VAT-wide Conspiracy Fearz

Of the various ONOZ!1 raised by lay (non-)economists, Charles Krauthammer booga-boogaz the VAT threat. Let me shorter: The high cost of Obamacare (sic) will force the U.S. government to levy a Value-Added Tax regime, turning us into German Diaper Babies or Vichy French Mimes or something.

Well, I am certainly a lay (non-)economist, so naturally I went to the Wiki-well. I’ll shorter that, too: Every time value is added to a product or service, a tax is collected by the producer and paid to the government, which returns an equivalent deduction; the tax is ultimately levied on the end-consumer.

Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favour over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is 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 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.

The NYTimes ran a fuller, accessible article on the economics and politics of VAT a few months ago that is worth reading. A few libertarian and conservative economists have voiced support of VAT, including Greg Mankiw (inviting a dissenting response from a writer at Reason):

From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult.

Again, I am no economist, but I am having a hard time seeing the problem with this strategy. It seems progressive, as most of the tax burden will fall upon higher income consumers who tend to buy higher valued goods. (Liberals argue it is regressive because the poor have fewer savings and spend a larger percentage of their income on consumer goods they need, like, say, food and clothing.) It is harder to evade taxes. It lacks the cascade effect of the sales tax.

The Reason reasons for opposition seem to be a) VAT didn’t stop the Greek economic collapse (which was caused by the world-wide economic crisis, credit default swaps, and, yes, debt); b) VAT revenue cannot be counted on to aim at deficit reduction (but wouldn’t more revenue for necessary social programs offset federal borrowing?); c) even if we could aim VAT revenue at deficit reduction, we can’t raise enough money to offset CBO projects of deficit increases; d) VAT on top of our current tax system could encourage an “underground economy” and a rise in homemakers (???); e) go read the rest yourself.

Combine VAT with a more progressive income tax scheme, as European countries tend to do, and we might have the makings of a more sustainable and equitable society. Of course, we still have to cut spending. I say we start with our worldwide military adventurism and turn defense into just that, defense. This suggestion goes totally against the grain of Krauthammer et al’s way of thinking, of course.