Why I’m Torn On The Value Added Tax

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Could America Be Next?

I am not and will never be perfect, I sincerely do not believe that any human being ever has or ever will know what the best position to hold on every single political issue is. Even as someone who knows significantly more about politics than most I would have to be consumed by hubris to ever think or suggest that I know the right answer to every single political issue. That is mostly what has been on my mind lately with regards to this issue; for now my position on whether a valued added tax or VATs for short would help America (if it were to replace many other forms of taxation such as corporate, payroll, capital gains, etc.) is a simple “I don’t know”.

 

What is a Value Added Tax?

Countries with some form of VATs tax.

If you are a citizen of any OECD country besides America and you either own a business or pay attention to politics then you probably know what a VAT is but in America it is understandably not as understood due to the fact that Americans are taxed through different forms of taxation and none of these is a value added tax. So from all of my research on the subtraction method VAT which is what has been proposed in the U.S[1][2] the main finding is that the Value Added Tax is just like the name suggests a tax on the value added to products when sold.

In the subtraction method, VAT businesses are taxed on what they were paid for selling goods or services in x amount of time where in the U.S. x would most likely be a year minus however much they paid to buy items for their business. For example, if I own a business where I sell hot dogs and people buy 500,000 dollars in hot dogs in one year but the business buys 300,000 dollars buying supplies (buns, meat, fuel for the grill, etc,) then the business would pay taxes on 200,000 dollars for that year at whatever the VAT rate was[3]. In this situation using my made up hot dog business as an example under Senator Cruz’s (R-TX) tax plan the business would pay 32,000 dollars in taxes[1] while under Senator Paul’s proposed plan the business would pay 29,000 dollars in taxes [2].

Disclaimer on where I stand

The policy on which I am currently stuck is not whether or not it would be a good idea to add a VAT to our current tax code because that is something I would vehemently oppose but rather whether the VAT would be a good idea in relation to a plan similar to the Ted Cruz’s plan where individuals  would pay a 10% flat tax and businesses would pay a 16% VAT[1] or the Rand Paul’s plan where individuals would pay a 14.5% flat tax and businesses would pay a 14.5% VAT[2]. The other situation where I would consider a VAT would be under a 20% or less VAT plan where every other form of federal taxation is done away with. Also, I do believe that in the short term Senator Cruz’s plan is most likely the best tax plan that has been released by a sitting but my main concern about the VAT is the long term.

 

Why I am considering yet skeptical of a VAT

Right wrong or indifferent the VAT is an absolute money machine that can raise significantly more money than other forms of taxation such as the corporate tax or the income tax without necessarily harming the economy as much. For example according to the highly respected tax foundation if the entire corporate income tax were to be repealed and replaced with a 5% VAT then that simple change to the tax code over ten years would create an additional 337,000 jobs, grow the economy 5.5% more than what it would grow under current law while raising $3.145 Trillion dollars in new revenue, while at the same time raising after tax income for every single income group[4].

This ability to raise so much money so easily is both the reason I am considering the VAT and the reason that I am skeptical. I do believe that Senator Cruz’s plan if kept as the law, would greatly improve the American tax code and the American economy although if it were to be passed I would be extraordinarily skeptical that it would remain law. I simply just do not have sufficient trust in Chuck Schumer and Nancy Pelosi to believe that they could have such an enormous revenue machine in front of them and not try to push the pedal to the metal and speed up the revenue flow by taking the 16% and transforming it into a 25%, not only do I not have sufficient trust in Schumer and Pelosi to not try it but I also lack sufficient faith in Mitch McConnell and Paul Ryan to put all of my hopes for sound tax policy on their ability to prevent Schumer and Pelosi from raising taxes. In countries that have implemented VATs their taxes have tended to rise which is something very sad considering how efficient and fair a VAT would be in comparison to a corporate income tax, payroll tax, or pretty much any other form of taxation. If a VAT were to be implemented and the government was a moral entity that lacked thirst for power that would be amazing but the fact is that when VATs have been implemented historically tax rates have had a tendency to go up which is something which I vehemently oppose. With that, I return to the same place that I started on whether the VAT would be a good public policy which is “I don’t know”.

 

References

Cruz, Ted. “The Simple Flat Tax Plan Summary.” Ted Cruz for Senate, CRUZ FOR PRESIDENT, www.tedcruz.org/tax_plan_summary/.

 

Paul, Rand. “Blow Up the Tax Code and Start Over.” The Wall Street Journal, Dow Jones & Company, 17 June 2015, www.wsj.com/articles/blow-up-the-tax-code-and-start-over-1434582592.

 

United States, Congress, “US Chamber.com.” Uschamber.com, U.S. Chamber of Commerce, 25 Apr. 2010. www.uschamber.com/sites/default/files/legacy/issues/econtax/files/vat_paper_4_25_2010.pdf.

 

Foundation, Tax. “Options for Reforming America’s Tax Code.” Tax Foundation, Tax Foundation, 9 Mar. 2017, taxfoundation.org/options-reforming-americas-tax-code/.

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