The VAT Balloon

Over the last week or so, there has been talk of a VAT. For those of you who don't know what a VAT is, VAT stands for Value Added Tax. What a VAT does is taxes the value of a product increases through the manufacturing process. I'll Give an example.

You want to buy a widget. This widget has 3 parts supplied to the widget manufacturer (WM) which it uses to construct the final product. Each part supplier purchases raw materials and makes a part A, B, & C. During the process of manufacturing each part the value of each part increases in value by $50. So, lets say each part manufacturer (PM) pays $50 in materials making the price sold to the WM is $100. At this point, the PM is taxed 25% (one of the floated rates). This means the PM will pay $12.50 when selling each part. The WM takes each part and makes a widget which it sells at a price of $500. The value increase will be $200 ($500-3($100)). So at the same 25% VAT, the tax paid by WM will be $50. So the VAT taxes paid on the purchase of a $500 widget will be $87.50 ($50 + 3(12.50)).

What is good about this?

Well, the first thing is that a VAT will be partially an elective tax. If you don't want to pay the VAT, don't buy anything. The ability of paying taxes electively gives power to the people. Don't like a military engagement? Don't buy anything. Don't like a entitlement program? Don't buy anything. Having a tax system based upon a "sales tax" model (Note that a VAT is not a sales tax) gives the public the ability to control the purse strings of the nation through voting with their pocketbook.


So, what's the down side to this?

The VAT balloon floated by the Obama administration is not a tax system in opposition to the current system. In other words the VAT will not replace, but be added to, all the other taxes. There is some talk about possibly augmenting the income tax to make the tax more palatable to tax payers; however, the income tax is not being proposed to being repealed. This will mean just another layer of taxation added to the already multiple-tax tax policy of the governments in the U.S.

The $500 widget will rapidly assume a $587.50 price. The VAT, just as other corporate taxes, will be passed on to the consumer. The VAT will not just be applied to our $500 widgets. The VAT will be applied to basic necessities. It will be more expensive to survive; or in other words, it will be more difficult to rise above the poverty line. $5 gallons of milk and $2 bread will be a thing of the past. A $50 grocery trip will now be about $60. Sound like a winner to you?

In addition to the higher prices at the check out, the increase in prices will not be in any way transparent. "VAT" will not be a line on your receipt. You won't know how much you are paying in taxes; you'll just know that you're paying more. Through this type of cloaked tax, politicians will be able to talk about how the corporate fat cats aren't paying their "fair share" and you won't have the foggiest idea of how much the fat cats aren't paying because you can't see, and by these types of hidden taxes prevented from seeing, how much of these taxes you are actually paying.


What should we do?

Well certainly, the VAT should be opposed. It is a tool by which politicians will use to hide how much they are actually spending so they can confiscate your wealth without you getting wise to their scam. There is, however, a tax policy that can retain the benefits of the VAT and eliminate the disadvantages. This is the FairTax. The FairTax will be an actual sales tax. You will know how much you are being taxed. There will be a line on your receipt which tells you how much you spent on your taxes. Not only that, but it will not be a tax added to all the other taxes you already pay. Personal & corporate income taxes, Medicare & Medicaid withholdings, Social Security withholdings, self-employment taxes, the alternative minimum tax (AMT), estate taxes, every federal tax; ALL GONE! Your "take home pay" will become your "gross pay!" Not only that, but the additional resources your company allocates to your employment in taxes and government paperwork will be eliminated. Your company will be more efficient and would have the choice to reallocate that money to its employees. So in addition to getting your whole pay check, you could get an additional raise on top of it.

It is less stressful. You don't have to worry about filing your taxes. You don't have to worry about getting audited. April 15th will no longer be a day you have to your government paper work done, submitted, & paid for; but might be an excellent day to find a nice place in the park for a picnic. That sounds pretty stress free to me (depending on your company of course), but how many of you have been told by your health care provider to reduce your stress? It just another additional benefit. And since we're on the topic of not having to file your taxes, how much of you spend on having someone prepare your taxes? How many hours do you spend doing them yourself? You don't have to pay for or spend your time doing any of that stuff again! I do want to suggest to you that the onerous tax laws require you to pay a de-facto tax by paying to have your taxes prepared by a professional, or a tax of your personal time (either at your job, with your family, or other) so that you can become competent in knowledge of tax law and actually filling out your tax return. The cost of compliance is a tax with a different name.

Let's return to the fact that the FairTax is an actual sales tax. Now the VAT has the element of elective taxation that is shared by the FairTax. The FairTax is different from the regressiveness of the VAT is not shared by the FairTax. The FairTax is progressive and not applied to the basic necessities. So, if you don't like what the government is doing; no matter what the percentage of tax is, you can control the purse stings by choosing not to buy anything but the basic necessities. The FairTax will also be limited to the retail market. Although it makes sense to me that the VAT would be collected at the point of retail sales, what about sales of used products at the retail level? Although I am sure there are other examples, the used car market seems the most obvious question. Would the VAT apply to the average elevated value of used vehicles sold at retail dealerships? I don't know, but what I do know is that the FairTax would not. The FairTax only applies to new products at the retail level. If you want to go buy a previously purchased vehicle (or anything else for that matter), you don't pay tax. You pay tax once, that it! Simple.

Although there are a couple good things about the VAT, the disadvantages outweigh the benefits. If we were to enact the FairTax, we would have all of the benefits of the VAT without any of the disadvantages. If you want a more in depth discussion of the FairTax, the link above will take you to FairTax.org, but I severely recommend getting "The FairTax Book" and "The FairTax Book: Answering the Critics." I have read both of them and they are very informative. There are even more benefits to enacting the FairTax which you will read about in those books, but I believe I've covered the basics.

Really agree with what you read? Really disagree? Somewhere in the middle?....Let yourself be heard in the comments!
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