Could there be a VAT in our future?

As the national debt swells to unsustainable levels and federal spending continues unchecked, the folks who gave us our huge financial problems are casting about for a “solution.” One candidate likely to be proposed by the “spend more but don’t cut” crowd is the value added tax (VAT). The VAT is a European creation designed to raise huge sums of money to sustain the highly expensive social welfare state systems in Europe.

In practice, the VAT is a colossal sales tax levied at every point of transaction. When a farmer buys fertilizer and seed, the VAT is levied. It is levied again when he sells his wheat, again when it is milled and sold to a distributor, once again when a baker purchases the flour, and yet again when a consumer buys the bread. The cascading effect of the tax does raise huge sums of money, but it is also a significant deterrent to consumption due to its effect on prices.

The weighted average VAT tax for European countries is 19 percent. Denmark and Sweden have the highest VAT rates at 25 percent. Ireland and France levy a 21 percent tax. It is interesting to note that some of the European nations with high VAT rates are the ones with huge fiscal crises at the moment. Greece – on the door of bankruptcy – has an 18 percent VAT; Iceland levies the tax at 24.5 percent; Portugal collects a 17 percent VAT; Ireland levies 21 percent; Italy imposes a 20 percent VAT; and Spain – whose bonds were recently downgraded – collects a 16 percent VAT.

In spite of utilizing these huge cash cows for revenue generation, most of the nations who rely most on the VAT are in fiscal distress. Why? Because their levels of spending and debt accumulation have exceeded the ability of the VAT to generate the amount of revenue needed to balance their books. These European nations are reaching the limits of public tolerance of taxation and are facing the backlash from those opposed to any reductions in the welfare state.

Now the big spenders in our federal government are floating the VAT as the answer for the dismal fiscal situation in the U.S. Of course, they mouth platitudes about “everything being on the table” to solve our federal fiscal woes, including entitlement spending. This comes shortly after many of the same individuals enacted the largest entitlement program in the last 50 years. If anyone thinks that the folks in Washington who caused the fiscal disaster we are faced with are going to solve it by significantly reducing entitlement spending, they are gullible at best.

The only way that the VAT would remotely make sense is if it replaced the cumbersome and inefficient income tax, and strict limits were placed on government spending. Unfortunately, the culprits who spent us into oblivion have no desire to do less spending. What they are looking for is a huge influx of additional federal revenue to feed their insatiable appetite for appropriations.

If a VAT is stacked on top of the existing income tax in the U.S. it would act as an anchor dragging against our consumption-based economy that is struggling to recover from a severe recession. While its supporters clamor for it as a tool for deficit and debt reduction, it most likely will be employed to maintain the current high levels of federal government spending. Consumers and taxpayers should look carefully at the European experience with the VAT before forming their opinion of the wisdom of enacting one here. They won’t like what they see in Europe.