The Value Added Tax (VAT). An interesting perspective.

What is my general attitude toward taxes? HATE THEM! What is my general attitude toward the Value Added Tax (VAT)? I think it is just another way to gouge more dollars out of the private sector and send them to Washington.

However, if the VAT was somehow miraculously used to reduce income and payroll taxes proportionately (i.e., revenue neutral) I would favor that. Why is that, ask you? Because the “hidden economy,” “tax cheats,” and those with “favored tax status” all get away with theft. A consumption tax (a VAT is essentially a “consumption tax”) solves much of that problem although there are still ways to cheat.

However, the following is a new wrinkle in the VAT debate – at least it was for me (my readers are a lot smarter than me). One of the reasons Mr. Trump was elected was our trade deficit with numerous countries. He believes we are getting screwed by our trade deals and I do not disagree. However, there is another reason we are getting screwed and it has nothing to do with bad trade deals and everything to do with the VAT. Importantly, I am not making a claim of expertise on this matter. I am regurgitating from the Mauldin article below. I have done some minor editing. (And, by the by, I believe in free trade and think tariffs are a bad idea.)

[Source: Hot Summer Mailbag: Trade War Games, by John Mauldin]

Here’s a comment responding to “Trade War Games” and my (Mr. Mauldin’s) concerns about rising protectionism.

Rolf Parta: Much of America’s trade deficit stems from our refusal to adopt a Value Added Tax when virtually all of our trading partners have one. To review, VAT is added to the cost of everything purchased inside a country, including IMPORTS, but does not apply to EXPORT sales. So, if the total tax burden in two countries is equal and the actual manufacturing cost is equal but one uses a VAT and the other does not, you can expect that the total cost to produce, ship, and sell goods in BOTH countries will be lower for the company located in the country with the VAT. Those who wish to challenge this notion are welcome to sit down with paper and work it out.

Companies in the non-VAT country pay both the full tax (corporate tax – RF) in their own country plus the VAT when they try to export to the VAT country against competition from the locals who pay only the full tax (corporate tax and ours is the highest among the OECD nations – RF). Meanwhile, in the non-VAT country, imports enjoy a tax reduction equal to the VAT percentage while local makers pay full tax.

This unfairness has persisted since the 1950s when the VAT was invented. It was, long ago, “justified” in Europe by the need to rebuild their infrastructure destroyed in World War II. I humbly suggest that the need for America to subsidize manufacturing in Europe [and China] via refusing to adopt a VAT is long since past and that using a VAT here, possibly as an exchange for lower or no income taxes, would right our trade situation in multiple industries at once.

And, since most of our trade partners already have a VAT, their “bully pulpit” to complain about the US starting a trade war doesn’t exist … they started it, as the saying goes, long ago.

John Mauldin: Regular readers know I would like to see a VAT system in the US. I think it could eliminate or greatly reduce both income and payroll taxes. For some reason, though, the politicians who could make this happen refuse to consider the idea. They fear – perhaps reasonably – that we would end with both a VAT and existing taxes on top of it (Also my fear – RF). There are ways to prevent that from happening, but it would take more vision and dedication than the current congressional leadership seems to possess.

And let me make a further point. Today’s deficits will grow even larger because of entitlement programs. The only way to get serious money, and by that I mean the trillions it will take to balance the budget or even come close, is a VAT. Let’s face it: We are going to get a VAT sooner or later – probably under a Democratic Congress and administration, but Democrats are not going to look kindly upon lowering income tax rates. A Republican administration, on the other hand, could use a VAT to completely eliminate Social Security taxes and deeply cut corporate and income taxes.

Again, I will state that I have no expertise on this matter. However, in a tongue-in-cheek post where I stated my platform to run for president I included a tax plan (footnote). I still like it and it included a “consumption tax.”

Roy Filly


The Roy A. Filly, MD Presidential Campaign Platform (Tax Structure):

The tax structure I would prefer would be based on a balanced budget amendment. Congress must levy sufficient taxes to pay for everything they wish to do during a given fiscal year. I believe a combination of the “fair” tax and the “flat” tax would be most appropriate. The “fair” tax is a consumption tax, and the “flat” tax is an income tax.

My ten guiding principles:

  1. A balanced budget (as required by a Balanced Budget Amendment to the Constitution), unless we are at war. (Going to war requires an Act of Congress as stated in the Constitution and not a Presidential excursion permitted under the War Powers Act).
  2. Everyone has “skin in the game” (i.e., everyone pays some taxes – see the single exception below).
  3. Tax both income (employing a single tax rate – a Flat Tax) and spending (the FairTax Plan – although modified as appropriate because there will be two forms of taxation instead of only one). The “consumption tax,” I believe, is important to tax the “hidden economy” and income tax “dodgers.” I also propose that there be no income taxes on anyone whose earned income is below the poverty line. Also, if their earned income is below the poverty line they receive a refund for their “consumption” tax (i.e., those at the poverty line or below pay no federal taxes). The consumption tax can only be levied at the point of purchase… There will be no issue about whether this tax proposal “explodes the budget deficit” or whether it “gives Congress free reign to increase expenditures.” The budget must balance.
  4. All forms of Federal taxation are included under this single tax structure (i.e., no payroll taxes). Social security and Medicare taxes all fall under the term “taxes.” All “agency costs” must be considered in the federal budget. We will not add to our debt through federal agencies any longer. The American people will know what their government “costs” in my administration.
  5. Reduce or eliminate taxes on saving and investing.
  6. Reduce or eliminate corporate taxes.
  7. No exemptions, no tax credits, no “nuttin” as my sainted Mother would say. An exemption can be added but only by a super majority vote of both Houses of Congress, and of course, the budget must still balance.
  8. Only the consumption tax can be raised if more money for new programs is necessary. The single income tax rate can never be raised or divided into “progressive” rates. This means that no politician can play one “constituency” against another. Every constituency will pay this tax. Thus every politician will face their electorate knowing they have increased everyone’s taxes.
  9. Any increase in the consumption tax requires a super majority vote.
  10. If these will not produce adequate revenue and no tax increase is deemed appropriate, then any deficit must be solved by reduced expenditures.

About Roy Filly

Please read my first blog in which I describe myself and my goals.
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4 Responses to The Value Added Tax (VAT). An interesting perspective.

  1. Bob Herwick MD says:

    One problem with a VAT is for someone just retiring. He/she has been paying income tax for years and now must live off his/her savings and retirement accounts. Now suddenly with very little income to be taxed this unlucky timing will produce taxation of purchases w/o the offsetting reduction in personal income tax, payroll tax, social security tax etc. Congress may be loathe to disadvantage an increasingly aging population.

    • Roy Filly says:

      However, a great many Americans have 401k accounts which are taxed as income and when 70 and one years of age must take a minimum required distribution. Possibly the “tax geniuses” can figure a way to soften the burden to which you correctly point.

  2. Bill Grisham CPA says:

    There is no such thing as a “fair tax.” As you said it is just another way to suck money out of the private economy and send it to D.C. or some of the state capitals. And expecting them to lower some taxes (instead of abolishing them outright) is just a pipe dream. How many of our past taxes have been lowered with the same premise and not later raised again?

    • Roy Filly says:

      That is why is said “if the VAT was somehow miraculously used to reduce income and payroll taxes proportionately (i.e., revenue neutral) I would favor that.”

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