We’re a nation opposed to taxation. It’s a part of our history. The Tea Party movement that’s railing against government took its name from the Boston Tea Party when colonists dumped tons of British tea into Boston Harbor to protest “taxation without representation.” The sentiment seems to be the same now. If elected officials aren’t conducting themselves as you would like them to, then supposedly they aren’t representing you (depending heavily on how one defines representation), and yet they continue to tax you. How dare they?!
On the other hand, Americans seem okay with some taxes–sales tax and particularly the special local option sales tax (SPLOST) seem to be a well-accepted part of our culture. It’s income taxes that people really seem to dislike. Presidential pipe-dream Ron Paul is so opposed to government involvement in the lives of Americans that he wants to abolish the income tax and dismantle the IRS. Yeah, good luck with that. But the opportunity in this is to realize that people are much more comfortable being taxed on consumption than income. It may not make a huge difference, but in some key respects, people view consumption as optional and that changes how they feel about paying those taxes.
So, when government needs to increase revenues to offset the costs of something (say a war or a health care reform or the building of a high-speed rail system) it might do well to look at approaches that mirror the sales tax more than the income tax. Enter the value-added tax or VAT. As Catherine Rampell of the New York Times’ Economix blog explains, the VAT “is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Even though it is collected in stages from different producers, economists generally think the cost of the tax is passed along to and primarily paid by consumers, just like a regular retail sales tax would be.”
Most countries already employ a VAT as indicated in the map below. The darkly shaded countries had a VAT in 2008.
There are pros and cons to the VAT, however. Perhaps the biggest pro is that as a consumption tax, the VAT does not discourage–in fact it may even encourage more–saving. The same is not true of income taxes. Historical trend data and recent economic woes clearly demonstrate that Americans have overspent and undersaved. Introducing a VAT–perhaps in place of all or some portion of the income tax–might seriously correct this imbalance. There are other pros, too, and a number of articles out there advocate the VAT.
On the other hand, conservatives and liberals alike have found reasons to object to the VAT. As Rampell notes in her primer, conservatives oppose the efficiency of the VAT, which they foresee encouraging rampant government spending, while liberals oppose the VAT because of its potential to be regressive (disproportionately affecting the low-income). The liberals’ concern could be handled by excluding essential items like food from the VAT. If you want to read a conservative argument against the VAT, what better source to go to than the Wall Street Journal?
Let me be clear on my stance: I don’t advocate introducing the VAT in addition to the state and federal income taxes and state and local sales taxes we already pay. Rather, I think that the VAT represents a better approach to taxation and should be considered only as an alternative to all or some portion of the current income tax we currently pay. I think doing so would make us better savers and more conscientious shoppers. Fiscal responsibility in this nation starts with its people, and the VAT could just do the trick.