VAT for financing health care proposals, still a bad idea
According to this article in the Washington Post by Lori Montgomery (”Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look,” Washington Post, 5-27-2009), the Democrats in Washington are looking at the European-style Value-added tax (VAT), a stealth version of the sales tax, to finance the Obama health care plan. In 1993, just a little earlier in Clinton’s first year in office, the VAT was proposed as a way to finance the Clinton health care plan. Back in 1993 I wrote an op-ed article for my local Chamber of Commerce magazine, and that article is still appropriate. Below is the article.
“A Tax at Every Turn,” R. Morris Coats, Thibodaux Chamber of Commerce Magazine, 24(4):10-11 (August, 1993).
With the worst possible political timing, Clinton’s team floated a trial lead ballon on April 15, the idea of using a Value-Added Tax (VAT) to finance Clinton’s health care reform plan. (By the way, it still escapes me how we must come up with an extra $100 billion dollars to adopt health care reform so that we can reduce the federal budget deficit.) Just mentioning the word “Tax” on that dreaded day signifies the administration’s lack of understanding of the plight of America’s taxpayers. Suggesting that we use a Value-Added Tax to finance anything in this country signifies either the administration’s lack of understanding of public finance or its intent to play slight-of-hand tricks with the federal budget.
A national Value-Added Tax is much like a national sales tax. Instead of charging a flat rate on every dollar of retail sales, that same rate is collected from producers on the difference between the cost of the goods that they sell and their sales revenues, that is, on the value that they add to goods at each stage of production, from raw materials producer to manufacturer to wholesaler to retailer. Take the case of a loaf of bread that sells for a dollar. In the process of making the bread, a wheat farmer sells wheat to a mill which sells flour to a bakery which sells bread to a store which sells it to the final customer. The wheat that went into the flour that went into a loaf of bread sold for a quarter, while that much flour sold for a half dollar while the baker sold the bread to the retailer for 75 cents. Each producer adds a quarter at each of the four stages of production. If each producer is charged a 10 percent Value-Added Tax, each of the four pays a tax of 2 1/2 cents, which adds 10 cents to the cost of the bread. The price of the bread ends up going up by 10 cents, the same amount as it would if there were just a national sales tax of 10 percent. Who ends up paying for this tax? The same person who ends up paying the sales tax, the consumer.
This does not mean that there is no difference between these two taxes. Since most areas already have some sort of sales tax, a national sales tax would cost little extra to collect. With a Value-Added Tax, we would have to add a huge bureaucracy of accountants to check the cost of goods sold and the sales at each stage of production. This is a very costly tax to collect.
Another difference is that the burden of a sales tax on the poor can be eased by putting exemptions on certain classes of goods, such as groceries, utilities or medicine, because the poor spend a larger portion of their income on these items than wealthier citizens. With a Value-Added Tax, producer groups can be excluded, not consumer groups. Instead of easing the burden on certain consumers, it is eased on certain producers. This not only makes it difficult for the tax to be eased on the poor, but also makes it more likely that many producer groups will be lobbying in Washington to get their group excluded from the tax. Special interests do not lobby as much for exemptions from sales taxes because it is harder for consumer groups to organize for lobbying than it is for producer groups. For an administration that is always complaining of the influence of special interests in Washington to give special interests a greater incentive to lobby in Washington means that they are either hypocritical or uninformed. President Clinton, if we are to believe the media, is not uniformed.
A national Value-Added Tax is differs from a national sales tax in another important way. With a sales tax we see what we pay in these taxes at the cash register. The consumer never sees the bill for a Value-Added Tax, though the consumer ends up paying for the tax since it is passed forward to the buyer. This has prompted some critics of this tax to call it the Stealth Tax, because it hits us before we ever see it coming. When we see the bill for big government, we question whether the spending is necessary. But when we don’t perceive the costs, we don’t question the spending. We are more likely to ask for new spending programs if we never notice how much it costs.
The administration is quick to remind us that the Value-Added Tax is widely used in Europe. This is true. But the Europeans arived at their Value-Added Tax by their own peculiar history. They have no corporate income tax. Their Value-Added Tax evolved from their former business tax, a tax on gross receipts at each stage of production. In our bread example, a 10 percent tax would collect 2 1/2 cents from the farmer, a little more than a nickle from the miller, about 8 cents from the baker and about eleven cents from the retailer, adding up to more than 21 cents. The Europeans quickly found that businesses could avoid the tax by combining the various stages of production into one business which would lower their taxes considerably.
For now the Clinton administration has abandoned the Value-Added Tax. It is fortunate that they were not politically astute. This is a tax idea that is likely to resurface in this administration in a few years. The administration’s suggestion that we adopt this tax because all our friends are doing it is a reason that never washed in my adolescence. I hope that voters are adult enough not to ever let the Stealth Tax to become law.
In his camaign for president, Obama said over and over, that if elected, taxpayers in the bottom 95% of taxpayers would not see their taxes go up by one cent. The word to stress there, apparently, was “see” because the VAT tax would certainly raise taxes, and raise them the most on the poor, but it is indeed a stealt tax, and taxpayers will never see this coming. If we adopt a sales tax, let us adopt a real sales tax.
-MC