Thursday, October 8, 2009

Pelosi Says Value Added Tax Is On The Table

Earlier this week, Nancy Pelosi, in an interview on the Charlie Rose Show, said that a Value Added Tax (VAT) is on the table to help pay for health care:

In that interview, Nancy made it sound like it would be applied to make up for the health care cost differential of domestic versus foreign products. But that's not true. It will be primarily applied to our own manufacturers and not those who import finished goods. It would basically hit our domestically manufactured products the hardest. Otherwise, it would be called an Import Tariff and not what she is calling a VAT. But, she is clearly talking about a Value Added Tax that will be applied to all manufacturing and, I suppose, somehow, finished imported goods.

The problem with a VAT is that it is one of the most job and company killing taxes that ever existed. It ignores whether or not a company is profitable and even able to pay the tax. Instead, it is a tax that becomes attached to the cost of doing business, and it is passed along throughout the manufacturing process of the finished goods from one company to another; with each company paying the tax along the way. In effect, it is a roll-up tax that gets compounded each time value is added to something.

Take for example, a steel company. Assume that it buys iron ore from a mining company and then turns that ore into various types of end-product steel such as rolled steel. The end-product, the rolled steel, is a product that has added value from the original iron ore, and it will be subsequently taxed for the increase in its value. That tax is applied before any profit or loss is realized by the steel company. If the steel company is profitable, it will pay that tax in addition to any income tax on its profits. If the company is losing money, the VAT will still have to be paid and that tax will only deepen the company's losses.

From there, the rolled steel might be sold to another company to make something else. That something else could be an automobile trunk lid or a washing machine frame. Whatever that rolled steel is made into will be considered, again, to be value added. Once again, the government will tax the increase in value. And, so it goes until you or I eventually buy the product.

Ultimately, we will pay for that tax in higher prices for all the things we buy. Further, the VAT will punish our own manufacturers because it will make our products more expensive and less competitive against foreign made finished products. That's because the tax will be applied all along the manufacturing process on a compounded basis. At best, this tax will only be applied to the straight value of the finished imported goods.

We are a country that is losing manufacturing operations by the day. Now, Nancy Pelosi wants to punish American manufacturers even more.

Lastly, it will hurt the poor the most because of their inability to pay the resulting higher prices. So, in effect, we are going to give the poor free health care; but, at the same time, punish them by making all the things they need in order to live, from clothing, to cars, to furniture, more expensive for them to buy. This is totally insane!

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