Retirement and Social Security Reform
The VAT Tax Scare Is A Hoax
Investor's Business Daily
January 27, 2016
By Ernest S. Christian
To 99.9% of people, the term value-added tax and its lingua franca acronym “VAT” mean a sales tax paid by consumers — nothing else. And they are right. Grab your Webster’s Collegiate.
Using the term or the acronym in public discourse to describe a tax reform plan that is not a sales tax misleads the press and the voters — and diminishes the real prospects for tax reform in 2017.
A VAT is so inimical to tax reform that the mere mention of the “VAT” word has recently scared some of my fellow conservatives nearly out of their wits, to the point of seeing VAT taxes lurking where none exist.
Premature false alarms notwithstanding, conservative Sen. Ted Cruz of Texas has not strayed from the fold and proposed a crypto-VAT or any other form of sales tax. Quite to the contrary. Nor has Sen. Marco Rubio or the distinguished Dr. Ben Carson.
All three of these potential Republican presidents have proposed reformed income taxes. Their reform plans tax income from work (expressed as wages and salaries) and income from capital (generally expressed as profits, dividends, interest and gains).
Because the combined income from work and capital equals the amount of value added in the economy, each of these reform proposals could be said to tax value added. But so what? The base of the current federal income tax is also equal to value added. Nobody calls it a VAT. Why confuse people with a novel word not relevant to the subject?
The term “value added” is relevant to “bookkeeping” transactions in the eponymous European retail sales tax. A portion of the tax is in form “collected” from each upstream company (the wheat farmer, the miller, the baker, etc.) based on the portion of total value that it added.
Because, however, of a system of statutorily mandated reimbursements and refundable tax credits between businesses, the only “real” taxpayer under the VAT-type sales tax is the retail consumer — the last one in the chain and the one who receives no tax credit.
Without the statutorily mandated reimbursements and credits, each business in the chain would not automatically be able to pass on its tax to the next business. Whether the tax base is value added or net income, it is Econ 101 that businesses can pass forward their tax costs (in the form of a higher price) only to the extent that market forces allow.
The term “value-added tax” is relevant to an abstruse provision in the World Trade Organization (WTO) treaty.
In 1996 and 2004, pre-eminent expert Dr. Gary C. Hufbauer and I advanced the thesis that a flat-rate tax similar to the current Cruz and Carson proposals could qualify under the WTO and, as a matter of both principle and statutory mechanics, could correctly exclude export sales from U.S. income tax — in the same way that European VATs exclude exports from sales taxes.
Other experts argue that only a VAT-type sales tax can qualify. The Cruz proposal pushes the envelope with an export exclusion — but that does not mean he has proposed a sales tax; just the opposite. He is apparently trying to break through the wrong-headed WTO barrier and establish the principle that the U.S. does not have to adopt a VAT-type sales tax in order to level the international tax playing field on exports.
The circa 1998-2005 “Five Easy Pieces” approach to tax reform shows that all the brand-name tax reform proposals are merely packages of long-sought, familiar amendments to the current federal income tax.
As articulated by me, the late Jack Kemp, Grover Norquist and others, those familiar amendments are: (a) lowering marginal rates (including capital gains tax rates); (b) eliminating the double tax on corporate earnings; (c) accelerating depreciation, ultimately to the point of 100% first-year expensing for business capital investment; (d) expanding the Roth IRA to all personal saving; and (e) excluding export and other foreign trade income of American companies from tax in much the same way that other countries already do in the world marketplace.
These important components of tax reform do not a VAT make. Rather, they create a high level of tax efficiency, economic growth and bang for the buck. According to Tax Foundation data, the Cruz proposal adds $23 to gross domestic product over a 10-year period for every $1 of dynamically computed 10-year revenue loss. The ratios for the Carson and Rubio proposals are in each case about $8 to $1.
Tax reformers should focus on creating the best tax code for America — instead of creating confusion by wrongly tossing around the “VAT” word as a j’accuse epithet.
Christian, a lawyer in Washington, D.C., and former Treasury tax official in the Ford Administration, co-edited “The Value Added Tax: Orthodoxy and New Thinking” (Kluwer, 1989).