Back in September we discussed a couple of different tax systems that could be introduced to lessen the burden on Americans and make our tax code a bit more simple. As if the 45,000 or so pages of existing tax code aren’t enough, politicians will be considering new ways to rob hard working people of their already depleted incomes.
With the costs of government rising, especially considering the new health care legislation, we are going to need much more revenue to offset spending in order to prevent a debt crisis, which by the way, is probably unavoidable at this point. The solution that the President and Congress will be looking at is a Value Added Tax, or VAT. It was implemented in European countries over the last decade with citizens forced to pay upwards of 19% on most goods sold. If you’ve ever been to Europe and wondered why everything costs so much, the VAT is a major part of the problem.
But how realistic is it for the VAT to be passed in the USA and when will we learn more? Charles Krauthammer explains in The Vat Cometh:
Obamacare was sold on the premise that, as Nancy Pelosi put it, “health care reform is entitlement reform. Our budget cannot take this upward spiral of cost.” But the bill enacted on Tuesday accelerates the spiral: It radically expands Medicaid (adding 15 million new recipients/dependents) and shamelessly raids Medicare by spending on a new entitlement the $500 billion in cuts and the yield from the Medicare tax hikes.
Obama knows that the debt bomb is looming, that Moody’s is warning that the Treasury’s AAA rating is in jeopardy, that we are headed for a run on the dollar and/or hyperinflation if nothing is done.
Hence his deficit reduction commission. It will report (surprise!) after the November elections.
What will it recommend? What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.
But this won’t be nearly enough. As Obama has repeatedly insisted, the real money is in health care costs — which are now locked in place by the new Obamacare mandates.
That’s where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade (depending on what you exclude — if you exempt food, for example, the yield would be more like $900 billion).
It’s the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.
American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.
It’s important to remember that the VAT is not a replacement for the taxes you pay currently from your income to support such things as social security, medicare, medicaid and wasteful government spending. Nor will it be a replacement for the additional funds you’ll be stripped of when you start paying universal health care taxes. No, the VAT is a supplemental, additional tax on your already heavy tax burden.
More than likely, to save some political points, Congress will not put a VAT on essential grocery foods, but you can bet that it is going to raise prices on everything else from restaurant dining and hotel rooms, to cars and clothing.
Of course, you’d think an easy solution to not having to pay the VAT tax would be to consume less and save and invest the rest. This would keep you from having to cough up another 20% to the government, right?
Wrong. Capital gains, which are basically investment gains, are also slated to rise and will effectively be taxed at your income rate, so you can expect to pay anywhere from 20% to 35% on any investment money you make in stocks, bonds, gold or even the sale of your house. Ouch.
So much for not raising taxes on those earning under $250,000.
One important consideration that may have serious implications for our economy as a whole, in addition to stripping the private sector through taxation, is that as governments raise tax rates to obscene levels, the smart money starts to flee. It used to be that investment dollars from around the world would flow to the USA because of our property rights guidelines, manageable debt and somewhat decent tax system (as compared to Europe). No more. Money will now start flowing out of the USA to “safer” countries. Where those countries are is yet to be determined, as we will likely see a global economic fallout before any serious capital movement trends are identified – but Asia and parts of South America seem to be on the radar.
Hat tip to SHTF Plan reader Patrick for the article link