Suddenly, it seems, Americans have become concerned about the mounting national debt. Why now? I’d like to think there is something terrifying about $12.5 trillion or $41,000 per person. I’d like to think that the debt-driven financial meltdown magically produced revelations of new found responsibility. I’d like to think that people suddenly realized the technological revolution of the last 50 years should have made everything in the world more streamlined, efficient and affordable.
Instead, I believe new taxing proposals, like the Value Added Tax (VAT), are providing the wake up call. Americans have been fine with spending our grandchildren’s money for what we want today. But, we are suddenly appalled when a proposal is floated that suggests we pay for this stuff ourselves.
While I believe we should not spend more than we have, I do not like the VAT. I fear that the VAT is philosophically wrong for America, functionally wrong for states and potentially devastating to cities like Memphis.
The VAT just feels wrong
United States taxes on individuals are largely transparent. If I make $45,000 a year I know I should pay about $7,000 in taxes and the guy working next to me is probably paying about the same thing. What I pay is written on my check stub and I have to sign a tax return at the end of the year.
The VAT is a multi-layered sales tax levied on every stage of manufacturing. This will cause the costs-of-goods-sold to increase. And I don’t get to see any of this on the check-out receipt at the register.
The VAT competes with the funding mechanism of many states
In Tennessee, we already have a 7% sales tax on everything. If the cost of products begins to grow due to the hidden VAT, then that 7% starts to look like a pretty big number. Because in Tennessee, we have to print taxes on the receipt for the sole purpose of providing transparency regarding what our government is taking from us.
A VAT may provide a short term boost in revenue for government but it represents an effective immediate pay cut for every shopping Tennessean. As well, lower tax rate states that surround our skinny territory start to look like much better shopping destinations as the costs of taxable goods rise.
The VAT goofs up the entire local system
Despite the rise of creative industries, every economic developer still salivates over manufacturing plants and the ancillary businesses that support them. If products begin to cost more because each stage of manufacturing is taxed, companies will consolidate functions to reduce these taxable stages and may ultimately move even more of their operations to districts with lower taxes… overseas.
Killing manufacturing does not just disrupt a few evil big corporations. It eliminates a web of small, locally owned businesses. Nissan, for instance, builds cars. A local company close to the plant builds the frames. Another local minority company electroplates the frames. Another locally owned distributor stores and trucks the frames to the plant. I think the VAT will eventually make this disappear.
In Memphis, a bolt & screw company makes a part for a self-propelled lawnmower. Barrels of these parts are shipped to Tupelo, where the mowers are assembled with a bunch of other parts made in this region. Then the mowers are sent to a warehouse in Memphis until they are shipped to hardware stores around the country. The VAT (a tax on each of these stages) will force the lawnmower company to reduce the number of steps in the process, make fewer parts in this area and possibly build their mowers in Mexico, for instance. If you build them in Mexico, why not ship them from Mexico… goodbye to America’s Distribution Center?
Retail taxes may equal retail destruction
Over the last five or ten years, America has had one huge advantage. Due to our dollar valuation and due to our tax rates, retail has become a leading industry. Tourism is being driven by foreign travelers who want to come see Graceland, tour the National Civil Rights Museum and shop. Because European countries have versions of the VAT, it is cheaper (or at least enticing) to buy a plane ticket, rent a hotel room and shop in America!
And since we have already been losing manufacturing jobs due to other factors, crashing our financial services market and bankrupting our governments, in many ways mall jobs are some of the last positions to aspire to. That will be severely damaged by the VAT.
Multiple tax streams are necessary but new mechanisms aren’t
I know multiple tax streams produce economic stability. When property values are down, it is nice to lean on sales taxes. When sales taxes wane, it is nice to have income taxes to keep the schools open, fire trucks running and police on the street.
I also recognize that existing income taxes are largely a middle-class mechanism. Property taxes, in Tennessee anyway, disproportionally impact middle and lower income homeowners. Sales taxes are fair in the sense that everyone pays but those at the lower income levels only have so much to give.
But at what point do we stop just adding new revenue streams and look at a rational approach to providing a fair, stable system? When do we realize that there are always unintended consequences every time we just roll out a new expense then desperately grasp to find some way to pay for it later?
Rather than staff reductions, program restrictions or policy reviews, we may be offered a multi-layered sales tax on every stage of manufacturing. Instead of department overhauls, efficiency studies and productivity programs, we may be offered a new tax that will increase the cost of goods sold without having to display the taxes paid on the receipt. Instead of comprehensively looking at an entire system of taxes and spending, we may be offered a way to temporarily raise revenues through a mechanism that will stick it too those who can least afford it.
Maybe it’s just me but I think we need to spend less before instituting new taxes.
I am so pleased that after decades of some people screaming about the national debt, an administration has finally become interested in doing something about it. I just fear that raising revenues through a tax on one of the most devastated American sectors is the wrong first step for local economies and for the country as a whole.
If you want America to spend less and invest more the VAT is by far the best tax system we can have (On top of a large reduction to income taxes). The US government is not going to make itself efficient, so get use to it. You stated that the US tax code is efficient, which is by far wrong. The US tax code is by far one of the most inefficient tax systems in the world. You also stated the valuation of the dollar being an advantage. Actually the low valuation of the dollar is what is causing America to have high budget and trade deficits, which is killing our economy. One thing I notice is that Smart City speaks highly of creative industries and college attainment, which are very important for a city to have. One thing i do have a problem with is the creative industries. Creative industries are great to have for branding a city and staying on top of entertainment, but for creating wide spread prosperity for a city, a county, a state, and even a nation can’t be done by creative industries. If you are look for true entrepreneurs they are likely to be found at trade schools than on a college campus ( which teach students to become employees). Even majors in college such as engineering and architecture are in actuality
trade schools that are on college campus. The VAT will not bring devastation to America nor Memphis. It will bring much need tax revenues to pay down or off our debts while at the same time encourage Americans to spend less and save and invest more. Just about every country in the world have some form of the VAT tax, the only country to not have is America. Our tax code encourage more investment overseas than at home, so I say to bring back prosperity to this nation we will have to reform our tax system. Personally to me the Fair tax would be better.
Broaching new taxes as the economy emerges from the Great Depression is economically backward. However, from a theoretical perspective, a flat sales tax (with vouchers for the poor) makes more sense than a VAT or income taxes.
Also, “I am so pleased that after decades of some people screaming about the national debt, an administration has finally become interested in doing something about it.” Unfortunately, this does not seem to be the case. President Obama is only worsening the national debt.