Say No to the VAT

The U.S. Capitol is seen in Washington on the morning of Jan. 5, 2023. Nathan Howard/Getty Images

Commentary

Recently, a light appeared on the dark horizon. It seemed like some Republicans were getting serious about reforms we need to save the country from a pillaging ruling class that has been stealing everything that’s not nailed down.

It seemed like perhaps some wise people were thinking about radical and dramatic reform to restore constitutional limits on government power. It appeared that they were putting the interests of the people ahead of that of the government.

The idea, briefly floated, was to abolish the income tax and the agency that collects it. What a thrilling idea! The government expects to collect about $500 billion in income taxes this year. If we look at the federal budget, what would losing $500 billion in revenue mean for the budget? If we were doing strict accounting here, it would mean cutting back receipts by that same amount. They’re currently running at $3.2 trillion.

A cut of $500 billion in revenue would take us back only two years, when the federal budget was spending $4.8 trillion per year, unlike today’s $6 trillion. That means that we could completely eliminate the income tax by reverting to a federal government exactly the size it was before the Great Reset, while retaining existing debt obligations and totally eliminating the income tax and the agency that collects it.

In other words, we could eliminate the whole of the income tax, match that with budget cuts, and set a new course for the whole country.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

To be sure, vast taxes would still exist, including payroll taxes, corporate taxes, excise taxes, and tariffs, among many other sources. Still, doing this would provide for an amazing emancipation of the American people. And from a fiscal point of view, this would actually be no big deal. Just cut the government growth that developed over the past two to three years and you end up at the same place, except with a heck of a lot more liberty!

That’s precisely where the Republicans should have left it. Eliminate the income tax and replace it with nothing. Even better, let’s get a consensus that the 16th Amendment was a disaster. It was, as Frank Chodorov said, the root of all evil. It should be repealed if we’re serious about restoring the dream of the Founding Fathers. Anyone not willing to do that shouldn’t be taken seriously as a reformer, much less a constitutionalist.

But of course, that’s not where the Republicans left it. Instead, they’re proposing what’s in effect a value-added tax (VAT), which is a fancy name for a national sales tax or a consumption tax that pertains not just at the retail level but at each stage in the production structure. Every wholesaler, every manufacturer, every seller of raw materials, and so on, would owe not simply on profits (as now) but on the sales alone.

The details vary but this is the essence of the Fair Tax Act. Sad to say, it’s dangerous.

This is the exact system in place in Europe today and the major source of the doomed economies in the European Community. The VAT has introduced terrible stagnation in the business cycle, intensified surveillance of all businesses, eliminated local control of fiscal policy, and led to the centralized coercion (stealing) of everyone and anyone trying to do business in the eurozone. The very notion that the United States would institute such a thing is a disaster. Can the Republicans not see with their own eyes what the VAT has done to Europe? It’s been horrible.

It would be horrible in this country, too. Local control would go out the window. It would be even worse than the more-or-less stable system in place now and invite the federal government into a very close and intimate relationship with every large, medium, and small business in this country, even small family businesses. It would legitimate close surveillance of every transaction and pave the way for a central bank digital currency to make it all possible.

Economist Murray Rothbard explained that under the VAT:

“Each firm would be obliged to report its income and its expenditures, paying a designated tax on the net income. This would tend to distort the structure of business. For one thing, there would be an incentive for uneconomic vertical integration, since the fewer the number of times a sale takes place, the fewer the imposed taxes. Also, as has been happening in European countries with experience of the VAT, a flourishing industry may arise in issuing phony vouchers, so that businesses can overinflate their alleged expenditures, and reduce their reported value added.”

Maybe it seems like it would be less arduous than the income tax because you only pay when engaging in commerce. Just to be clear, you'll pay since business only pays in a formal sense but will make every effort as a matter of accounting to have the cost of those high taxes as a part of the retail price for the final consumer. Just what you need, right? Higher prices!

Philosophically, Rothbard pointed out that the income tax is at least a tax based on what you earn and that those who earn less also pay less. Many people in this country pay no income taxes now simply because they don’t earn enough to qualify. Under the VAT, everyone pays!

Rothbard explained: “The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax doesn’t strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.”

He concluded with the trenchant principle advanced by J.B. Say in the 19th century: “The best scheme of [public] finance is to spend as little as possible; and the best tax is always the lightest.”

For this reason, Republicans really need to shift their attention from attempting to impose a new form of taxation to instead getting rid of the existing forms. Of course, that would require that they bravely take up the topic about which none of them really want to speak: the incredible and terrible problem of government spending itself.

They need to work on cutting the budget to half its current level or one-quarter or one-tenth. This isn’t only smart economics, but it would also do extra duty in starting the essential process of gutting the administrative state, which is the real problem in this country. The elected leaders of this country aren’t really in charge so long as the administrative state maintains its existing size and reach. This is the problem that Republicans need to focus on, using the only power that Congress really has.

Politically, cutting taxes is popular. Adding or intensifying taxes isn’t. As another example, years ago, Steve Forbes doomed an otherwise popular presidential run by acknowledging that his flat tax proposal would require the elimination of the mortgage interest deduction. Voters aren’t dumb. They know how this works. The good parts of the idea get thrown out while the higher tax portion of the idea gets through.

Republicans right now need a clean and clear proposal, not a dramatic-sounding tax idea that’s really just a cover for another new layer of taxation. Forget the flat tax, the fair tax, or any other cockamamie idea. They should stick to cutting all taxes anywhere and everywhere and matching those ideas with dramatic budget cuts, too. Until they come around to this level of reform, they’re truly impossible to take seriously.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.