VAT Redux...

I think that it can be taken for granted that the US will face severe fiscal and financial restraint whilst dealing with the deficit that the Obama Administration has created for the US taxpayer (and yes, it is his problem, not one he can blame on others: the fact that he tries to underscores the weakness of his character...).

One approach to increase tax revenues would be to impose a VAT, a Value Added Tax. This is a tax on every stage of value added in the economic chain: when raw materials are processed into semi-finished goods, a tax is added; when semi-finished goods are transformed into factory goods, another tax is imposed (subtracting the first tax, though, to avoid double-taxing); when the goods move from the wholesaler to the retailer, another tax is imposed (subtracting the previous step, of course); and when the goods are finally sold, they are taxed once again. Hence, for instance, a 20% VAT tax is imposed at every stage of production: when raw materials worth $10 are transformed into semi-finished, they are sold for $12 and $2 is sent to the government; when they are input into a product that is sold to a wholesaler for $100, $20 is added, but the $2 is discounted, so that the government gets $18 from the factory; the wholesaler sells for $200, adding $40 but discounting $20; the retailer sells it for $400 ($80 VAT) but discounts $20. Hence $2+($20-$2)+($40-$20)+($80-$40) = $80 for the government on the final sales price of $400.

Of course, this is a marvelous way to raise revenues: it takes consumption, most of which is fairly involuntary, as we consume to live (and it does tax those who prefer to live to consume...) and turns it into a revenue generator of significant proportions.

Of course, there are downsides: it is highly regressive, tax those who can afford it the least proportionally the most (and for this reason alone should be rejected by all politicians who claim to represent the little people...), and while you can free certain necessities (or impose a lowered VAT) such as food, housing and clothing, the tax burden remains on those who consume.

There is, however, another component that people have completely forgotten to include, and one with sever and unintended consequences: the VAT must also be imposed upon imported goods when they arrive, in the form of an import tax that is the same level as the VAT. Hence when you, coming from a country without VAT, export to a country with VAT, your goods have a import tax placed on them at the port of entry that is equivalent to the VAT, with the importer paying for this.

The unintended consequence of a US move to a VAT would be this import tax, which will be viewed by many as a major change in the US policy of freedom of trade: the imposition of a VAT in the US could be interpreted as an act of protectionism, leading to a significant worsening of international trade relations.

Just something to think about when y'all are contemplating how we are going to pay for Obama's Follies.