What A Value Added Tax Will Do To America

Yesterday, Obama's lead man on financial issues, former Federal Reserve Chief, Paul Volker, said that America must consider a Value Added Tax (VAT) in order to reverse deficit spending and clear our high national debt.

Most American's are under the false belief that a VAT is just some kind of national sales tax. But, they're wrong. The VAT is actually a compounded tax that is applied every time any product gains or "adds value" over its entire production process. Take, for example, a piece of steel that will be ultimately sold as part of a new automobile. When the original iron ore was mined and, then, turned into steel ingots , there was a change in the ore's value and, as a consequence, the value differential that was created would be subject to a VAT. Once those ingots are turned into rolled steel, that, too, is a change in value, and the VAT would be applied. Then, that same steel, after being stamped into a more valuable automobile frame would be VAT'ed again. Finally, as part of a finished car, the value increase of that auto frame would be included in the final VAT that is applied to the finished car. Because the VAT is a compounding tax, it is highly possible that a nominal 10% VAT could result in a 30% increase in the price of any product; depending on how complex the manufacturing chain is. As a result, the VAT favors building products out-of-country so the step-by-step VAT charges can be avoided. That, then, favors importation and not domestic production. (So, much for Obama's promise to double our exports in 5 years!)

Throughout the health care debate, liberals would always point to Europe as the shinning star that we should strive to match. But, as part of my former job, I spent a lot of time in Europe and things are hardly rosier there than in the good ole U.S. of A. My experience is that people in Europe lived smaller; had less to spend; and, almost always paid higher prices for everything they bought. Clearly, this is the trade-off they've had to accept as part of all of their social programs.

To prove this point, let me give you some very interesting comparisons between Europe and the U.S. In this country, the median after-tax yearly income (disposable income) is about $31,400. Throughout Europe, that number is almost 25% less because of their high taxes. For example, the median disposable annual income in France is $26,416. In Germany, that supposed economic powerhouse of Western Europe, its even less at $25,146. So, right off the bat, people have less to spend.

Then, because of the VAT's throughout Europe, things cost more. We can indirectly see that from the average age of cars on the road in Europe versus the average in this country. In Europe, the median age of an automobile is 14 years. In the U.S., it just above 9 years. People just can't afford to buy a new car as frequently as they do here. On top of that, gasoline taxes are so high that the per-gallon price of gasoline is 2 to 3 times what it is here; all throughout Europe. In terms of housing, there is an even larger disparity in the standard of living. In this country, the average new home being built is about 2,220 square feet. In Europe, that number is closer to 1,000 square feet. In Britain, it is actually only 815 square feet.

I get a little tired of all the talk that we should be more like Europe. The direction that Obama and the Democrats are taking us would literally cut our standard of living in half. That's what being more like Europe is all about. And, that's what the VAT will do to us.

Just a few more comments. Despite all their taxation, most of Europe is still neck-deep in deficit spending. That because, as taxes are increased, the economic expansion is reduced and the effect of any new taxes is completely negated. It's like the Post Office raising rates in this country. With every rate increase, the U.S. Post Office actually get's even deeper in debt because they continue to lose business. As a result, any rate increase is never enough.

The European Union -- only just a few years old -- is close to collapsing in favor of returning to country-by-country individualism. That's because Greece, Spain, and Portugal are near bankruptcy and they are dragging down the "Union". In the U.K., they have just raised their taxes even higher and my guess is that will only hurt their economy even more than it is being hurt tight now. Throughout the last two decades, most of Europe has had unemployment rates that were 30-50% higher than this country. This is the great economic model that Obama and his socialist friends seem to think we should follow.

One last comment about Volker. All of a sudden he's worried about all of our debt and is proposing an expansive tax structure to fight it. Where was this supposed genius when Obama and the Democrats decided to raise the national debt by nearly 30% or by $3.2 trillion dollars in "just one year" from the previous $10.8 trillion. All these people have done is put this country on a typical liberal economic treadmill. First, they create the debt. Then, they plan to fix it with taxes. But, with new taxes, they again start spending. And, again, the fix is another new round of higher taxes.