Thursday, May 28, 2009

The U.S. Senate: The Value Added Tax and High End Income Tax Should Be Considered

Tax Experts have approached Treasury Secretary Tim Geithnerregarding the institution of a Value Added Tax. Additionally, the Washington Post is reporting that North Dakota Democrat, Kent Conrad, believes that both a Value Added Tax and a high end income tax need to be implemented as part of “tax reform”.

A Value Added Tax, or VAT, is defined as follows:
Value Added Tax (VAT) is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is much like the sales tax paid in the United States. VAT may be calculated by the subtraction method or credit method. The subtraction method applies the tax to the difference between the value of the purchases and the value of outputs. The credit method applies the tax rate to total sales and then gives each member of the distribution channel a rate adjusted credit on purchases. The European Union, Japan and some South American countries assess VAT at a rate of 15-25 percent.


The Fair Tax, or a consumption based tax, is similar in that it is a “progressive national retail sales tax”, one which “replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.”

The VAT, however, charges a tax at every stage, which causes a rise in prices for consumers, who, in the U.S. are still subject to state and local sales taxes. The Fair Tax is charged at the time of purchase and stop-gaps are in place to insure those that are in lower-income brackets are safeguarded.

Why is the VAT being considered? The cost of the proposed Health Care Reform by the Obama Administration and Congress is so costly that the current Income Tax would not be sufficient to foot the bill. Currently, the Internal Revenue Service, has experienced a loss in revenue of 34% this year, due to the high number of unemployed not paying into the system. The net result is an increased inability to pay for programs already in place, let alone new programs being suggested.

The problem with the current Administration and simpatico legislature adding a VAT as part of a reform of the TAX system is that there is no mention of this type of tax replacing the Income Tax; rather, it is an addition. Also, there are no safeguards in place for those consumers on fixed incomes. Those living in states that have both income and sales taxes in place, yet are seeking ways to pay for continued state and federal mandated programs (see Massachusetts – entitlements and corruption), will suffer considerably.

The only solution is for the government to curb spending, overhaul the way in which government agencies are budgeted, and cut earmarks entirely. The current method for disbursement of budget funds to government agencies demands that each department spend the entire budget, should a department come in under budget for any fiscal year, they may be penalized by losing funds the following year. This method currently in place produces waste, an alternate approach would be to reward those agencies and/or employees that find methods of cutting their department’s budget each year with a bonus, the savings could be added to the following year’s budget, with no loss of budget funds for that particular agency. This would save the taxpayers untold millions, and provide incentives for those agencies to consistently come in under budget.

The Stimulus Bill passed by the Administration has created temporary jobs, without producing one private sector job. In the States that are hardest hit by the current recession, such as Massachusetts, continue to exploit their citizens with round after round of new taxes. Tim Geithner recently visited with Massachusetts Governor Deval Patrick, and said that the economic plan is working, specifically the $780 Billion that is being spent to stimulate the economy. Not everyone in Massachusetts is in agreement. The Massachusetts GOP dismissed theses claims, citing that the stimulus has not helped create jobs in the entitlement rich, debt ridden Commonwealth. The Executive Director for the MassGOP, Nick Connors said: "The reckless spending of the Obama Administration has not created the jobs that were promised, and Massachusetts is proof of that. Our unemployment rate is 8 percent and the only new jobs being created are in state government, which has added 2,000 new soft landings for Patrick-Murray Administration supporters. Families and small businesses in Massachusetts are hurting, and Governor Patrick and the Democrats are trying to squeeze even higher taxes out of them to fund pension abuse and do-nothing state jobs. If Geithner and Obama want to help the people of Massachusetts, they'll tell the Massachusetts Democrats to clean up Beacon Hill, and they will return the stimulus money to the taxpayers by lowering their federal taxes."

What Mr. Connors is suggesting is Tax Cuts, which have been proven over time, and under varied administrations (Kennedy, Reagan, and Bush) to be most effective as a stimulus. With a VAT on the table, in addition to the current Income Tax, (on a Federal Level), the burden on the tax payer would be unbearable, and for those on fixed incomes, the quality of life would be untenable.

2 comments:

Ralph Short said...

Tina, your analysis is exactly correct but don't hold your breath for this administration to change their ways. Here is how I see this thing playing out:
1. Their priorities are a) cap and trade and b) nationalized health care. Both are priorities because they generate revenue for the government. It has nothing to do with climate or with health care.

Both will generate increased revenue but not near enough to put the fiscal house in order or to allow for other socialistic programs. Therefore they will over the next 6 to 12 mos. keep floating tax increase and/or new tax ideas and see how the public reacts. A lot depends on how the lapdog press reacts as to how the proposals are received by the public.

The math is simple, we are in terrible debt, the democrats want more government, more spending and much more revenue to accomplish their agenda. The other part of the equation is approx. 57% of people who file actually pay federal income taxes, the rest either pay nothing or actually get a check from the government courtesy of the 57%. So, how will the 57% react to these ideas and will the 43% give a rip either way.

The other question is how in hell did we ever get to this point.

Tina Hemond said...

Hi Ralph, I'm not holding my breath - and, having lived through Jimmy Carter and Company, I had my misgivings that this might happen, historically, it was a possibility - Those that were moderates, and voted either party line, or against the "Republican" (and would have regardless of who might have been on the ticket) did so because they bought the "middle class tax cut" nonsense which, those of us already experienced with "Yes We Can" in Massachusetts knew it was the least likely scenario. Add to that the Christian Right (Dobson - see Interview with Sean Hannity) did not back any Republican candidate - there were millions of missing votes - this is what actually tipped the balance. Look at the raw numbers, although the Democrats registered millions of new voters, the same number of people voted (approximately) as in the last election. Additionally, track back to each general where it appears that a Democrat might win the election - Wall Street reacts and there's a "crisis" - until the outcome - I have no doubt had the outcome been different, the stimulus package, the omnibus spending bill, the budget and the rest of the kit and caboodle would have not existed, or have been on the scale of real tax cuts - the banks, auto dealers and the like would have been allowed to tank - allowing private industry to bail them out - or the strongest to survive - it may have hurt for the short term, but nothing like what we are facing now. Unless and until those in the Senate and Congress learn to manage the tax dollar as if it were their own money, things will remain the same - change the Senate and the House, and we can get back on the road to recovery - it needs to be balanced - not ruled by one particular "brand" - term limits would aid in making sure those that came to do the people's bidding, did so, not making a career out of "legislating".

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