April 13, 2005
Like It or Not, VAT's in Your Future

By Froma Harrop

Conservatives don't like it, nor do liberals. No one loves the value-added tax, but the VAT is looking better all the time. Expect to hear more nice things said about it in the months to come.

A VAT is basically a national sales tax. America doesn't have a VAT. European countries do, and they're not shy about letting it rip. Britain charges a 17.5-percent VAT on everything people buy. In Denmark and Sweden, the VAT is 25 percent!

Conservatives don't like the VAT because it's a politically easy way to raise taxes. And it greases the skids for big government programs. Europeans will be the first to tell you that their sales taxes are how they pay for universal health care, lush unemployment benefits and the rest of the dolce vita.

On the other hand, a VAT takes pressure off the income tax -- a tax that most conservatives hate like no other. It taxes consumption only and doesn't penalize investments. Some conservative reformers want to completely replace the income tax with a VAT.

Liberals don't like the VAT because the poor spend a bigger percentage of their income than do the rich -- so more of their income gets taxed. (However, the rich do tend to buy more stuff overall.) Furthermore, everyone gets taxed at the same rate: In Italy, the seamstress and the corporate lawyer pay the same $20 sales tax on a $100 baby carriage.

On the other hand, the VAT makes possible the generous government programs that benefit seamstresses more than attorneys. And it helps achieve other societal goals. For example, environmentalists who want high gas taxes to discourage fossil-fuel consumption need only wait for a European-style VAT.

Another thing: The income tax is rigged against ordinary people. Working stiffs have the income tax ripped every week out of their paychecks. Our Byzantine tax code lets rich people play with the numbers. Guided by daring accountants, business owners and investors can do creative things to lower their declared income and thus avoid paying income taxes. But they can't escape the VAT. When they buy their Learjet, Mercedes CL600 or Chanel suit, the VAT will catch 'em.

The VAT would also force members of the underground economy to share the burden. We speak of criminals, nannies, illegal immigrants and others who get paid off-the-books -- under the Internal Revenue Service's radar. The shadow economy is almost $1 trillion in size -- or about 9 percent of the U.S. economy. If there were a VAT, underground workers would start paying taxes whenever they purchased a lawnmower, disposable diapers or a flat-screen TV.

Small-government conservatives are probably the saddest new converts to the VAT idea. They bought into the theory that tax cuts would force reductions in government spending. Lower taxes, they said, would "starve the beast."

But the Bush administration's spending spree has them utterly demoralized. As an example of their despair, conservative economist Bruce Bartlett bitterly attacked President Bush for ramming a $23 trillion expansion of Medicare "down the throats of the few small-government conservatives left in the House."

Combined with lower taxes, the steroidal spending has sent federal deficits into a dangerous upward spiral. Eventually, the financial markets will force discipline on these reckless fiscal policies -- and in ways that may prove most unpleasant for the economy.

Responsible conservatives don't want an economic meltdown, so they are throwing in the towel. Bartlett wrote that he and other conservatives now "conclude that starving the beast simply doesn't work anymore." A VAT would be the best of the ugly alternatives.

And so we have shrink-government types promoting the very tax that Old Europe uses to support its cradle-to-grave programs. A minute of silence for small-government conservatives.

With memories of wrestling with form 1040 still fresh, Americans should be open to considering a vastly more simple way to pay taxes. It was in the name of both simplification and fighting tax evasion that most of India recently introduced a value-added tax. The tax is controversial, but it will stick.

In sum, the VAT has proven an efficient way to collect revenues. No one has to love it, but just remember two things: A VAT makes everyone pay for government and lets government pay its bills.

2005 Providence Journal Co. Distributed by Creators Syndicate

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