In recent weeks, more and more pundits inside the Beltway have been raising the prospect of the Obama Administration imposing an economically devastating Value Added Tax (VAT) as a way to pay for the trillion dollar Government Health Care takeover.
Writing in today’s Wall Street Journal, Irwin Stelzer, director of economic policy studies at the Hudson Institute, explains exactly how a VAT works in practice in the (many) countries where it has been tried:
Because both upper- and lower-income families pay the tax at an equal rate, the VAT is considered regressive; that is, it hits the poor harder than the better-off. So it is the practice in countries such as Britain to exempt food, which lower-income families spend a greater proportion of their income on….
This process of writing regulations for the VAT man when he cometh is more than merely amusing. For one thing, it confers enormous power on faceless bureaucrats. They can hand a competing product the advantage in the U.K. of a price 17.5% lower (in Sweden it’s 25%) than a close substitute. That invites both lobbying and corruption and sheer, inexplicable arbitrariness. Get your "sweetened dried fruit" deemed to be "held out for sale as snacking and home baking" and your product will bear a tax and have to compete on grocers’ shelves with zero-rated "sweetened dried fruit held out for sale as confectionary/snacking." Peddle your sandwiches "as a general grocery item" and consumers pay no tax, but offer them as "part of a buffet service" and the VAT man wants his 17.5%.
Manufacturers twist and turn and juggle their product specifications and processes, not to find the most efficient way of making things but the surest way of obtaining a zero rating. The resulting inefficiencies cannot be measured accurately, but they certainly contribute to Europe’s lagging productivity and increasing inability to compete in world markets.
We urge all legislators to join our Anti-VAT caucus, so that we won’t have to write (yet another) blog posted tagged "told you so" if this disaster is passed into law.