Amid the furor over the so-called “Volcker Rule,” the President’s Economic Recovery Advisory Board, of which Volcker serves as Chairman, has gone largely unnoticed. This board, in Volcker’s words, was created “to discuss the pros and cons of a spectrum of reform ideas relating to tax simplification, enforcement of existing tax laws, and reform the corporate tax system.” In line with that mission, Sen. Orrin Hatch of Utah sent Chairman Volcker a letter Thursday urging him and his committee not to consider a value-added tax as an option.
First acknowledging the necessity of “moving toward a tax code that finances the nation’s priorities with as little interference in savings, investment, and growth as possible,” Hatch then asserts that “I believe that the mere discussion of a VAT overlay on top of our current tax system is dangerous and could move some Washington policymakers further toward an inclination to increase spending by providing more revenue.”
He then points out many of the problems that plague the implementation of a VAT. In principle, a value-added tax levies production at each stage, and it then includes that tax burden in the price. Using a loaf of bread as an example, one can trace the rising tax bill through the entire production chain. Most importantly, a VAT hides the level of taxation in the prices of goods, so cash-strapped legislators can then increase the rates quietly, and unlike a sales tax, consumers have no way of seeing the amount of tax that they paid. For proof, just look at the aggregate tax levels in European countries before and ten years after enacting a VAT. As much as politicians would like to sell this as a replacement for other types of taxes, it merely offers s convenient and opaque backdoor to more revenue extraction from the economy. Moreover, while income taxes have a demonstrable maximum percentage of GDP that they can suck out of the economy, a VAT allows for completely unchecked growth of government spending and interference in the economy. To combat this pernicious approach to hijacking revenue, Americans for Tax Reform has assembled a toolkit on the VAT and has joined with Members of the House and the Senate to reinvigorate the Anti-VAT Caucus.
Given the rationale against the VAT expressed by Sen. Hatch, one can only hope that Chairman Volcker and his board listen.