have gotten used to a rate that is two to three times what our unemployment rate has averaged over the past twenty years. Perhaps it's an acquired taste, like scotch or gin?

Don't worry you say, the President's Budget Commission is sure to deal with the deficit. Don't kid yourself! The President's new Budget Commission is just a diversion from reality. It is but a group of stammering, stuttering politicians who will will seek to convince you just how sober they are; whose pretense will be to convince you and me that there is just no way to cut government spending any further, and the only way out of the nation's fiscal troubles is to raise more revenue. After all, everyone knows Obama has frozen the spending on 13% of the budget already; so what else is there left to do?

What our representatives fail to see is that the way out of a spending problem is to stop spending, just like the way out of a drinking problem is to stop drinking. But we all know addictions can be difficult to break, and sometimes you have to hit bottom before you can admit you actually have a problem and seek help. I'm thinking that their political bottom is coming, and they'll be free to spend some much needed time in rehab, come November.

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