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November 18, 2015

Why Republican Presidential Candidates Should Abandon Their VAT Tax Proposals

 

Despite a number of debates in presidential primaries, the tax plans of the candidates have yet to be a central issue. That will likely change because voters routinely see tax issues as very important. Since the former chairman of the House Ways and Means Committee is now the Speaker of the House, the chance Congress will consider a reform plan are much higher. However, the country needs the right kind of tax reform, which does not include a value-added tax (VAT) as has been proposed by two candidates.
 
A VAT is a consumption tax, common in Europe, added to a product or service at every stage of production and also on the final sale. Currently in the U.S., any sales tax is only imposed at the final point of sale to consumers.
 
The VAT is attractive to those who:

  • Place a high value on the efficiency of government to be able to sweep in tax revenues; 
  • Want to grow government; and 
  • Do not want the amount of tax collected to be particularly obvious because a VAT is likely the murkiest of all taxes.

Whether or not those proposing such taxes are interested in expanding the scope of government is almost irrelevant, because once the tools for such expansion are in place they can be used by future politicians to grow government subtly.  Similarly, whether a tax is labeled as a VAT or not is also irrelevant if the function is the same—for example by not allowing companies to deduct wages.
 
One absolute principle of appropriate tax reform is transparency—citizens should know what is taxed and at what rate. A VAT is antithetical to that goal.  Lawmakers can easily increase taxes with little public awareness, and hence little public reaction, because the public is left unaware of the layers upon layers of tax stacked onto a product or service as it makes its way from raw material to finished good.  The point of sale price is paid without any awareness of the total amount of tax included.
 
By contrast, a "transparent" tax system makes clear to taxpayers how much government costs and who is paying for it.  As IPI explains in "A Framework For Tax Reform",
 
"Visibility is necessary for voters to determine effectively the amount and composition of government spending at which its benefits match its costs. Visibility is a key element in providing political efficiency.
 
Transparency requires that taxes be levied as openly as possible with some form of annual accounting through which individuals can tally up the full amount of taxes they have paid over the course of the year.
 
Transparency also requires that revenues not be collected from taxes buried in business transactions, which allows the tax burden to be passed invisibly forward to consumers and backwards to investors and lenders. Since taxes are really paid out of income, taxes are most visible when they are collected directly from people out of their income (properly defined and measured)."
 
Perhaps more than ever the public is demanding greater understanding and transparency in government operations. To introduce a hidden tax as part of a tax plan is a sure path to failure of transparency, and a failure to serve the citizens.


 

  • TaxBytes-New

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