In response to my recent article discussing the inappropriateness of value-added taxation in the United States, one reader has directed me to an article written by David Ignatius, which raises a compelling counter-argument. In essence, Mr. Ignatius argues that the U.S. is comparable to Greece in the sense that: (1) like Greece, the U.S. has spent more money than it has earned and borrowed to cover the resulting deficit for many years; and (2) like Greece (pre-EU/IMF bailout), the U.S. is one of the only nations without a system of a value-added taxation in place. Accordingly, he suggests that, unless the U.S. implements a value-added tax (VAT), it will experience a large-scale financial meltdown similar to the recent Greek fiscal crisis.

While I understand the logic of Mr. Ignatius' argument, I respectfully believe that his reasoning is flawed on 2 levels:

(1) A 21% VAT did not save the Greek government. To adopt a solution that failed for Greece in an effort to prevent what happened in Greece is counterintuitive.

As far as Greece's VAT goes, it should be noted that it was probably involuntary. The International Monetary Fund (IMF) routinely conditions loans on implementation of a VAT. In addition, European Union (EU) law requires that every member state adopt a VAT that conforms to EU standards. Thus, it is likely that Greece's enactment of a VAT was motivated by its need for financial bailout by the EU and the IMF.

(2) The root of the Greek fiscal crisis was rampant tax evasion, not proliferate government spending. Indeed, international comparisons reveal that tax evasion in Greece is among the worst in the developed world.

The high levels of tax evasion in Greece are largely attributable to the structure of its economy. Unlike the corporate-dominated landscape of American business, the Greek economy is comprised primarily of "mom and pop" operations, which can easily avoid reporting income. Thus, the conditions for underground business activity and tax evasion are optimal in Greece. The structural distinctions between the American and Greek economies in this sense really preclude any meaningful analogy of the U.S. economy to the Greek economy.

Continue reading "VALUE-ADDED TAXATION DID NOT WORK FOR GREECE, AND IT WILL NOT WORK FOR U.S. " »

In its January 2011 report, the Congressional Budget Office (CBO) estimated that America's expanding spending policy will generate a combined deficit of nearly $8.5 trillion over the ten-year period from 2011 to 2021. Significantly, 30% of this projected overspending ($2.5 trillion) will be incurred in 2011 and 2012 alone. These projections are in spite of the CBO's warning last year that, "[t]o keep federal deficits and debt from reaching levels that would substantially harm the economy, lawmakers would have to significantly increase revenues, decrease projected spending, or enact some combination of the two." In light of this cautionary apprisal, a European-style value added tax (VAT) has emerged as a potential solution. Indeed, just this week, Jeffrey Owens, a director of the Organization for Economic Cooperation and Development (OECD), called for international agreement on a VAT structure at a lecture at NYU's School of Law.

Components of a good tax. There are four components of a good tax:

1. a tax should be fair and equitable;
2. a tax should be transparent;
3. the time and manner of tax collection should be convenient for the taxpayer; and
4. tax administration should be efficient.

With that being said, while it is true that the United States is the only major nation without a VAT, it does not necessarily follow that VAT is an appropriate or even viable solution for the United States. To the contrary, a U.S. VAT would be inequitable, hidden, inconvenient, and inefficient.

A U.S. VAT would be inequitable. A tax is considered to be equitable if citizens pay tax in proportion to their respective abilities. Under American tax policy, a taxpayer's ability to pay is measured in terms of available revenue for spending. In this regard, a U.S. VAT would be inconsistent with the ability to pay principle insofar as it measures taxpayers' ability to pay in terms of consumption rather than available revenue. In addition, a U.S. VAT would be inequitable in the sense that taxpayers would bear dissimilar tax burdens. A fair tax requires equal sacrifice from all taxpayers, but the incidence of a U.S. VAT would fall primarily upon lower income taxpayers because lower income taxpayers will spend higher percentages of their incomes on VAT.

A U.S. VAT would lack transparency. A value-added tax is a hidden form of taxation because those who ultimately pay it - i.e. consumers - are unaware of what they are paying. The hidden nature of a U.S. VAT would be particularly problematic because hidden taxes are easily increased by the government with little taxpayer resistance. Accordingly, once a value-added tax is introduced into the U.S. Tax Code, the rate of taxation is almost certain to increase. Indeed, there is a historical correlation between increased revenue and increased spending in the United States.

Continue reading "MORE MONEY, MORE PROBLEMS: A VALUE-ADDED TAX IS NOT THE ANSWER FOR THE U.S. " »