Sunday, June 17 , 2018, 5:48 pm | Overcast 64º

 
 
 

Harris Sherline: Beware of the Value-Added Tax

It's the most likely source to pay for Obama's big-ticket agenda

The Obama administration is turning over every rock it thinks might be hiding a tax that can be imposed to solve the growing problems created by their massive deficit spending.

Harris Sherline
Harris Sherline

The following is a partial list of the major financial commitments President Barack Obama has already made:

» A deficit budget that is now expected to exceed $9 trillion over the next 10 years

» The $700 billion Troubled Asset Relief Program

» The $787 billion stimulus bill

» The Obamacare health plan, which has been scored by the nonpartisan Congressional Budget Office at a cost of $1.6 trillion and is already affecting the balance sheets of many major corporations

» The $3 billion Cash for Clunkers program

» The cap-and-trade program, which would significantly increase the cost of energy, if it’s adopted as proposed

To think, all of this has been done in just 15 months since Obama became president. With less than three years remaining in his term of office, there’s no telling how much more of the taxpayers’ money this spendthrift president and Congress will go through.

But the big question is: Where will they be able to find enough money to pay not only for the commitments that have already been made, but for the additional spending they are contemplating?

Obama is faced with a dilemma: If he continues to spend money without having the revenue to pay for it, he will further exacerbate the financial disaster he has already launched, which is leading the nation down the path of inflation to the possibility of hyperinflation. It could result in the complete destruction of the nation’s monetary system. However, even if he stops spending, he still will have to increase the federal government’s revenue by trillions of dollars.

Since he doesn’t seem to believe in increasing tax revenues by expanding the economy, it’s clear it will be necessary to generate the money that’s needed by imposing other taxes. But how?

Although taxing the rich fits his social and economic views, it can’t possibly generate enough revenue to pay for everything that’s already on his plate — let alone any new programs, such as health care. Since the top 5 percent of wage earners already pay more than 54 percent of all federal income taxes and the top 10 percent pay almost 66 percent, it’s clear that it will not be possible to pay for trillions of increased expenditures by taxing “the rich.” Even the total federal income tax revenue of about $11.15 trillion wouldn’t come close to paying for everything (2007 IRS statistics).

Furthermore, a national sales tax also would be a problem, because it is already an important source of revenue for most states. California and 44 other states have a state sales tax, ranging from 4 percent to 7.25 percent.

This doesn’t leave Obama with many other options.           

Enter the value-added tax, or a consumption tax that is “levied on any value that is added to a product.” Wikipedia notes that it differs from a sales tax, which is levied only at the point of final consumption. The VAT is imposed on the “value added” at each stage of production through the manufacturing and wholesale processes. It was created in 1954 by France, where it now brings in 52 percent of that nation’s revenues. Wordwide-tax.com notes that in addition to a VAT of 19 percent, France also imposes a corporate tax of 33.33 percent and individual income taxes of 5.5 percent to 40 percent.

The VAT has a number of advantages, not the least of which is that it is an indirect tax and, therefore, is generally not visible to the ultimate user or consumer. This is accomplished by collecting the VAT from everyone who adds value to a product as it moves through various stages of production and processing to the end user. Double taxation is avoided by enabling businesses to recover the VAT that is charged on the materials and services they buy to use in producing their own products or services.

The primary reason for creating the VAT was to avoid the cheating and smuggling that generally result from high sales taxes. It also has been criticized because it is regressive, in that it has a greater impact on those with low income. Another negative of the VAT is that it requires a large bureaucracy to manage, regulate and collect the tax as products and services move through the process to the ultimate consumer. More jobs and work for the IRS bureaucracy, I suppose.

Considering the situation that Obama is now facing, the VAT looks like the most likely source to raise the taxes that are needed to pay for his agenda. We’re about to find out, but one thing’s for sure, it will be in addition to all the other taxes Americans already pay.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.

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