Value Adders Should Reap Rewards, Not New Taxes

The following article originally was published April 30, 2010, by Grand Junction’s Free Press.

Value adders should reap rewards, not new taxes

by Linn and Ari Armstrong

Once American revolutionaries fought to rid themselves of European politics. Now, given the direction the Obama administration is moving our nation, we might as well start applying for membership in the European Union. Or maybe we could become a colony again.

First the Democratic health bill moved us closer to British-style rationing and waiting lines. Now an advisor to Obama wants to adopt a value-added tax, or VAT, which spread from France throughout Europe and beyond. While White House spokespersons denied that Obama wants a VAT, reports the Associated Press, Obama himself said he wants “to get a better picture of what our options are” before deciding.

The premise of the VAT is that all people who add value to the economy should be bound more tightly in bureaucratic red tape. This is distinct from a regular sales tax, in which only businesses that sell directly to consumers must track and pay sales tax. Currently various state and local governments impose a sales tax, but the federal government does not.

To take an example, under a simple sales tax, somebody who buys a teddy bear pays a percent to the retailer, who must collect the tax for each sale and pay it to the applicable levels of government.

Under a VAT, everybody involved in the production of the teddy bear must calculate and pay taxes, including the makers of thread, stuffing, sewing machines, eyes, and the bear itself.

Why do politicians prefer a VAT to a regular sales tax? Consider what would happen with a sales tax of, say, 25 percent. Lots of consumers would be tempted to find a way to avoid paying the tax, and lots of sellers would be tempted to help them. If everybody in the production line pays a little part of the tax, nobody has much incentive to evade it. Moreover, when every business reports sales records to the government, no business has an easy time escaping the tax.

While a VAT is great for politicians, it dramatically expands the number of businesses required to keep intricate tax records, an especially onerous burden on small businesses. A VAT also invites eternal special-interest warfare, as groups argue that particular goods should be taxed at different rates.

Today, the major harm of a VAT would be to raise taxes. True, the Democrats are spending our children’s future on special-interest payoffs and bloated bureaucracies. But the answer to that is to cut spending, not raise taxes.

Unfortunately, various conservatives have long advocated a national sales tax, which would inevitably morph into a VAT. They foolishly imagine that a sales tax would replace the income tax. (George Will recently wrote of this possibility.) But all those conservatives have accomplished is to legitimize another sort of tax without undermining the income tax. In the reality of American politics, we’d end up with both.

Instead of talking about a new type of tax, we should be figuring out how to reduce the types of taxes. Having more types of taxes dramatically increases compliance costs — the effort required just to calculate the taxes — and obscures from the citizenry how much they’re paying and where the money is going.

While a full description of taxation would fill more than this entire paper, the main forms of taxation are income, sales, and property. (A VAT is a type of sales tax, and a payroll tax is a type of income tax.)

New Hampshire, to take an interesting example, relies largely on a property tax, and the state imposes neither a general sales tax nor a personal income tax. But we strongly dislike the property tax, because it’s like paying rent forever to the government. You never truly own your property if politicians can kick you off of it for not adequately paying them off.

As we’ve mentioned in a previous article, we’d also love to completely abolish state and local sales taxes, even if that meant moving everything over to the income tax.

If we could wave our magic wand, we would also rather have just a sales tax than both a sales and income tax. However, it wouldn’t do much good to eliminate the personal income tax without also abolishing payroll taxes (such as the Social Security tax), for otherwise people would still have to track their income in intricate detail for the government. Eliminating all sales taxes seems more politically feasible.

In our ideal world, all forced welfare would be replaced by independent effort and voluntary charity, and politicians would spend far less of other people’s money. In such a truly liberal order (to use the term precisely), taxes would be simple, few in number, and dramatically lower. At least that would be a good start.

For now, though, Americans who care about our founding ideals of liberty and Constitutionally limited government must at least resist the imposition of new sorts of taxes.