Is a VAT Tax Back on the Table?

A recent Yahoo news story suggests that President Obama might consider a VAT (or Value-Added Tax) – essentially a National Sales Tax.  Recently, former Federal Reserve chairman Paul Volker brought up the topic of a VAT tax as a potential way to boost taxes.  But, others thought much differently, including the U.S. Senate that voted overwhelmingly 85-13 last week in a non-binding resolution to state that a VAT “is a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.”  After that Senate vote, it sounded like this bad idea would go away.  Now, we learn it might be back on the table.  What is a VAT tax?  What would a VAT tax really do to America and to our struggling economy?

A VAT tax is a type of excise tax that works much like a National Sales Tax.  However, it’s actually worse than a sales tax.  A VAT tax charges a tax  on a product at each stage of production, up to and including, the final sale to the consumer.  Some products such as food and medicine might be made exempt from a VAT tax.  VAT tax rates might be set by the government between 15%- 20%.  (The average VAT tax in European countries today is about 20%, with the European Union mandating a minimum VAT tax of 15%.)

The Wall Street Journal this week provides a great discussion on the VAT tax.  It also gives the likely impacts of a VAT tax on the economy.  VAT taxes go back to the 1960’s in Europe.  From then until now, with VAT, the average European country spending has gone from 30% of GDP to 50% of GDP.  In effect, the VAT tax has helped Europe fund European welfare state socialism.

At the same time, job creation and economic growth has been held back substantially.  Consider the years 1982 – 2007.  During this time, roughly from the Reagan tax cuts to the Bush tax cuts, America created 45 million new jobs.  Europe with their VAT taxes and high government spending lanquished behind, creating only 10 million jobs.

The VAT tax would be a job-killing new tax that will stifle America’s economic growth.  It will likely result in higher unemployment numbers.  Remember one of my favorite examples from economic history.  The JFK tax cuts in the 1960’s resulted in the LOWEST unemployment rate in 30 years.

A VAT tax is a bad idea from an economic viewpoint.